Globalization and the Australian Car Industry

It’s been a devastating 18 months for the Australian auto industry and its 50, 000 workers. One by one, the country’s automakers declared that without import protection they couldn’t be profitable and had to close.

Ford is the first to go.  Its local CEO Bob Graziano observed that Australian manufacturing costs are four times Asian levels and double those of Europe.  Having lost $600 million over five years, he said local production would end in 2016.  Ford has made cars in Australia since 1925.

General Motors Holden, the biggest manufacturer, will cease Australian production in 2017. And Akio Toyoda told Toyota workers near Melbourne that with current and future free trade agreements, “it is not viable to continue building cars in Australia.” Toyota’s modern Australian plant will close in two years.

Analysts say economies of scale killed the Australian auto industry. With only 23 million people and a vehicle market that barely exceeds 1 million sales annually, unfettered competition did in high cost domestic manufacturers.

Successive Australian governments have embraced globalization and abandoned the discredited import substitution model of economic development.  Domestic producers used to be protected by quotas and tariffs that in the mid-1990s were as high as 30%. Market opening measures brought auto tariffs down 2.5% each year to their current 5% level.  To soften the effects of competition the government lavished hug subsidies on domestic producers but they are being phased out.

Low tariffs triggered a surge of lower priced imports, which now dominate the market. Even with the car market growing and the local economy booming, domestic car production fell by 50% over the past decade. Last year a mere 210, 000 cars were produced in Australia, an amount equal to the output from a single assembly plant in many places. Domestics now account for less than 18 % of the Australian auto market.

As foreign visitors know well, Australia is a high cost economy. During my two-week visit in November, I was shocked to pay $8 for a hamburger and fish sandwich at McDonalds, or $6 for a donut and coffee at Krispy Kreme, and $20 for a burger and beer at a Brisbane restaurant.

A McDonalds menu in Adelaide, South Australia

Australian autoworkers—those still working--are well paid. Many earn over $100,000 per year and even with the recent depreciation of the Australian currency, the basic industry wage exceeds $20 per hour.  Australia’s minimum wage is US $15 per hour.

Australia is a treasure chest of minerals. China is its biggest trading partner and after hosting last month’s G20 summit in Brisbane, Prime Minister Tony Abbott signed a landmark free trade agreement with China’s president Xi Jinping.

Riding the commodities boom of the 1990 and 2000s, Australia got rich from exporting iron ore, coal and natural gas.  Unemployment remains low and Australia hasn’t had a recession in 20 years. On a per capita basis it is one of the world’s 20 richest countries.

But with the commodity boom over, Australia faces a growing competitiveness problem. Because of strong capital inflows from mining, the Australian dollar rose to levels well beyond what could be sustained. The Aussie dollar soared well above parity with the US dollar, making the cost differential even more severe.  Since 2013 that trend has reversed and the Aussie dollar has recently given up half of its 40% advance of the past decade.

But even at current levels, Australia is uncompetitive.  The Boston Consulting Group designates Australia as the worst-performer of 25 economies in its global manufacturing cost-competitiveness index. Manufacturing costs in Australia, it says, are higher than in Germany, Holland and even Switzerland. Manufacturing wages, it says, rose 48% over the past decade while productivity fell.

Australia has become a service and resources economy, or as former GM Australia CEO Mike Devereux bluntly put it, Australia is now “a farm, a hotel and a quarry.”

Manufacturing has a bleak future in the land down under. But some observers, lamenting the passing of the Australian auto industry, wonder how did it manage to survive as long as it did? 

(this story originally appeared on marketwatch.com)

Cuba's Dual Currency System Complicates Needed Reforms

Che Guevara, the global icon whose revolutionary image adorns millions of tee shirts, was governor of the Cuban central bank from 1959 to 1961. While stopping short of his fanciful notion of abolishing money, the Argentine-born communist did nationalize all farms and industries, a measure that bedevils the island 55 years later.

Cuba’s economy is a wreck. Most of the island’s 13 million inhabitants are impoverished, earning the equivalent of $20 a month. Food is in short supply with rice, beans and coffee rationed. Meat is a rarity for many. Cuba is broke, with foreign debts it is unable to repay.

Living standards according to researchers at Washington’s Brookings Institution have stagnated for two decades.  Even Fidel Castro admits the failure of socialism, declaring in 2010, “the Cuban model doesn’t even work for us any more.”

The 2014 Index of Economic Freedom from the Wall Street Journal and Heritage Foundation ranks Cuba as second to last in its assessment of 178 countries.  The three lowest ranked countries are Zimbabwe, Cuba and North Korea.

When the Soviet Union collapsed in 1991 Cuba lost its financial benefactor.  Desperate for foreign exchange, Fidel Castro opened Cuba to tourism, an industry he had denounced as parasitic during the previous three decades. Sun-seeking European, Latin American and Canadian tourists flocked to the island bringing with them the hard currency Cuba so badly needed.  Cuba today couldn’t survive without tourism.

