POVERTY AND UNEMPLOYMENT IN SOUTH AFRICA

UNCLAS SECTION 01 OF 04 PRETORIA 002971

SIPDIS

DEPT PASS TO USTR, USAID
DEPT FOR E, EB/IFD, AF/EPS, AF/S
DEPT FOR AF/S/AMBASSADOR FRAZER
TREASURY FOR OIA/OAN/JRALYEA, BCUSHMAN

SENSITIVE

E.O. 12958: N/A
TAGS: ECON EAID EFIN EINV KMCA SF
SUBJECT: POVERTY AND UNEMPLOYMENT IN SOUTH AFRICA

REF: A) 04 PRETORIA 171 B) PRETORIA 29 C) PRETORIA 1413

D) PRETORIA 2621 E) JOHANNESBURG 231 F) JOHANNESBURG
762


1. (SBU) Summary. While the government's macroeconomic
and stabilization effort is largely complete, South
Africa faces formidable medium and long-term challenges
to reduce high unemployment and widespread poverty. More
than a decade after apartheid, poverty and unemployment
are still dramatically skewed along racial lines, with
African blacks and "coloureds" experiencing the highest
rates. Unfortunately, changes in statistical methodology
over the years make it difficult to conclude whether the
situation is improving or getting worse. Independent
studies suggest that the situation has actually worsened
since the early 1990s. Moreover, poverty in South Africa
is tragically compounded by the fact that the country has
the greatest number of HIV/AIDS infected people in the
world; increasingly, HIV/AIDs related deaths are taking
parents away from the next generation. The precipitous
fall in life expectancy has lowered South Africa's rank
in the 2004 Human Development Index to 119 out of 177
countries. Most inside and outside of government agree
that South Africa's GDP growth rate of 3.7% in 2004, one
of the highest in a decade, is still insufficient to
reduce poverty and unemployment in the medium term. The
political ramifications of unemployment and poverty in
South Africa is such that we should make sure that
economic growth and employment, along with HIV/AIDS,
remain central elements of U.S. assistance programs for
South Africa. End Summary.

Poverty in South Africa
--------------


2. (U) While the government's macroeconomic and
stabilization effort is largely complete, South Africa
faces formidable medium and long-term challenges to
reduce high unemployment and widespread poverty. Fifty-
seven percent of the population lives below the poverty
line [defined here as a family of four living on less
than $215 per month]. Rural provinces such as Limpopo
and the Eastern Cape have even higher rates of poverty,
i.e., 77% and 72%, respectively. A rampaging HIV/AIDS
epidemic has reduced life expectancy to 46 years in 2004
- down from 63 years in 1992 and well below the 69-year
average for other lower middle-income countries. This
reduction in life expectancy has been the primary factor
for lowering South Africa's rank in the 2004 Human
Development Index to 119 out of 177 countries.


3. (U) Poverty in South Africa is tragically compounded
by the fact that the country has the greatest number of
HIV/AIDS infected people in the world. In 2003, the
United Nations estimated that 24% of adult South Africans
were HIV positive. Statistics South Africa estimates
that 15% of adult South Africans are HIV positive.
Whichever estimate you accept, the outlook is horrifying.
The South African National Department of Health now
estimates that 6.4 million South African were HIV
positive in 2004 or 13.4% of the total population. AIDS
claims 800-1300 lives every day and the prevalence rate
continues to rise in most age groups. In the absence of
corrective measures, nine million lives, equivalent to
20% of the current population, could be lost over the
next decade. Estimates suggest that the AIDS could
reduce GDP growth by 0.5 to 2.5% per year as greater
numbers begin to suffer from AIDS and die.


4. (U) Poverty in South Africa is also compounded by the
fact that the country is still recovering from the
political and cultural ramifications of apartheid.
Socioeconomic divisions are dramatically drawn by race,
and income inequality in the country is one of the
highest in the world. Per capita income for the white
population rivals that of developed countries, while the
overwhelming majority of the 25.5 million South Africans
who live in poverty are of African descent. If taken
separately, the country's African and "coloured"
population would constitute the fifth largest sub-Saharan
African country by population - after Nigeria, Ethiopia,
the Democratic Republic of the Congo, and South Africa
itself. For 2004, because of the high income of white
South Africans and currency appreciation, South Africa's
gross national income per capita reached $3630, putting
South Africa within the World Bank's upper middle-income
country group for the first time. Without the 10% of the
population that is white, however, South Africa's per
capita GNI would stay squarely in the lower middle-income
country category for many years to come.
The Absence of a Definition for Poverty
--------------


