By Peter Kohli
When I looked at India and Indonesia , I explained why I thought the middle classes in those countries showed the kind of political passion needed to move their countries closer to economic success.
Unfortunately, the same cannot be said of either South Africa or Brazil, which are facing elections in May and October, respectively. I'm predicting that the outcomes of these two elections will further delay, or even derail, any significant increase in global investment in these markets.
When judging whether or not a developing market is moving closer to success, we look at the country's middle class. Many money managers only measure whether this pivotal group is growing and increasing its spending. But I think there's another, maybe even more important, element: determining whether the country's middle class is politically influential and involved in moving the country towards openness.
Regrettably, in the cases of South Africa and Brazil, the middle classes lack the numbers, power, voice and drive needed to push their economies forward.
This year, the African continent's wealthiest and most-developed country will elect a new General Assembly, as well as new provincial legislatures.
The assembly chooses the president after the election. As the polls indicate now, the current leader, Jacob Zuma, and his party the African National Congress (ANC) have the majority of votes. I believe the ANC's two-decade lock on politics has hampered South Africa's development.
In my opinion, Zuma is part of the entrenched establishment, and it appears he's going to win. Compared with the leaders in the polls in India and Indonesia — who are anti-corruption and pro-openness — he's not against or for anything more than the status quo. Moreover, between 1995 and 2005, he was accused of accepting bribes in exchange for helping secure government contracts.
On the one hand, we often forget how new this South Africa is and how far it has come. It's been just 20 years since the first all-race elections in 1994. Elections are free, the country is a member of the G20, its post-apartheid constitution is among the most progressive, its judiciary is independent and its press unrestricted.
On the other hand, the ANC and its policies have helped drive away the middle classes needed to keep moving the country forward. This is by no means merely a "white flight" phenomenon as other races, especially those with advance degrees, have been emigrating.
While the South African government does not keep reliable emigration statistics, a number of independent studies have shown the drain of skilled, educated citizens. Currently, the South African middle-class numbers are down to some seven million in total out of a nation of 52 million.
And those numbers are sealing their fate. Compare the seven million middle class with the 12.5 million people paid cash benefits thanks to Africa's only broad-based welfare state set up by the ANC.
Even if every single middle-class voter of all colors voted against the ANC, they are more than outnumbered by those supporting it.
Worse, South Africa's middle class has dramatically cut back on their consumption or, as a UTC Unilever study calls it, have embraced "financial conservatism." I see it as a one-two punch: a middle class spending less and neither vocal enough or consisting of enough numbers to effect real change.
All of this is starting to show in the investment climate of South Africa. Take a look at their currency which is getting hammered because foreign investors see no prospect of change on the horizon.
As the world counts down to the World Cup in June hosted by Brazil — and the Olympics two years later — I can only count down to that country's pivotal October election.
Between those two world events and following the elections, the world's seventh-largest national economy is going to have to do some very unpopular things to mitigate inflation and revitalize the stagnating economy.
I predict deep budget cuts, huge hikes in taxes, especially for the wealthy and populist policies to pacify the poor. Even still, Brazil's GDP will remain restrained in the 1%-2% range, and its foreign imbalance will grow.
Like South Africa, the current president, Dilma Rousseff, who represents the workers party, is running far ahead of anyone else (in the opinion polls). Unfortunately, I don't see her losing, which is both a disappointment and a negative for Brazil because she has really done nothing in or for Brazil (the Olympics is really due to her predecessor, Lulu).
Then we have Brazil's middle class. They have taken to the streets in protest, but instead of working with them, Rousseff is trying to suppress them. Even with their protests, the middle class is not doing its work through the ballot box. In my opinion, some of these protests are for the TV, and many in the middle class sympathize with the socialist and populist elements of the president's agenda.
Certainly they don't seem to see that the price controls administered by the government on gasoline and other commodities will have to go after the elections, and there will have to be an extreme belt tightening needed to restore credibility.
They not only dilute their own voice, but like South Africa, they simply don't have enough in numbers to force an electoral change.
How is this playing out in investment terms? Take a look at their currency, which is being hammered. Even the often slow-to-react ratings agencies have cut Brazil from BBB to BBB-. After the elections, I think foreign investment will fly out of Brazil. In the short run, meaning three to five years, I predict Brazil will experience incredible social upheaval.
It will be interesting to see if positive elections in India and Indonesia motivate change in other countries in the developing world. On the whole, I doubt it. As they say, all politics is local.