In 1994 Cuba unveiled a two-tier currency system that remains operational. Tourists are compelled to convert their money at the artificial rate of one dollar to one convertible peso. Ordinary Cubans meanwhile use the national peso whose exchange rate is not 1:1 but a more realistic 25:1.  Two legal currencies, the convertible peso and national peso, freely circulate.

The dual currency system has led to immense distortions. Since remittances from abroad total $2 billion annually, if you’re getting dollars from relatives in Miami you can live well because that cash becomes convertible pesos. In a form of economic apartheid, shops with the scarce consumer goods that people want accept only convertible pesos.

As was the case in communist Eastern Europe, those with access to foreign currency—hotel maids, bellboys, drivers-- do well while the masses suffer with national pesos. A common complaint is the absurdity of being paid in national pesos while needing convertible pesos to buy goods you need.

During a seven-day visit to Cuba some years back, I experienced the anomalies of the two-currency system. Using public transport to travel the ten miles from downtown Havana to Ernest Hemingway’s home in San Francisco de Paula, I paid the bus fare in national pesos, less than one US cent.  At the Hemingway museum the $3 entrance fee had to be paid in convertible pesos.  Inside staff furtively cajoled visitors to buy with dollars Che Guevara commemorative coins. Later dining in a private home permitted to serve tourists, the owner disclosed that he earned more in one night than he did in a month in his job as a veterinarian.   

Not surprisingly the dual currency system is deeply unpopular and Raul Castro, who succeeded his brother in 2006, promises to phase it out. But how can this be done without triggering social unrest? No one knows what the Cuban peso is really worth.

Two bicyclists I met on the Havana waterfront who had grown up in communist East Germany had an insightful perspective on the Cuban revolution.  They had traveled three weeks cycling the entire circumference of the island.  They were shocked at the poverty they witnessed but said that everywhere people retained pride in the long ago revolution. Cubans, they said, were justifiably proud of their achievements in health care and education.

I think the normalization of US Cuban relations poses significant risks for the island’s communist rulers.  For decades they pointed to the US economic embargo as the reason living standards remain low. That argument will fall away and the authorities will be left with the dysfunctional system they created.

Can Raul Castro manage the kinds of market-based reforms essential for Cuban economic growth? His record thus far suggests he can’t.  Since taking power he has zigged and zagged, trying one thing, then another, never following through.

In 2011 Raul Castro said half a million workers would be dismissed from money losing state enterprises. It hasn’t happened. Cubans can now own cell phones and use the tourist hotels that were previously off limits. So what, if the police state apparatus remains intact?  The media is still tightly controlled.  Promised moves on property rights and private business have been tentative.

 Cuba is a big deal in the Caribbean and Latin America. With 11 million people and a landmass greater than the other Caribbean islands combined, Cuba could be a regional powerhouse.

As Canadian Prime Minister Stephen Harper observes, normalization of US Cuban relations is long overdue. Fundamental change at last appears to be underway but Cuba’s future is very uncertain. 

    

Missing from the Celebration of Freedom—Two Leaders Who Died Too Soon

BRISBANE, AUSTRALIA:  As the world marked the 25^th anniversary of freedom returning to Eastern Europe, it is sad that two of the wisest post-communisleaders are no longer with us.

In the extraordinary events that followed the collapse of the Berlin Wall, Poland was the inspiration. It had elected a non-communist government months before the wall came down. Lech Walesa, Pope John Paul II are true heroes who changed the world. Ronald Reagan’s strong stance and his 1987 call to “tear down this wall” were similarly decisive. Mikhail Gorbachev, the last Soviet leader-- still alive at 83—courageously allowed the wall to be opened, sacrificing in the process Moscow’s loyalist East German communists. 

Comprehending the enormity of Gorbachev’s deed, an astonished British editorialist wrote that, “all of Stalin’s war time territorial gains in Europe were given up without a shot being fired.”

Events cascaded rapidly. Czechoslovakia’s communist government collapsed within days after the wall came down. Hungary catapulted towards free elections while the remaining regimes-- Romania, Bulgaria and Albania-- toppled like a row of dominoes.  In 1990 East Germans voted to merge their country with West Germany. And late in 1991 the USSR itself collapsed, fragmenting into 15 separate countries.

History, in my opinion, will judge Vaclav Havel of the Czech Republic and Lennart Meri of Estonia the most significant leaders to have emerged from the wreckage of communism.

Meri, Estonia’s president from 1992 to 2001, deserves recognition. Born into a prominent family, when the Red Army invaded in 1940, 12 year-old Meri, his mother and younger brother were exiled via prison train to the Siberian gulags. His father, an Estonian diplomat, had to endure Moscow’s infamous Lubyanka prison. Miraculously the family survived and later Lennart was permitted to attend university. He became a respected writer and filmmaker. He was 60 when the Wall came down.

Meri earned the admiration of Estonians during the failed coup against Gorbachev in August 1991. With his countrymen terrified that a Russian invasion would soon snuff out their drive for independence, Meri took to the radio, assuring citizens they needn’t worry, that he knew the plotters to be clueless and incompetent. There was no invasion and Meri’s grandfatherly counsel had enormous impact. 

