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2005-10-07 14:45:00
Embassy Pretoria
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						UNCLAS SECTION 01 OF 04 PRETORIA 004109 




E.O. 12958: N/A


(U) This cable is Sensitive But Unclassified. Not for
Internet Distribution.

1. (SBU) Embassy recommends continued AGOA eligibility for
South Africa, based on the country's general compliance with
the eligibility criteria. South Africa has continued to make
progress in deepening its market-based economy, respecting
the rule of law, protecting worker rights, implementing
policies to reduce poverty, and combating corruption. The
government is a multiparty parliamentary democracy. Specific
information relating to AGOA eligibility criteria follows in
the reftel-specified format.

Country Background


2. (SBU) At midyear 2005, the population of South Africa was
estimated to be 46.9 million. In 2004, South African Gross
National Income (GNI) was $165 billion; GNI per capita was
$3630 (World Bank). In 2004, U.S.-South Africa two-way trade
grew 17%, totaling $8.9 billion. U.S. exports increased 10%
to $3.0 billion. South African exports to the United States
grew 21% to $5.9 billion. In 2004, AGOA exports grew 7%
after having grown 24% in 2003. South Africa is the 32nd
largest trading partner of the United States, equivalent to
Norway or Chile, and is the largest U.S. export market in
sub-Saharan Africa -- twice the size of Nigeria and equal to
Russia. In September 2005, South Africa led the Southern
African Customs Union delegation in restarting free trade
agreement negotiations with the United States.

Comments on Eligibility Requirements


I. Market-based Economy

3. (SBU) South Africa continues to make progress in deepening
its market-based economy. Government expenditure as a
percentage of GDP is lower than the OECD average. The
government has set sound macroeconomic objectives, and has
managed to successfully control inflation and the fiscal
deficit. Years of fiscal discipline by the SAG are making it
possible for the government to reduce the interest cost of
the national debt, lower marginal tax rates, and increase
government expenditures on social programs and capital

4. (U) Inflation (CPIX, consumer price inflation less the
change in mortgage costs) has been brought down from 9.3% in
March 2003 to 4.8% in August 2005 -- well within the central
bank's target range of 3-6%. In 2005, headline inflation
(CPI) dropped to 1.6% largely as a result of lower import
costs and falling interest rates. Strong fundamentals,
comparatively high interest rates, and the view that the rand
is essentially a commodity-based currency have kept the value
of the rand strong. In September 2005, the value of the rand
in dollar terms was approximately the same it was a year ago,

i.e., R6.5/$1. The South African Reserve Bank last cut its
repurchase rate in April 2005, lowering the rate to 650 basis
points below what it was in 2002. This has translated into
equal cuts in the prime rate, boosting business confidence in
the economy and consumer spending.

5. (U) On the strength of the private sector, the economy has
achieved a record 28 quarters of continuous growth. In 2004,
economic growth was 3.7%, the highest in five years. In
2005, the forecast for growth is 4.0% or more. However, the
strong rand has been problematic for labor-intensive
industries and exporters of all kinds, especially for
textiles and apparel. Notwithstanding this strong record of
growth, poverty and unemployment remain serious issues.
Researchers estimate that the country needs 6.0% growth for a
decade or more to halve unemployment (i.e., to reach an
official unemployment rate of 15%). In an effort to
stimulate faster growth, generate employment, and improve the
country competitiveness, government will invest $30 billion
in infrastructure over the next five years, much of which on
the strength of the balance sheets of large state-owned

6. (SBU) The economy is still encumbered by layers of
bureaucratic regulation that can inhibit domestic and foreign
investment in some areas. Many government departments and
agencies suffer severe capacity constraints, and have thus
been unable to implement programs on time and with minimal
confusion. Although supportive of the aims of the
government's Black Economic Empowerment (affirmative action)
program, U.S. firms continue to have questions about the
implementation of regulations and provisions calling for
equity ownership by and procurement from members of formerly
disadvantaged groups in South Africa. Some analysts believe
that confusion surrounding this key government program has
deterred foreign direct investment.

II. Political Pluralism/Rule of Law/Due Process

7. (SBU) In April 2004, South Africa held free and fair
elections in which the ruling African National Congress (ANC)
won nearly 70% of the vote. The Cabinet includes 27
ministers from the ANC and one from the Azanaian People's
Organization (AZAPO). Seats in the Parliament's National
Assembly are allocated based on the percentage of votes each
party receives. In the 2004 elections, the ANC won 279 of
the 400 seats in the Assembly, followed by the Democratic
Alliance, which won 50 seats, and the Inkatha Freedom Party,
which took 28. A subsequent "floor-crossing8 period in
September 2005, in which MPs were allowed to change parties,
resulted in the ANC gaining 14 more seats for a total of 293.

8. (SBU) The government respects the rule of law but
inadequate training and resources result in uneven
implementation. Violent crime is high and this strains the
judicial system. The Constitution's bill of rights provides
for due process including the right to a fair and public
trial within a reasonable time of being charged, and the
right to appeal to a higher court. All branches of
government generally respect the right to due process.

III. Elimination of Barriers to U.S. Trade and Investment

9. (SBU) Between June 2003 and June 2004, the U.S. and the
Southern African Customs Union (SACU ) South Africa,
Botswana, Lesotho, Namibia, and Swaziland) held six rounds of
negotiations on a free trade agreement (FTA). After progress
stalled in the fall of 2004, former U.S. Trade Representative
Robert Zoellick and his SACU counterparts met to discuss how
to move forward. SACU ministers reaffirmed their commitment
to a comprehensive free trade agreement and delegated
oversight of the negotiations to their deputies, who met in
July 2005 to agree to a negotiating framework. In September
2005, negotiations resumed in Gaborone, where the two sides
planned smaller negotiating rounds and expert-to-expert
consultations on issues new to SACU. In addition,
substantive progress was achieved in the area of
nonagricultural market access. The talks have served to
clarify to U.S. negotiators where there are barriers to trade
and investment. A successful FTA presents the best prospect
of eliminating these barriers.

