Identifier
Created
Classification
Origin
05PRETORIA2343
2005-06-17 10:17:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Pretoria
Cable title:  

ANC Document Presents Controversial Economic

Tags:  ECON EINV EFIN ELAB SF 
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UNCLAS SECTION 01 OF 03 PRETORIA 002343 

SIPDIS

USDOC FOR 4510/ITA/MAC/AME/OA/DIEMOND
TREASURY FOR OAISA/CUSHMAN

SENSITIVE

E.O. 12958: N/A
TAGS: ECON EINV EFIN ELAB SF
SUBJECT: ANC Document Presents Controversial Economic
Policy Changes

REF: A) Pretoria 2161 B) Pretoria 2310 (NOTAL)

Sensitive but Unclassified; Protect Accordingly. Not
For Internet Distribution.

UNCLAS SECTION 01 OF 03 PRETORIA 002343

SIPDIS

USDOC FOR 4510/ITA/MAC/AME/OA/DIEMOND
TREASURY FOR OAISA/CUSHMAN

SENSITIVE

E.O. 12958: N/A
TAGS: ECON EINV EFIN ELAB SF
SUBJECT: ANC Document Presents Controversial Economic
Policy Changes

REF: A) Pretoria 2161 B) Pretoria 2310 (NOTAL)

Sensitive but Unclassified; Protect Accordingly. Not
For Internet Distribution.


1. (SBU) Summary. An ANC document proposes
controversial policy changes to address poverty,
unemployment and income inequality. Key suggestions
include measures to promote a more competitive
currency and liberalize labor market regulation.
President Mbeki is likely behind the discussion
document, apparently growing increasingly concerned
that South Africa's moderate growth over the last
decade has not dented unemployment. Achieving the
policy changes, especially in the labor market, will
be difficult: key ANC allies are strongly opposed.
We would expect lively debate on the policy
suggestions when the ANC General Council meets later
this month, but fallout from the firing of South
African Vice President Jacob Zuma, implicated in a
fraud conviction; and the emerging "oilgate" ANC
funding scandal could well dominate the proceedings.
End Summary.


2. (U) In advance of its June 29-July 3 National
General Council meeting, the ANC circulated a
discussion document entitled "Development and
Underdevelopment - Learning from Experience to
Overcome the Two Economy Divide." The document
proposes policy revisions to address South Africa's
key economic challenges. The General Council will
provide guidance to the ANC's Executive Committee as
it prepares for the organization's 2007 National
Conference.

Changes Needed to Address Poverty, Unemployment
-------------- --


3. (U) The document states that while ANC economic
policy has achieved important results over the decade
of majority rule, including macroeconomic stability,
lower government debt and inflation, and strong
manufactured export growth; growth has not been
sufficient. Challenges remain: high unemployment,
especially among youth, and job losses in the formal
sector; low savings and investment levels; and
poverty and income inequities based largely on race,
gender and region. To address these, the ANC should
modify some of its microeconomic policies to ensure

the integration of South Africa's "First" and "Second
Economies."


4. (U) The paper states, however, that government
alone cannot resolve these challenges and argues that
government interventions should set the preconditions
for market-led growth. Interventions must focus on
investment to create jobs; investment in
infrastructure that contributes to development;
support for small and medium sized enterprises; and
investment in education, training and health. The
paper, for example, rejects welfare grants and
increases in the social wage to solve the problems of
unemployment and poverty.


5. (U) The policy document recommends that South
Africa pursue a strategy to raise the level of
investment and economic activity while reforming the
labor market so that more labor is absorbed and the
benefits of growth are spread more evenly. Elements
of this strategy entail reducing the cost of capital
and supporting a more competitive currency, while
allowing labor demand to expand through more flexible
labor market policies.

Lower Capital Costs, Competitive Currency
--------------


6. (U) The ANC paper cautions that a policy to
reduce the cost of capital should not be based on
artificial reductions of real interest rates. Lower
real interest rates must come from prudent fiscal
policy, more efficient use of capital in state-owned
enterprises (reftel A) and a more competitive unit
labor cost. The paper also suggests that government
pursue policies that allow for a more competitive
exchange rate without abandoning the inflation-
targeting model. It could, for example, accumulate
reserves more aggressively and liberalize further
foreign exchange markets, approaches long advocated
by private sector economists. Both National Treasury
and Reserve Bank officials subsequently made clear
that South Africa would not intervene in the market
to influence the exchange rate.