Fluent in six languages, most learned as a youth during his father’s postings abroad, Meri repeatedly observed that the end of communism was a beginning, not an end. A tall, dignified man, Meri understood the horror of mass deportation. But remarkably he championed the cause of freedom for Russians. He died in 2006. Were he alive today Meri would be aghast at Russian actions in Ukraine, and equally comforted that Estonia’s security is anchored in Nato and European Union membership.

Lennart Meri as president

Vaclav Havel, like Meri, for five decades was deprived of the honest, authentic life he so passionately wanted. Like tens of thousands, he had to make the best of a bad situation.

Like Meri, Havel paid a heavy price for coming from an entrepreneurial family that after the communist takeover in 1948 was denounced as a class enemy. Coming of age during the period of maximum repression, he was banned from universities.  In 1975 he wrote a devastating critique of totalitarianism. In six pages Havel dissected the massive fraud and corruption of communism. Its lofty ideals, he wrote, were hollow.

Reflecting on the 1989 Velvet Revolution in Czechoslovakia, Havel explained to an audience at the World Economic Forum in 1992 how Soviet imperialism imploded.

"Communism was not defeated by military force, but by life, by the human spirit, by conscience…. It was defeated by a revolt of color, authenticity,.. and human individuality."

Famous for his essay on the power of the powerless, Havel lived to see the society where imperfectly, “truth and love prevail over hate and lies.”

Vaclav Havel

Universally hailed as a great European, Havel the dissident playwright spent years in communist jails before being swept to the Prague Castle in the Velvet Revolution. He served as president first of Czechoslovakia and then the Czech Republic from 1989 to until 2003.  Vaclav Havel died at age 75 in 2011.  Writer Anne Applebaum hails Havel’s unique success in making the transition from dissident to national leader.

Alan Levy, the founding editor of the Prague Post, was asked why Prague had become the in spot for émigré young Americans in the 1990s. He replied that he himself had pondered the question, why Prague instead of Berlin, the place that exemplified both the wall and freedom. “Prague,” he concluded, “became the Mecca for young people because of one man, Vaclav Havel. It was Havel’s example of intelligence, modesty, artistry and love that drew people to Prague.”

Havel and Meri, I suspect, would both celebrate 25 years of freedom, while warning of the obvious dangers ahead.

Barry D. Wood covered the collapse of communism and the rebuilding of Eastern Europe for Voice of America. A version of this article appeared on marketwatch.com

Poland's Extraordinary Transformation

WASHINGTON:  Twenty-five years ago this autumn two remarkable events took place in Washington.

On September 27^th, 1989 in the musty embassy ballroom of the Polish People’s Republic on upper 16^th Street, Leszek Balcerowicz, finance minister in the new non-communist government, outlined a plan to transform Poland’s economy from communism to capitalism. Shock therapy would be launched in three months.

Balcerowicz’s message was breathtaking.  Prices would be decontrolled, individuals allowed to start businesses, the survival of state enterprises determined by the market. There was more-- the printing press would be shut down—halting hyperinflation, the worthless Polish currency redeemed.

Financial journalists in Washington for the annual meeting of the International Monetary Fund were astonished.  Some sprang from their seats to file stories after the modest man in the ill-fitting East European suit stopped talking. For those of us remaining the room was electric. One reporter said, “there are lots of books about transforming capitalism to communism, none for going the opposite direction.”

This was six weeks before the Berlin Wall came down.

On October 19th, 34-year-old Jeffrey Sachs, the Harvard economist advising the Polish government, made an emotional plea to Washington insiders. At a Willard Hotel dinner arranged by the Institute for International Economics, Sachs said Poland required a cash injection to “leap across the chasm” from disintegrating communism to capitalism. “The next six months,” he said, “are critical in determining whether Eastern Europe’s first non-communist government since World War II succeeds.”

Sachs had made his name by helping to end hyperinflation in Bolivia. He essentially shamed his Washington audience into action, excoriating the US government, the IMF and World Bank for dragging their feet.  It was imperative, he said, that the Polish experiment succeed.

The debate over big bang and shock therapy essentially began that night.

Sachs had offered his services to Poland only weeks earlier and was just off the plane from Warsaw where there was chaos and anger over shortages of basic commodities, including food. Few outsiders thought the planned reforms-- that in the short-term would further depress living standards—had any chance of working. Sachs said later, "It was a terrifying and unpredictable period."

The rest, of course, is history. Not only did the Balcerowicz reforms stabilize and activate the economy, they won critical public and government backing. They became a model for similar plans in Czechoslovakia and the Baltics (where they worked) and in Russia (where they failed).

What could not be foreseen in the autumn of 1989 was that Poland would become the star performer of all the economies that emerged from the wreckage of the Soviet empire. Poland’s return to growth and fiscal discipline were powerful factors in the European Union agreeing to admit eight former communist countries in 2004.

