US embassy cable - 04PRETORIA4098

UNCLAS SECTION 01 OF 04 PRETORIA 004098 
 
SIPDIS 
 
DEPT FOR AF/S TCRAIG; AF/EPS DKRZYDA 
USDOC FOR 4510/ITA/IEP/ANESA/OA/JDIEMOND 
COMMERCE ALSO FOR HVINEYARD 
TREASURY FOR BRESNICK 
DEPT PASS USTR FOR FLISER 
 
E.O. 12958: N/A 
TAGS: ETRD, EFIN, EAID, ECON, PREL, XA, SF 
SUBJECT: INPUT FOR AGOA ELIGIBILITY REVIEW OF SOUTH AFRICA 
 
REF:  (A) STATE 168472, (B) Pretoria 695 
 
(U) This cable is sensitive but unclassified.  Not for 
Internet Distribution. 
 
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Summary and Recommendation 
----------------------- 
 
1. (SBU) South Africa has continued to make progress in 
establishing a market-based economy, respecting the rule of 
law, implementing policies to reduce poverty, and combating 
corruption. There is a strong case to be made that South 
Africa is meeting the eligibility requirements of the 
African Growth and Opportunity Act (AGOA).  South Africa 
hosted two of the six rounds of free trade agreement 
negotiations between the Southern African Customs Union and 
the United States aimed at eliminating barriers to trade and 
investment.  SACU's seeming low level of ambition, however, 
has made it difficult to move forward on the negotiations. 
While we do have concerns about how the FTA negotiations are 
proceeding, at this point Post concludes that South Africa 
continues to comply with the eligibility requirements of the 
African Growth and Opportunity Act (AGOA) and recommends its 
selection for continuing eligibility. 
 
2. (SBU) In deliberating on whether or not to recommend 
South Africa for continued eligibility, we considered the 
course of the Free Trade Agreement (FTA) negotiations with 
the Southern African Customs Union (SACU).  We concluded 
that, despite the slow progress and some concerns about 
negotiating tactics, South Africa's active participation in 
the FTA talks are a sign of making continual progress in 
establishing the elimination of barriers to U.S. trade and 
investment.  Being difficult at the negotiating table is 
nothing new in trade negotiations.  Moreover, given that the 
WTO talks took nearly three years to achieve a framework for 
negotiations on the Doha Development Agenda, it is not 
surprising that the FTA talks have also taken time.  There 
are many legitimate reasons for the slow pace of the U.S.- 
SACU FTA talks, including the learning curve for SACU 
negotiators, logistics, and the competing demands for 
participation in other negotiations (e.g., WTO, SADC, EFTA, 
EU, Mercosur).  One could even argue that given the strains 
on SACU's negotiating capacity (four developing countries 
and one Least Developed Country), we have actually 
accomplished a lot in one year.  Moving the FTA talks 
forward is now a question of renewed commitment and vigor. 
South Africa's continuing engagement with the United States, 
as exemplified by the July talks in Paris, as well as 
various telephone conversations by our senior trade 
officials, demonstrates South Africa's continued good faith 
in this bilateral effort to remove trade barriers.  Finally, 
concluding an FTA is not a condition for AGOA eligibility. 
 
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A Market-Based Economy 
---------------------- 
 
3. (U) South Africa is making continual progress in 
establishing a market-based economy. One example of its 
commitment to an open rules-based trading system was the 
government's publication of proposed new countervailing duty 
and safeguards rules in 2004.  While the government 
continues to own significant stakes in various sectors of 
the economy and progress towards privatization has been 
slow, the government has made renewed pledges to move 
forward with restructuring.  Due to elections in April 2004, 
all work on privatizations came to a halt.  Since then, the 
new Minister of Public Enterprises, Alec Erwin has received 
clear direction from the President to pursue restructuring 
rapidly and promised major new policy initiatives by 
December 2004 including a plan to concession Durban's 
container port and move toward concessioning other ports. 
Transnet (the state transportation firm) has recently 
decided to focus only on ports, freight rail lines and its 
petrol pipeline, divesting all passenger rail traffic, road 
freight, and its other businesses. The new CEO has 
emphasized that she is considering the possibility of public- 
private partnerships even in its core business (she had been 
Director General at National Treasury and was a strong 
supporter of National Treasury's work on public-private 
partnerships). Government is expected to sell off additional 
shares in Telkom, plus the US/Malaysian partners are 
expected to reduce their shares by selling to a SA black 
empowerment partner. The new Minister of Trade and Industry, 
Mandisi Mpahlwa, initiated a Forum on trade so the views of 
labor and business can have a direct impact on negotiations. 
 
4. (SBU) The U.S. Trade Representative, Ambassador Zoellick, 
met with South Africa's Trade Minister in Cape Town in 
February 2004 to discuss the way forward after the Doha 
Development Agenda had stalled in Cancun.  South Africa 
commended Ambassador Zoellick's initiative to reinvigorate 
the talks and worked constructively to advance the process, 
culminating in the successful July/August 2004 multilateral 
WTO meeting in Geneva on a framework for negotiations. 
South Africa, like other AGOA eligible countries, will 
likely continue to champion the interests of developing 
countries in the global trade talks and criticize U.S. 
agricultural policies, particularly farm subsidies. 
 