5. (U) The government has yet to define poverty according
to a level or critical range of income. To date, the
primary guides have been expenditure studies, such as the
Income and Expenditure Surveys (IES) in 1995 and 2000
that give a sense of income groupings. However, the 2000
IES had major deficiencies caused by faulty weighting and
the high number of non-responses, especially among well-
off households. A number of independent studies have
tried to bridge the 1995 and 2000 IES by linking either
national accounting statistics or reconstructing the 2000
IES results. The general result has been that poverty
appears to have increased since 1995, although the extent
to which it has increased is debatable. Statistics SA
will start a new IES in the third quarter 2005, with
results to be published in 2007.


6. (U) In the meantime, independent studies do not agree
on a measure of poverty. In the absence of good data on
income and consumption, some researchers argue that an
asset-based approach should be used (Ref B). In the
context of calculating the Gini coefficient, the
government once argued that social service spending on
the poor should also be incorporated into calculation of
a "social wage" when measuring poverty, but this has been
a source of great contention. As with unemployment, the
lack of good data means that the government is not sure
if things are improving or getting worse.

The Outlook on Poverty
--------------


7. (U) The outlook on poverty in South Africa appears
grim. Most independent studies suggest that poverty has
increased since the early 1990s. Common sense suggests
that as the impact of the HIV/AIDS epidemic is realized,
the country will have to cope with increasing numbers of
orphans and parentless households, only worsening the
situation. The number of AIDS orphans is expected to
triple by 2015. Projections using the ASSA2002
demographic model show HIV/AIDS deaths in 2010 could be
450,000, if 20% of infected persons receive anti-
retroviral treatment, or 381,000, if 50% receive
treatment, and 290,000 if receive 90% treatment. Certain
sectors could be severely impacted, including government,
agriculture, and mining. The rapid increase in child-
headed households serves as a warning sign that
unemployment and poverty will continue to be critical
issues for South Africa.


8. (U) To measure the depth of poverty in South Africa, a
November 2004 Human Sciences Resource Council (HSRC, a
partly government funded institution) study calculated
what it called the "poverty gap," i.e., the annual income
transfer to all poor households required to bring them
out of poverty. Between 1996 and 2001, HSRC found that
the poverty gap had grown from R56 billion (equivalent to
6.7% of the GDP) to R81 million (equivalent to 8.3% of
GDP),indicating that poverty was growing faster than the
economy.


9. (U) This growth in poverty is reflected in a rise in
inequality between rich and poor. HSRC found that South
Africa's Gini coefficient (a measure of income inequality
where zero equals perfect equality and one equals perfect
inequality) had actually grown from 0.69 in 1996 to 0.77
in 2001. In its "Towards Ten Years of Freedom" report,
the SAG calculated a coefficient of 0.57 in 2000. A
recent University of Cape Town study estimated it to be
0.60. Whichever figure one uses, income inequality in
South Africa remains among the highest in the world.
(Ref A)

Unemployment in South Africa
--------------


10. (U) Over the past decade, unemployment appears to
have worsened, but again no one really knows by how much.
Changes in statistical methodologies limit the value of
historical comparisons. The government relies on the
Labor Force Survey (LFS) to provide the most accurate
assessment of unemployment. It surveys households and
covers formal and informal sectors, including
agricultural and non-agricultural workers. It found that
official unemployment (using the ILO definition of
unemployment, which is comparable to the U.S. definition)
had risen from 26.7% in February 2000 to 31.2% in March

2003. In September 2004, the last estimate, it fell to
26.2%. While the recent downward trend is positive, the
levels are still unacceptably high.


11. (U) A new data series, called the Quarterly
Employment Statistics, was just released in June 2005.
It has improved on the methodology used in the previous
study of formal, non-agricultural employment, but
excludes the informal sector and agriculture. It found
that in the first quarter of 2005 formal non-agricultural
employment fell 136,000 (1.9%) to 6.9 million.


12. (U) Increasingly, politicians and economists refer to
the "broad" definition of unemployment. This is because
the official definition requires that a person looked for
work in the last four weeks, while the broad definition
only requires that an individual self-certify that he or
she would be willing to work. This captures the very
poor who want to work, but cannot easily afford to spend
a couple of dollars a day to search for work. The
current broad estimate of unemployment, calculated in
September 2004, was 41.0%.