Balcerowicz, now 67, served as finance minister and then central bank chief until 2007. Currently he teaches at the economics university and runs his own research institute.

While Poland has not yet joined the euro currency zone, Balcerowicz subscribes to the fiscal austerity doctrines championed by Germany. He faults Greece and other southern periphery countries for not moving fast enough or hard enough to restructure their uncompetitive economies.

The Polish miracle continues.  Alone among European Union economies it did not experience a downturn following the 2008 financial crisis. In most recent years Poland has been the fastest growing economy in the EU. Its gross domestic product has doubled since 1989 and is today Europe’s sixth largest economy.

More significantly, per capita g.d.p. has more than doubled since 1989.  This in a country of nearly 40 million, by far the largest in Eastern Europe.

Poland and Germany—with a long history of conflict—have become partners, demonstrated most recently by Chancellor Angela Merkel championing the selection of conservative Polish  Prime Minister Donald Tusk as the new president of the EU council. 

Reflecting on the 25^th anniversary of his reforms, Balcerowicz credits Sachs with playing a vital role in persuading the Solidarity-led government that shock therapy was the best way forward. For his part, Sachs says he is "thrilled that the Poles acquitted themselves so beautifully in the pages of history."

  

South Africa’s Nuclear Agreement with Russia Raises Questions

WASHINGTON: On the sidelines of a conference in Vienna on September 22d, South Africa signed an agreement for Russian nuclear power plants to be built in the country. The deal could be worth $50billion.

Signing ceremony in Vienna: South African Energy Minister Tina Joemat-Pettersson and Rosatom CEO Sergei Kirienko (photo: Rosatom)

Assuming the deal goes forward, they would be the first Russian nuclear reactors in Africa, joining the continent’s sole nuclear facility, the French-built Koeberg power station near Cape Town. 

South Africa badly needs additional generating capacity. Its power grid is overstretched and rolling brown outs have become common. The African National Congress (ANC) government has long favored additional nuclear plants to augment coal-fired facilities. The Russians would build eight VVER reactors with a combined output of 9.6 giga watts by 2030. It would be one of South Africa’s biggest infrastructure projects.

The opposition Democratic Alliance is calling for details of the strategic partnership agreement to be made public. The South African energy department says the accord is preliminary and that constitutionally mandated procurement procedures will be followed.

With the government having a history of shady business transactions, the Russian nuclear deal has set off alarm bells in the South African media. Commentators are calling attention to President Jacob Zuma’s surprise five-day visit to Russia last month, for which no official program was released.  It is known that Zuma met with President Vladimir Putin but it is not known if the nuclear framework was discussed.

Zuma is already under fire for financial irregularities in a $20 million upgrade to his private residence.  In 1999, long before he became president, there were charges of kickbacks to ANC officials-- including Zuma—as part of a $5 billion arms deal with Sweden.

Following the ANC’s victory in last May’s parliamentary election, Zuma reshuffled his cabinet, surprising analysts by elevating his lightly regarded agriculture and fisheries minister, Tina Joemat-Pettersson to the energy portfolio. Last year Ms. Joemat-Pettersson, a communist from Kimberly in the Northern Cape, was investigated for unethical conduct after awarding a fisheries contract to a company  inked to the ANC but with  no experience in commercial fishing. She turned aside opposition calls to resign.

At the signing ceremony in Vienna, Ms. Joemat-Pettersson said the accord “opens the door for South Africa to access Russian technology, funding and infrastructure.”

By signing with Rosatom, South Africa is ignoring the punitive sanctions levied against Russia by Europe, America and Japan to protest Moscow’s intervention in Ukraine. While in Washington in early August for President Obama’s African Leaders Summit, Mr. Zuma called for increased US investment in South Africa.  The Westinghouse unit of Japan’s Toshiba, as well as French and Chinese firms, have wanted to build nuclear plants in South Africa, but analysts say the Russian technology is cheaper.

South Africa is the leading beneficiary of AGOA, the African Growth and Opportunities Act, that allows most African products duty-free entry into the US market.  

South Africa's Election a Triumph of Democracy

The biggest winner in South Africa’s May 7th parliamentary election is democracy itself. Twenty years after the first all race ballot, Nelson Mandela’s rainbow nation is alive and well in the country of 50 million. The election is a triumph of constitutional government and rule of law.

Eighteen million people, 74% of registered voters, peacefully cast ballots at 22,000 polling stations across nine provinces from the Cape of Good Hope to the Limpopo River on the Zimbabwe border. It was South Africa’s 5^th democratic election since 1994 and the first since the death of Mandela last December. Voting took place without violence or disruption. Not one of the 29 parties contesting the election cried foul or claimed vote rigging.

Helen Zille congratulates Jacob Zuma on ANC victory

As with neighboring Botswana, the peaceful South African election provides a model for a continent where—sadly--free elections are rare.