10. (SBU) South Africa is a leading member of the G-20 group
of emerging market countries in WTO negotiations. It has
been a vocal advocate for special and differential treatment
and improved market access for developing countries. We
continue to stay in close contact with South Africa in the
effort to advance the Doha Development Agenda.

IV. Economic Policies to Reduce Poverty

11. (SBU) President Mbeki has made the reduction in poverty
and raising the level of employment cornerstones of his
second term in office. Government introduced programs to
supply free basic water and electricity to all, and has been
working to expand its low and no-income housing programs.
Government has increased its social welfare grants program to
cover growing numbers eligible for the child support grant.
It has also increased welfare grants going to old age
pensioners, foster care (important to the growing number of
HIV/AIDS orphans), and the disabled. In 2004, Mbeki launched
the Expanded Public Works Program, a major new jobs
initiative similar to U.S. depression era work programs. The
objective is to create one million temporary jobs, and in so
doing impart skills and bring more unemployed into the
mainstream workforce. Government continues to commission
research to better understand the dimensions of poverty, the
poverty gap, and to establish a poverty line so as to be able
to monitor success.

12. (SBU) In February 2005, Finance Minister Trevor Manuel
presented this year's budget to Parliament. Once again the
government increased spending on pro-poor social services,
welfare grants, education, and HIV/AIDS programs. Over the
next five years, the government, mostly through its
state-owned enterprises, will lead investment in port, rail,
dam, power and other infrastructure projects in an effort to
improve country competitiveness and spur growth.

13. (SBU) An area of particular concern for economists and
the government is the shortage of skilled professionals.
After the successful effort to make basic and secondary
education universally available, the quality of South African
schools remains uneven. Critics increasingly focus on
problems with the education system and inadequacies in
vocational training programs for not producing the skills
that the country needs.

V. System to Combat Corruption

14. (SBU) South Africa has an excellent anticorruption
regulatory framework, highlighted by the passage of the
Prevention and Combating of Corrupt Activities Act of 2004.
For the first time, the Act defined the scope of corrupt
activities and thus is a welcome complement to other
anticorruption laws. President Mbeki has made the fight
against corruption a hallmark of his administration, most
notably by dismissing Deputy President Jacob Zuma after his
financial advisor was convicted of corruption relating to
Zuma's support for a high dollar contract with the French.
In addition, the ruling ANC ousted five MPs from the party
and Parliament who were found guilty of pocketing
Parliamentary travel funds.

15. (SBU) Despite these and other advances, there is still
the widespread view that corruption is prevalent within
government, particularly within the South African Police
Service, the Department of Home Affairs, and the Department
of Transport. Inadequate funding for law enforcement creates
an incentive for corruption. While South Africa's
anticorruption regulatory framework is excellent, consistent
enforcement of anticorruption laws is required to overcome
these perceptions and change behavior in government and the
private sector.

VI. Protection of Workers' Rights

16. (SBU) Many employers complain of rigidities in labor law
when it comes to hiring and firing, and the payment of
benefits. For this reason, a system of labor brokers has
developed whereby labor contracts are outsourced. Unions
worry about this workforce "casualization" along with sizable
layoffs in mining and manufacturing caused by the strong
rand. Today, there are fewer workers covered by formal
employment contracts or collective bargaining agreements than
ten years ago. In addition, the expiration of the Agreement
on Textiles and Clothing and Chinese competitiveness has
resulted in layoffs and plant closures in the textiles and
apparel industry.

17. (SBU) Employers in the textiles and clothing industry
continue to be anti-union and poor working conditions are
common. However, court decisions in 2005 have confirmed that
bargaining council wage agreements in the textile industry
apply even to non-participating employers. Similarly, the
Minister of Labor recently expanded coverage of a sectoral
minimum wages and working conditions determination for the
taxi industry as well.

18. (SBU) Enforcement of labor laws in commercial farming
remains difficult. Economic migrants, especially from
Zimbabwe, are willing to work for subsistence and resist
coming to the attention of the authorities for fear of

19. (SBU) The South African government is ahead of its
targets in implementing child benefits grants now available
to children under the age of 14, but the growing number of
AIDS orphans continues to fuel child labor, especially in
agriculture and street vending. Child sexual exploitation
continues to be an issue. The Child Labor Action Program is
still being costed, but should be presented to Cabinet later
this year.

VII. U.S. Security/Foreign Policy Interests

20. (SBU) No comment.
VIII. Human Rights/International Terrorism

21. (SBU) South Africa has ratified nine of the twelve U.N.
counter terrorism conventions and protocols as well as the
African Union Convention on the Prevention and Combating of
Terrorism. The three outstanding that are at some stage of
ratification are Safety of Maritime Navigation, Safety of
Fixed Platforms on the Continental Shelf, and Protection of
Nuclear Material. In May 2005, South Africa enacted
comprehensive anti-terrorism legislation entitled the
Protection of Constitutional Democracy Against Terrorist and
Related Activities Act, which required citizens and financial
institutions to report suspicious activity to law enforcement
and allowed terrorist assets to be seized. In July 2005,
South Africa assumed the Presidency of the Financial Action
Task Force, an intergovernmental organization that combats
money laundering and terrorist financing. South Africa needs
to take stronger steps to secure its identity documents.