Foreign Correspondent: Winds of Change

Pretoria, South Africa. During the past 12 months, the Southern African scene has changed drastically. The winds of change that have been blowing over our immediate neighbors for some time now, have suddenly turned into hurricanes. Angola and Mozambique, two territories bordering on South Africa and formerly under Portuguese rule, are well on their way to independence. This, unfortunately, is coming about with a lot of bloodshed and wholesale destruction of property. In Mozambique, the new transition government, Frelimo, has already indicated its Marxist orientation, and its total commitment to socialism. Most of the economically active people are fleeing the country and the whole economy is grinding to a halt. In Angola, three different "Freedom Movements" are waging a civil war to decide which one shall lead the country to "freedom." Many of the African citizens of these countries think of freedom as the opportunity to nationalize the shops and factories and to harass their former employers. Hundreds of people have been killed and it will be a long time before any kind of economic order is restored. The new governments face the grim prospect that, if no aid in the form of food is forthcoming in the immediate future, at least two million of the mostly black population may starve. As so many times before in the history of Mankind, we have the terrifying spectacle that people do not understand the nature of the tyranny and succeed only in exchanging one tyrant for another. Angola and Mozambique were under the tyranny of Portugal. Now they are under the tyranny of the "Liberation Movements." The motives of the latter may be noble, but their course will only lead to a different type of slavery.

In the Republic of South Africa, these sudden changes in neighboring territories had an immediate effect—both directly and indirectly. Investors' confidence was badly shaken, causing South African gold shares to drop sharply. They feared that the labor supply to the gold mines, approximately 20 percent of which comes from Angola and Mozambique, would be cut off. This fear proved to be unfounded. The "Liberation" governments in Angola and Mozambique may well be very anti-South Africa, but they realize fully that without the earnings of the mine workers, their economic plight will be worse. South Africa is also the main user of Mozambique harbor facilities as well as the main prospective user of electricity from their almost completed Cabora Bassa hydroelectric scheme. A more direct result of the Angola/Mozambique revolution, was an immediate reaction by militant blacks in South Africa who tried their best to stage pro-Frelimo rallies. As could be expected, the rallies were banned and the organizers arrested by the government.

INVESTMENT IN SOUTH AFRICA

The major consideration for any investor when looking at foreign investments, is safety. It does not help him one iota if he gets a fantastic return on his money, only to find that the investment itself is confiscated, nationalized or destroyed. The questions to be asked when looking at South Africa, are the following: Will South Africa follow the road of Angola and Mozambique during the next few years? Will there be a revolution in South Africa? Will an investment in South Africa be safe, and if so, for how long? To answer these questions, one will have to consider the present racial and economic position of this country, and speculate as to the probable developments over the next ten years.

THE RACIAL POSITION

South Africa's racial policies have a long history. For most people it is usually easier to criticize these policies than to give a solution. It is also instructive to learn that new residents to this country, arriving here with grandiose schemes to advocate change, become as "racist" as the native white South Africans after a while, and are at a loss as how to bring about peaceful and lasting changes. (For a fairly objective view of the development of South Africa's policies, see A Very Strange Society by Allen Drury.) The present events in Angola and Mozambique, will expedite any attempted solutions. The recent and unprecedented attempt to expel South Africa from the United Nations, is a clear indication of the attitude of other countries. The message is simple—change or else.…

Will such change be good for South Africa? In order to put this question in perspective, one has to understand how the present situation came about. There are 24 million blacks in the country as compared to 4 million whites. Both groups had arrived in this southern tip of Africa approximately 300 years ago, the blacks as nomadic tribes from Central Africa, and the whites as new settlers from Europe. With their knowledge of Western civilization and of agriculture, the whites started settlements and formed their own local government as an extension of the parent government in Europe, while the blacks retained their nomadic character and developed scattered communal farming operations. After the discovery of gold, the whites started industrializing the country, and more and more of the blacks left their tribes and started working in the mines and other industries. This led to the situation that a substantial proportion of them are completely absorbed in these fields today. The State apparatus, however, remained in the hands of the whites, the reason being that the whole concept of government, as then practiced through most of the civilized world, was a concept unknown to the black tribes. During the past 20 years, the whites started realizing that this situation could not be perpetuated forever—but they faced a dilemma. The type of government at the time (and in the present) was an unlimited democracy, with no constitution or Bill of Rights limiting its power. The whites were outnumbered by about five to one by the comparatively uncivilized blacks and any "sharing" of the power would have resulted in majority rule by the blacks and, as the whites feared, a complete collapse of law, order and the economy. Subsequent independence of several other African states with the resulting chaos in some of them, substantiated their fears, and "separate development" was born. This separate development or "apartheid," as it is more notoriously known, was simply the attempt by the white South Africans to create separate little "states" for the nine different black ethnic groups in South Africa. Unfortunately the leaders of these ethnic groups, with the exception of one, are now rejecting eventual independence, firstly because the process is too slow and secondly because they fear that their "states" would never be economically viable. In other words—they insist on "sharing the power." How does this affect an investor? The answer is simple. Any "sharing of the power," given the present system of government, will result in more welfarism and socialism—conditions avoided by investors. Although I foresee that this "power sharing" will increase, I do not foresee major changes in the next 10 years. It will be gradual but certain. Will there be revolutionary outbreaks of violence? I doubt it. Contrary to overseas press reports, South Africa has had very little labour unrest, and its black labour force is probably the best paid, fed and clothed on the whole continent of Africa. This is confirmed by the fact that in spite of South Africa's so-called "oppression" of blacks, it has a big problem keeping blacks from neighbouring states out. These people flock to S.A. because of much better working opportunities. There is virtually no unemployment in S.A. and we are the sixth biggest food exporter in the world. The riots at the gold mines that one may read about now and again are simply faction fights between members of different tribes. Normal strike action (which occurs very seldom) is usually blown up out of all proportion by the press.

THE ECONOMIC POSITION

The second major consideration for any investor is the fact that S.A. will probably be the least affected by the threatening world wide recession and/or depression. The reason for this is that it produces 70 percent of the total world production of the one commodity demanded most at this stage—gold. Although S.A. also suffers from monetary mismanagement (our 13 percent rate of inflation confirms this) we are in the fortunate position that the malinvestments created may be absorbed by the extremely high profits of the gold mines. American Investors will be well advised to buy S.A. gold shares. (There is in New York a "specialist" on S.A. gold shares—James Dines. He sends out a weekly newsletter, the Dines Letter and I find him an avid advocate of free market principles). South African one oz. solid gold Krugerrands are also a very sound investment. As of January 1975, 30 percent of South Africa's total gold production (i.e. more than 20 percent of total world production) will go into Krugerrands. Mr. Dines reckons that the Krugerrand may still become the new international currency.

CONCLUSION:

Gold and gold shares are probably the soundest investments one can make in the present shaky world economic climate. For the foreseeable future (5-10 years) S.A. offers a very safe risk for this type of investment. Like most countries we are becoming more and more collective. Whether investments will be safe after this 10 year period, only time and experience will tell.

(For advice on individual gold shares readers can write to me c/o REASON magazine. Alternatively, they can subscribe to the Dines Letter.)