As predicted by polling organizations, Mandela’s African National Congress won by a landslide. The ANC, founded 102 years ago, has won all five of South Africa’s democratic elections, although its victory margin has gradually eroded.

Headed by 72-year-old Jacob Zuma, the ANC got 11 million votes, 62% of the total. The result was only marginally below the 66% it won in 2009.

The official opposition, the Democratic Alliance headed by the premier of the Western Cape, Helen Zille, boosted its vote to 4 million or 22%, up from 16.6 % five years earlier. Significantly, the DA extended its reach beyond minority whites and mixed race voters, winning 700,000 black votes.   

The biggest surprise was the rise of the far left Economic Freedom Fighters of expelled ANC Youth League president Julius Malema. His party was founded only eight months ago. Its message of nationalizing mines and banks and redistributing white farms resonated with youth and the poor. The EFF’s trademark in the campaign was the red beret popularized by the late Venezuelan leader Hugo Chavez.   The EFF won one million votes, 6.3% of the total, more than what had been predicted. 

South Africa’s new parliament convenes in Cape Town on May 21^st.  It will again be dominated by the ANC but the ruling party will not have the two-thirds majority it hoped for. A two-thirds majority is needed to amend South Africa’s 1996 constitution. 

Of the 400 seats in parliament’s lower chamber the ANC will have 249, the Democratic Alliance 89, and 25 for the EFF. The remaining 37 seats are split among 10 smaller parties.  With the presence of the flamboyant, populist EFF, the new parliament promises to be lively as the ANC is challenged from the left and the right. Parliamentary debate is televised by the South African equivalent of C-Span.

The May 7^th election also chose legislatures for South Africa’s nine provinces. The ANC triumphed in eight but the DA tightened its hold on the Western Cape where it has been dominant since 2009. The DA majority in the province rose to 59% while the ANC fell to 34%. The DA hoped to win Gauteng, which includes Johannesburg, but fell short with 31%, to 54% for the ANC.

The ANC landslide means that Jacob Zuma can serve a second five-year term as president. However, the ANC’s executive council can remove Zuma as party leader and president, an action Zuma employ to oust then president Thabo Mbeki in 2007. That extreme measure is considered unlikely as Zuma appears to have firm control of the party apparatus.

Since 1994 the ANC has governed in a tri-partite alliance with the communist party and the trade union federation. The coalition is fraying amid a split in the labor federation and dissension elsewhere. While Zuma’s minister of trade and industry is a communist, that party has been unable to persuade ANC leaders to embrace its call for state control of what the communists call an untransformed free market economy.

Zuma’s choice of cabinet ministers will be a marker for the future direction of South Africa’s economy, the most developed and industrial on the continent. Two years ago Zuma promised large-scale job creation and faster economic growth.  That hasn’t happened as growth slowed to 2% last year while five percent growth is needed to bring down a 25% jobless rate. Analysts are unsure whether Zuma’s new government will hold to its embrace of a mixed economy or become more friendly to business.

Barry D. Wood, a long time observer of South Africa, recently spent five weeks in several parts of the country.

    

The May 7th Vote in the New South Africa

To understand the new South Africa, look no further than the red-robed female jurist presiding at the televised trial of blade runner Oscar Pistorius. “My lady,” as she is addressed in court, is Thokozile Masipa, a 67-year-old lawyer from Soweto. In 1998 she became only the second black woman appointed to a South African high court.

Judge Thokozile Masipa (photo: SABC) 

Here is a judge who in apartheid days in Pretoria could have aspired to being no more than a “tea lady,” or at best a secretary. Now, 20 years after South Africa’s first free elections, it is she who will decide the fate of an Afrikaner Olympian who 18 months ago was a national and even global hero. As an effusive Archbishop Desmond Tutu likes to say, “what a country!”

On May 7th South Africans vote in the fifth parliamentary election since the end of minority rule in 1994. It is the first test of voter sentiment in the land of 51 million since the death last December of Nelson Mandela, the iconic father of South African democracy.

This is likely to be the last election in which Mandela’s African National Congress (ANC) wins a landslide victory. Polling data suggests that the ANC, which has ruled for 20 years, will again receive over 60% of the vote. In 2009 it got 65%, and the IPSOS polling organization predicts that with a high turnout the ANC majority this time could reach 67%.

But polling data doesn’t tell the whole story. The current ANC leader, President Jacob Zuma, is unpopular and has been booed at public events. His sexual indiscretions and lengthening corruption trail embarrass many. The ANC’s alliance with the communist party and trade union federation is unraveling. To its right, the pro-business Democratic Alliance is making gains and its tally could reach 23%, while on the left the new Economic Freedom Fighters of firebrand Julius Malema is projected to get 5%.

The ANC campaigned on the theme “we have a good story to tell.” In many respects this is true. The South African Institute of Race Relations says ANC support rests on its success in improving living conditions of the poor. Since 1994 three million housing units have been constructed, electricity and water connections have been extended into rural areas, and welfare grants have increased from three million to 17 million poor people. The number of blacks in the middle class has doubled to 10%.