7. (U) Interestingly, the policy document suggests
that South Africa could approach international
financial institutions for assistance, something it
has heretofore not done. It asserts that reducing
the cost of capital in the "Second Economy" can only
be achieved by the state carrying the cost of the
price reduction, which adds to fiscal pressure. The
magnitude of this burden, however, could be limited
by seeking soft loans from international multilateral
institutions. Finance Minister Manuel subsequently
suggested that the topic could be on the agenda for
discussion when new World Bank President Wolfowitz
visits South Africa this weekend. In the past, the
Congress of South African Trade Unions (COSATU) and
the South African Communist Party (SACP) have
staunchly opposed such borrowing because of
"political conditions."


8. (SBU) The ANC document also points out that the
capital requirements for financing black economic
empowerment (BEE) deals do not necessarily raise the
productive investment levels in the domestic economy
and, therefore, represent a drain on scarce capital
assets. This, the paper notes, is an example of
where policy decisions sometimes contradict each
other resulting in the failure to meet important
objectives. The statement, however, does not portend
major changes in BEE policy but rather closer
attention to the financial structuring of BEE deals.

Liberalize Labor Markets
--------------


9. (U) Most controversially, the ANC paper suggests
that small adjustments in labor market regulation
could produce substantial returns for job creation.
The government should consider changes to the present
bargaining arrangements to limit their effects on
parties outside the agreement. It should also
consider accommodating some flexibility in its labor
laws to allow younger workers to be regulated under a
more flexible regime. It could waive the minimum
wage and other collective bargaining arrangements and
make it easier to dismiss non-performers. Government
could apply labor laws more flexibly in its
industrial development zones or in sectors such as
tourism, textiles and clothing, household and
childcare and agriculture. The paper also suggests
an increase in the size of companies that must comply
with certain aspects of the labor legislation from 50
to 200 and a reduction in the tax compliance burden
to stimulate small business development.


10. (SBU) Comment. Despite sprinklings of
"leftist" rhetoric, the ANC document proposes sound
initiatives, long advocated by independent economists
and organizations such as the IMF, to address the
country's key economic challenges. It fails,
however, to address two important economic issues:
South Africa's inability to attract significant
levels of foreign direct investment and the economic
effects of HIV/AIDS. Barclays Bank's purchase of
ABSA bank and General Motor's re-purchase last year
of its South African facilities are positive signals
for investor confidence but do not represent a trend.
Despite wide discussion in the public and in private
industry circles, the effect of HIV/AIDS on the
economy is apparently still considered too sensitive
for the government to address as an economic issue.


11. (SBU) President Mbeki is likely behind the
presentation of the discussion document. Last year,
he initiated a large public works program to mop up
the jobless, and following a visit last week to
Chile, he will send a team there to study how Chile
reduced by more than one-half the portion of the
population living below the poverty line in ten
years, exactly what the ANC has been unable to do.
These actions suggest strongly that Mbeki is
concerned that South Africa's moderate growth over
the last decade has not dented unemployment.


12. (SBU) Unfortunately, as the policy paper
correctly notes, achieving the suggested policy
changes, especially in labor regulation, will not be
easy. COSATU, the SACP and the ANC Youth League have
all come out strongly against any liberalization of
labor laws. Both COSATU and the SACP have, however,
endorsed calls for a more competitive currency to
save jobs in the mining and clothing/apparel
industries. In fact, the paper, comments by senior
central bank officials and recent dollar strength
have prompted a depreciation of the rand to its
lowest level this year (R6.7/$).


13. (SBU) Under other circumstances, we would
expect lively debate on the policy suggestions during
the ANC conference. However, fallout from the firing
of South African Vice President Jacob Zuma,
implicated in the fraud conviction of Schabir Shaik
(reftel B); and the emerging "oilgate" ANC funding
scandal could well dominate the proceedings. Frazer