The losers traditionally say that in African politics, but unfortunately, the losers usually have guns. One Nigerian commentator had the temerity to compare the balloting process to that of Florida.
Of course, the latest election, and forthcoming balloting for president, must be evaluated in context: "Compared to what?" Compared to Nigeria's past, where a post-election coup is the rule (and is in prospect this month), even the present muddle may not be so bad. Compared to the rest of Africa, the happy news is, Nigeria may now be a democracy laggard.
"At the end of the 1980s," as David White noted in a thoughtful report for the Financial Times of London, "there were four democracies in the whole of Africa. Today, there are as many as 17." In 1996, then vice president candidate Jack Kemp and still-Congressman Donald Payne urged a group of investors to "buy elections," meaning, invest money in emerging democracies.
Kemp noted the continent's average ranking on the annual Freedom House survey had risen more than 30 percent since 1980. It's up more than an additional 10 percent since then, and threatening to break through in a number of countries.
"As a general rule, democracy should be good for markets," Kemp hypothesized. Kemp was right. The U.S. stock market traditionally rallies during a presidential election year, and will again in 2004, by the way. Emerging markets, where holding an honest vote can be a true societal watershed, enjoy a an average 42 percent gain over their first "clean election" cycle, according to a 1997 study for Brinson Partners.
"You had the Asian tigers in the 1980s," Payne noted. "The next 20 years, you could see some African tigers." Payne should be an investor. One money manager who attended the December, 1996 meeting snorted to me afterwards that he was putting all his money into serious, reliable countries and companies, like the U.S. technology sector. Yet Africa's small exchanges have outperformed the U.S. Nasdaq and other developed markets substantially following the dotcom sector's cordless bungee jump, and a number of specific African markets are actually up over the last five years.
In 1985, the typical top personal income tax rate on the continent averaged close to 70 percent, a figure that generated a massive exodus of Africa's most skilled, inventive, and entrepreneurial people. Today, the average, according to a calculation by Emerging Markets Group, is below 50 percent, and is in the 25-35 percent range in a number of fast-growing countries.
Africa as a whole has a number of other factors working in its favor. A U.S. free trade agreement, pushed by Congressman Phil Crane, is finally being implemented and will help African entrepreneurs to make money without leaving their countries, building internationally competitive firms at home. Prices for commodities should be strong over a 3-5 year time horizon, as two years of low U.S. interest rate fuel global recovery and, eventually, inflation.
Investing in Africa is complicated by the fact that the most liquid market, in South Africa itself, is not necessarily one of the best. South Africa has never found a statesman or group of statesmen to replace Nelson Mandela. It is now on the road to conducting the same kind of understandable but ill-advised land grab from farmers that touched off racial violence and white exodus in Zimbabwe and other neighbors.
As well, U.S. companies like the NASDAQ and New York Stock Exchange have been reluctant to spend scarce resources helping African countries set up an investable market. They're simply too small, at this point, to offer a profitable target for expansion.
Nevertheless, there are at least five countries that have solid or emerging democratic regimes and growth-friendly tax and monetary policies: Kenya, Ghana, Botswana, Mali, and Uganda. All five have established flexible but stable exchange rates, reasonable tax codes, and trade-friendly regimes -- compared, especially, to the rest of the continent.
(Uganda's regime is undemocratic on most scorecards, but its president, Yoweri Kaguta Museveni, is a skilled leader who once asked President Bill Clinton to "stop apologizing" for the continent's condition. "We need to solve our own problems -- that is the best message you can deliver," he told Clinton during a presidential tour. One African observer told me he regards Museveni as Uganda's Pinochet. This is overstated, but then again, anyone who invested in the Chilean stock market early in Pinochet's rule did very well.)
Small funds and individuals can get in on the action through such companies as Ghana's Ashanti Goldfields Company, and a number of mutual funds, and can hedge by shorting such South African companies as AngloGold Limited -- all listed in New York or London.
Investors should always be on the lookout for companies and countries, as Payne wrote in Investor's Daily in 1997, "where there is a large gap between potential output and actual output." From that perspective, Africa, the continent with the largest supply of under-used human capital in the world, remains perhaps the world's greatest opportunity.
(Gregory Fossedal is chief investment officer of the Democratic Century Fund, managed by the Emerging Markets Group. His firm may hold some of the securities mentioned in his articles. Individual investors should contact their own professional advisor before making any decision to buy or sell these or any securities.)
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