But arrayed against this are huge negatives. Corruption is widespread at the top, swirling in particular around the president. A report from the public protector says Zuma personally benefited from $20 million of public money spent on “security upgrades” at his rural Nkandla residence. There are multiple cases of theft in state enterprises and no bid contracts have gone to unqualified ANC cronies under the country’s flawed black economic empowerment program.

Public primary and secondary education has deteriorated with opposition leader Mamphele Ramphele saying, “it is worse now than it was under apartheid.” Crime is endemic, particularly in Johannesburg, although statistics indicate an improvement over the past two years. The biggest deficit for the ANC is the economy. Unemployment remains stubbornly high at 24%, with several economists saying the real rate is closer to 35%.

South Africa’s economy grew by only 2% last year while 5% growth is required to reduce joblessness. There is persistent labor unrest and strikes are typically settled with wage hikes well in excess of inflation or productivity gains.

For me, having spent considerable time in both the old and the new South Africa, the country’s long-term future is bright. Its institutions are proving to be surprisingly robust. All major groups in the rainbow nation of 11 official languages affirm allegiance to the 1996 constitution that US Supreme Court justice Ruth Bader Ginsburg extols as “a great piece of work,” embracing “fundamental human rights and independent judiciary.”

South Africa’s media is vibrantly free as evidenced by daily accounts of official corruption and wrongdoing. Despite the ruling party holding 2/3’s of parliamentary seats, debate is far ranging and contentious. South Africa has its version of C-SPAN where viewers last month could watch an opposition leader speak directly to the president, accusing him of having failed and “ hideously transforming” the party of Nelson Mandela.

Public Protector Thuli Madonsela is identified by Time magazine as among the 100 most influential people of 2014. In March she released a scathing 400 page report of upgrades to the president’s home that was broadcast live even on state television. Constitutional lawyer Izak Smuts calls the report “an outstanding example of the strength of our democracy.”

Property prices, always a good barometer of confidence, are rising in urban centers, particularly Cape Town and the adjoining Western Cape, the only South African province not governed by the ANC. White flight is negligible, an important factor as five million whites disproportionally possess skills needed to efficiently operate Africa’s biggest industrial economy.

Two decades ago South Africa was blessed with visionary leaders who built a foundation for future progress. The essential deal between Afrikaner president FW de Klerk and Nelson Mandela was majority rule—full democracy and an end of white rule—in return for constitutional protection of individual freedoms and property. The civil war that had long been predicted was avoided. Immense problems remain, not least income inequality. But as countries as disparate as the US and China are finding, there are no quick fixes, although education and equal opportunity are essential.

Should the ANC vote fall below 60% or if it loses its majority in Gauteng where Johannesburg is situated, Jacob Zuma will likely be recalled by the party, just as his predecessor Thabo Mbeki was unceremoniously ousted by a leadership group headed by Zuma.

I think of South Africa as a land where two mirrors are visible to all who care to look. One is Zimbabwe, the rich country to the north that under Robert Mugabe 30 years ago made a strong start and then descended into despotism and collapse. The other is the Western Cape, whose bright image the ANC would extinguish because since 2009—unlike the rest of South Africa-- a multi-racial coalition has succeeded in providing quality services while minimizing corruption.

Barry D. Wood was a reporter in South Africa in the 1970s and has returned regularly since 2010. Follow him on twitter @econbarry.

Remembering Portugal's Revolution That Changed Africa

Forty years ago a brave band of junior officers overthrew Portugal’s dictatorship. On April 25th, 1974 thousands poured into Lisbon’s plazas in celebration. Flower sellers did a brisk trade in red carnations that poked from the barrels of soldiers’ rifles. Marcelo Caetano, the despot who headed the fascist government in power since 1932, fled to Brazil.

The young captains behind the coup had seen for themselves that the colonial wars in distant Guinea Bissau, Angola and Mozambique could not be won. To me, an aspiring journalist eager to get to southern Africa, the carnation revolution was a signal that dramatic changes lay ahead. A glance at the map suggested that the white Rhodesians who had defied Britain by declaring independence in 1965 would face increased pressure as their Portuguese allies departed from Mozambique.

Arriving by ship in Cape Town in late 1974, I became a writer at South Africa’s Financial Mail magazine. I soon traveled to Lourenco Marques and Beira and from there by train to Salisbury, the colonial name of Zimbabwe’s capital. In Mozambique I found a white community divided between those welcoming independence and those who wanted out as quickly as possible.

Interviewing Portugal’s last governor-general and one of the coup plotters, Victor Crespo, it was clear that haste not caution guided the revolutionaries in Lisbon. Mozambique’s Frelimo insurgents were similarly surprised by the speed of Portugal’s planned withdrawal. Negotiations in Zambia quickly produced an agreement to hand over the territory that is twice the size of California to the Marxist guerrillas. The accord contained no provision for elections.