Unemployment and Race
--------------


13. (U) The legacy of apartheid is everywhere in South
Africa and perhaps most pronounced when it comes to
employment. The statistics that are available indicate
that the South African labor force is clearly bifurcated
along racial lines: one very educated and mostly white,
and the other not so well educated and mostly black. Of
those employed, more black South Africans than other
racial groups work within the informal sector, which has
no defined benefits derived from the place of employment.
In September 2004, the informal sector employed an
estimated 30% of black South Africans who had jobs and
6.6% of "other" South Africans (including white,
coloured, Indian)(Refs C, E and F).


14. (U) Unemployment is also dramatically skewed along
racial lines. Using the narrow, official definition, the
unemployment rate for black Africans is 31.3%, for
"coloureds" 21.8%, for Indians 13.4%, and for whites
5.4%. Black Africans and "coloureds" make up 88% of the
population. Using the broader definition, the
unemployment rate for black Africans is 47.8%, 30.4% for
"coloureds," and 20.8% for Indians. Black African women
have an official unemployment rate of 36%, the highest
for any demographic group in South Africa.


15. (U) Education may normally be the most important non-
racial factor in explaining unemployment, but in South
Africa, access to education is also dramatically skewed
along racial lines. Over 70% of whites have a high
school education or above, while less than 25% of black
Africans or "coloureds" do. Moreover, of South Africans
who do have a higher education, black South Africans are
still less likely to find employment. In 2002, 16.8% of
black South African who completed tertiary education
(i.e., university or technical training) could not find
work, while only 2.6% of whites in the same category
could not find work.


16. (U) Evidence suggests that the situation is getting
worse. Haroon Bhorat, Director of the Development Policy
Research Unit at the University of Cape Town and an award-
winning researcher on poverty, unemployment, and labor
markets recently released two working papers of note:
"Poverty, Inequality, and Labor Markets in Africa: A
Descriptive Overview," and "The Post-Apartheid South
African Labor Market". In these studies, Bhorat measured
South African labor market performance by race, using two
October Household Surveys conducted by the Department of
Labor in 1995 and 1999. For all new black entrants to
find employment during this period, Bhorat found that
black African employment had to have increased by 40%,
"coloured" employment by 23%, Indian employment by 25%,
and white employment by 9%. Actual increases in
employment by racial group during this period were 9.9%
for blacks, 15.9% for "coloureds", 12.4% for Indians, and
6.2% for whites. In other words, only about 25% of
unemployed blacks found work during the same period that
almost 70% of unemployed whites found work.
The Outlook on Unemployment
--------------


17. (U) Most inside and outside of government agree that
South Africa's GDP growth rate of 3.7% in 2004, one of
the highest in a decade, is insufficient to reduce
poverty and unemployment in the medium term. Charles
Meth, a research fellow at the School of Development
Studies at the University of KwaZulu-Natal and one of
South Africa's leading researchers on income inequality,
poverty, and unemployment recently authored a working
paper for the Development Policy Research, "Half
Measures: The ANC's Unemployment and Poverty Reduction
Goals." In his paper, Meth suggests that to halve the
official rate of unemployment by 2014, as set forth in
the UN Millennium Development Goals subscribed to by the
South African Government, South Africa would have to
create between 3.7 million, under the most optimistic
conditions, and 7.6 million jobs, under the most
pessimistic conditions. Using the broad measure of
unemployment, South Africa would have to create between
5.4 and 9.6 million new jobs. This infers that annual
GDP growth of 3.0% since 1994 has clearly not been enough
to stem the tide of unemployment.


18. (U) A study released on April 29 by T-Sec (a South
African consulting firm) compared the number of jobs
created -- 168,000 jobs in 2004 -- with the number needed
annually to halve official unemployment by 2014.
Although the GDP growth rate was 3.7% in 2004, the study
concluded that the economy only produced half the minimum
number of jobs needed annually to achieve this goal.

Comment
--------------


19. (U) The political ramifications of growing
unemployment and poverty in South Africa is such that
economic growth and employment, along with HIV/AIDs,
should remain central elements of U.S. assistance
programs for South Africa. Without employment generating
growth, the country will find it increasingly difficult
to recover from the structural racial division that has
defined its sordid past. National government still needs
help in designing effective pro-poor policies. Equally,
local and provincial governments are in dire of need
capacity building to implement national poverty and
employment programs. U.S. foreign assistance should be
directed to help set South Africa on a permanent course
for growth and development, so that the country can serve
as economic anchor and as an example for the rest of
Africa.

Hartley