An eerie calm settled over Mozambique in early 1975. A transitional government went about its business but big decisions like nationalizing banks and industries were put off. Tensions rose. Fear was near the surface. Radio stations and newspapers rehearsed citizens on the texts of Frelimo’s socialist anthems while the middle and upper classes worried their property would soon be seized. Refugee flights to Lisbon became more frequent.

Back in Johannesburg on the anniversary of the first Portuguese coup, I put a red carnation in my lapel and went to the offices of a Portuguese bank. Stepping from the elevator I met a banker who upon seeing my carnation tore it from my jacket and crushed it. He fumed, “Eu sou um fascista (I am a fascist).”

As independence day (June 25th, 1975) approached, Frelimo leader Samora Machel left Tanzania and journeyed the length of Mozambique, as Frelimo rhetoric described it, “from the Ruvuma to the Maputo.” When he reached the capital I was among the crowd at the airport observing the charismatic leader in battle fatigues step from his plane.

There was torrential rain the night of independence, soaking the thousands at the soccer stadium watching the Portuguese flag lowered and Frelimo’s banner for the People’s Republic of Mozambique hoisted. At city hotels war reporters, several fresh from Vietnam in flak jackets, clustered at telex machines that clattered with their dispatches. The experienced among them called out the calibers of the celebratory gunfire heard in the distance.

Returning to Johannesburg there was confusion over the name of the Mozambican capital. The notice board at what is now Oliver Tambo airport mistakenly spelled out “Can Pfumo,” as it was not yet known that the name was Maputo.

In Angola, the even larger oil rich territory on the Atlantic, official Portuguese conduct was disgraceful. Unable or unwilling to seek cooperation among three rival guerrilla armies, Portugal chose simply to sail away when their flag was lowered on November 11, 1975. Terrified of ethnic conflict, thousands of settlers fled, many crossing into Namibia with the few possessions they could carry. The stage was set for great power intervention, including later ferocious clashes between South Africans and Cubans. Angola’s cruel civil war went on for two decades.

Upon independence Mozambique made good on its promise to close Rhodesia’s vital rail links to Beira and Maputo. Still defiant, the Ian Smith government responded by stepping up its war against insurgents, a brutal conflict that killed thousands and continued several more years until Smith sued for peace and Zimbabwe won independence in 1980.

In the 1980s South Africa assumed from Rhodesia the supplying Renamo rebels that wreaked havoc and destabilized Mozambique’s government. In 1986 Machel was killed when his plane mysteriously crashed inside South Africa on its approach to Maputo. His successor Joachim Chissano was less of an ideologue and in 1989 Frelimo abandoned socialism and gradually embraced multiparty democracy and a market economy. There is a competition to replace the Mozambican flag still emblazoned with an AK 47 rifle.

Mozambique flag, 1975

Mozambique is in the midst of economic boom with foreign investment pouring in to mineral and natural gas resources in the north.

Buffeted by crippling sanctions and mounting unrest, South Africa’s last apartheid leader F.W. DeKlerk shocked the world in 1990 by ending apartheid and freeing Nelson Mandela. He began negotiations with the ANC. The result was the new constitution and South Africa’s first free elections whose 20th anniversary has just been observed.

In Portugal the flirtation with Marxism was of short duration. Banks and big industries were nationalized just as in Mozambique and Angola. But in Portugal they were privatized in the 1980s as Western Europe’s poorest country opted for modernization and membership in the European Union, which it joined in 1986.

Now in his ‘80s, Victor Crespo, the Portuguese naval officer I met in 1975, has been reflecting on the 1974 revolution. He told a Lisbon broadcaster that democracy overcomes all adversity and that the will of the people will triumph over today’s economic hardship. Crespo didn’t speak of democracy in 1975.

The Portuguese revolution set in motion many events, most immediately in the African colonies. It importantly hastened independence in Zimbabwe and Namibia and contributed to the coming of democracy in South Africa. In Europe the carnation revolution inspired the Spanish and Greeks who similarly overthrew their own dictatorships.

Kindle and the Rise of E-Books

In a late February talk in Washington, HarperCollins chief executive Brian Murray declared that Amazon.com seeks to put publishers out of business. “No-one,” he said, “has yet discovered how to compete with Amazon.” He regards Amazon as more powerful than Walmart.

Amazon’s Kindle that was unveiled in 2007, said Murray, triggered the explosive growth of ebooks, which now comprise 20% of all books sold in the United States. At Harper Collins, number two of the big-five publishers, the percentage is an even higher 50% of sales. Three quarters of all ebooks in the United States are in the Kindle format. “Everyone,” said Murray, “underestimated the speed at which ebooks would be accepted.”

The digital shift, said Murray, is pervasive, impacting every facet of the journey from author to reader. It means that anyone can be published. “For authors,” said Murray, “there are more opportunities now than ever before.” However, printers and retailers are collapsing.  Forty-two percent of book sales are online.

Significantly, publishers are coping. After several years of slow or no growth HarperCollins is publishing more books than ever, some 3,500 last year or 15 titles each day. The transformation of retailing has cut down on returns and thus boosted profits. In the pre-Amazon days 50% of books went unsold and came back to the publishers. Books—both printed and digital—comprise a $25 billion industry.

Murray’s message was that unlike music the publishing industry is figuring out how to compete and survive.  He pays tribute to Amazon, saying it is amazing that anywhere in the world a reader can order a book and have it delivered to his Kindle in seconds.

In his biography of Amazon founder Jeff Bezos (The Everything Store—Jeff Bezos and the Age of Amazon), Brad Stone says it was the success of Apple’s iPod that led to the Kindle. Released by Steve Jobs in 2003 along with the iTunes music store, they had the effect of destroying the traditional music business.  Realizing that, Bezos launched Lab 126, a secret mission to reinvent the clunky ebook readers, which had been around in primitive form since the late 1990s.  Bezos, argues Stone, understood that he had to destroy the old way of running Amazon in order to control the ebook business, just as Apple had reshaped music.  In effect, the iPod made the Kindle.

Up Against the Wind in Cape Town

CAPE TOWN, SOUTH AFRICA The 65-mile Argus bicycle tour has been an annual fixture in Cape Town since 1978. A charity event run in part by the local Rotary Club, the Argus has evolved into the world’s biggest timed bicycle race.

This year’s event on March 9th drew 35,000 cyclists, 90% of whom were South African. This year’s winners completed the scenic circuit winding around Table Mountain between the Atlantic and Indian oceans in less than 2 hours and 51 minutes. Riders battled the stiffest winds in five years that made climbing perilous with a risk of being blown over.

 Despite adversity 90% of entrants—only a fraction of which are professionals—finished the race, with most getting around the course in under 6 hours. About 20% of the riders were black, and somewhat over 30% women. The oldest riders were in their 80s and the youngest not yet teenagers.

Tour director David Bellairs said the 30 mph gusts actually made the race safer. “The wind slowed people down,” he said, “it almost seemed to reduce the number of crashes.” The three medical helicopters constantly overhead took only 59 riders to hospital, most of them with fractures.

Craig Leithwhite

Noting the growing popularity of cycling, Johannesburg rider Craig Leithwhite says, “cycling is the new golf.” People, he says, want to be fit and test themselves. Most riders train many months for the Argus and come back year after year. The Argus is big business for Cape Town, South Africa’s most prosperous city. Alan Winde of the Western Cape Tourist authority says the bike race brings $50 million into the local economy.

As it has exploded in popularity, cycling has become expensive. The cheapest bikes on display in the exhibit hall where riders checked in for race numbers and electronic chips cost $2,500.

Duncan Bell and wife

The one-day event over, riders already are turning their attention to next year’s race. Businessman Duncan Bell, 69, finishing his 20th Argus, is hopeful that in 2015 he’ll improve on this year’s time of 4 hour 20 minutes. #

Tesla's Battery Magic

Tesla and its CEO Elon Musk are on a roll. The Silicon Valley start-up’s stock price has nearly doubled in recent months after rising 400% last year. Consumer Reports named Tesla’s luxury Model S the best overall car of the year. And the company is unveiling plans for a $5 billion ‘gigafactory’ to produce lithium ion batteries in the desert southwest.

Under consideration for a year, the battery plant will be built by Tesla and possibly two other partners. It is a huge prize being contested by four states—Nevada, Arizona, New Mexico, and Texas.  It will encompass 500 to 1,000 acres and employ 6,000 workers. Bidding is fierce but the early favorite is a location near Reno, relatively close to Tesla’s auto production plant in San Francisco’s East Bay.

Analysts say however that if sales continue to surge Tesla may want a second assembly plant to produce its third-generation, more affordable electric cars that are due by 2020 when battery output is expected to reach half a million packs per year.  The plant requires abundant sunshine for solar power.  One prospective partner, Japan’s Panasonic, is currently Tesla’s sole battery supplier.

Musk, the engineering genius behind Tesla, Space X and SolarCity, says at full capacity output from the gigafactory will equal all lithium ion batteries currently produced worldwide.  The Model S uses 7,000 of the small AA-size batteries pictured above.  They are arrayed in a rectangular pan housed under the floorboard. Musk believes future cells will be lighter weight and that economies of scale will drive down battery prices by 30%.

A shortage of batteries has limited Model S production and may do so again this year as Tesla wants to boost car production 50% to 35,000 vehicles.

The battery plant sweepstakes and the promise of thousands of well paying jobs builds the Tesla brand and the favorable publicity to boost future sales. Morgan Stanley analyst Adam Jonas expects Tesla could double its share of the global car market to nearly 1% by 2028. Must says Tesla hopes to produce half a million electric vehicles annually by the end of the decade, half of them in the US. The gigaplant could supply cells to other EV producers.

Tesla supercharger locations

As part of Tesla’s brand-building strategy, Musk will soon out on a cross country journey that will showcase the company’s network of superchargers. The charging stations are cost free to Tesla owners.  They have been built at 200-mile intervals from LA across the country’s midsection to the east coast.