5. (U) In the past year, South Africa continued to succeed 
in achieving sound macroeconomic objectives.  Thus far in 
2004 growth has accelerated to 3.9% and is broad-based. This 
is the best that SA has done in the last five years. 
However, researchers estimate the country needs a minimum of 
4.0% growth rate for a decade to halve unemployment (that 
is, reach the 15% target). Inflation has come down steadily. 
In March 2003, the CPIX inflation rate was 9.3% but 
decreased to 6.3% in September 2003, which is just over the 
central bank's target range of 3-6%.  In 2004 headline 
inflation (CPI) has hovered between 0-1%, with CPIX being 
around 4.5%.  The rand continued to strengthen in 2004 from 
a rate of R10.57/$1 in September 2002 to R7/$1 in September 
2003, and to approximately R6.5/$1 in August 2004. The 
stronger rand has helped to reduce the inflation rate. 
Central Bank action to cut the domestic interest rate 
contributed to the depreciation of the rand from its peak of 
R5.85 during the year to R6.60 in September 2004. The prime 
interest rate has also come down.  Years of fiscal 
discipline by the SAG are making it possible for the 
government to reduce the interest costs of national debt, 
lower marginal tax rates and increase government 
expenditures on social programs and capital expenditures. 
 
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Rule of Law, Political Pluralism, and Due Process 
--------------------------------------------- ---- 
 
6. (U) South Africa respects the rule of law but inadequate 
resources and training results in uneven implementation. 
Violent crime is high and there are strains on the judicial 
system.  South Africa held free and fair elections in April 
2004 in which the ruling African National Congress (ANC) won 
nearly 70% of the vote.  The Cabinet includes 26 ministers 
from the ANC, one from the Azanaian People's Organization 
(AZAPO), and one from the New National Party (NPP).  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. 
The official opposition party, the Democratic Alliance, won 
50 seats, the Inkatha Freedom Party 28, the NNP 7, and the 
United Democratic Movement 9.  Several small parties won the 
remaining 27 seats. 
 
7. (U) The constitution's bill of rights provides for due 
process including the right to a fair, 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. 
 
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Elimination of Barriers to U.S. Trade 
-------------------------------------- 
 
8. (SBU) As a member of the Southern African Customs Union 
(SACU), South Africa participated in six rounds of 
negotiations for a Free Trade Agreement (FTA) with the 
United States from June 2003 to June 2004, hosting the first 
two rounds in South Africa.  The first year of the talks 
informed both sides of their respective positions on issues 
but did not lead to any breakthroughs.  The seventh round of 
negotiations scheduled for August 2004 was postponed at 
SACU's request.  The talks have served to clarify to U.S. 
negotiators where there are barriers and where there are not 
barriers.  A successful FTA provides the best prospect of 
eliminating barriers to U.S. trade and investment. 
 
----------------------------------- 
Economic Policies To Reduce Poverty 
----------------------------------- 
 
9.  (U) Finance Minister Trevor Manual announced the new 
budget on February 18, 2004, which will increase spending on 
social programs such as HIV/AIDS programs, education, and 
"pro-poor social services spending."  The 2004 budget 
provides for a marked acceleration in spending on basic 
social services, education, pension and disability grants, 
child support grants, HIV/AIDS, investment in 
infrastructure, and support for local development. 
 
10.  (U) President Mbeki has made the reduction in poverty 
and unemployment cornerstones to his second term program. 
Government has introduced programs for free basic water and 
electricity for all, and is expanding its housing program. 
Government has expanded its social welfare grants program to 
increase the number of children eligible for the child 
grant, and also increased the amount going to Support Old 
Age Pensioners (SOAP) and disability grants. Further, the 
Department of Social Development has loosened the 
eligibility requirements for the disability grants, which 
make it easier for unemployed people to access the funds. 
The major new jobs initiative has been the Expanded Public 
Works Program, which is not all that dissimilar to the U.S. 
depression era Works Progress Administration. The target is 
one million new jobs. All provinces have to have their 
programs up and running by the end of September. Government 
has also initiated a number of analytical pieces to better 
understand the dimensions of poverty, the poverty gap, and 
to establish a poverty line so as to be able to monitor 
success. 
 
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A system to combat corruption 
----------------------------- 
 
11. (U) Despite being rocked by a Parliamentary travel 
scandal and the resignation of the Director of Public 
Prosecutions, who was widely perceived as having been forced 
out due to his investigation of the Deputy President for 
corrupt activities, the government actually made significant 
progress in the fight against graft in 2004.  Most 
significantly, Parliament in April passed the Prevention and 
Combating of Corrupt Activities Act, a law that for the 
first time clearly defines the scope of corrupt activities 
and otherwise complements several other existing 
anticorruption laws.  Government anticorruption entities 
also made headway in 2004 in expanding their operations and 
working toward greater interagency cooperation. 
 
12. (U) Nonetheless, there is still a widespread view that 
corruption is prevalent within government, particularly in 
the police, the Department of Home Affairs, and the 
Department of Transport.  Although South Africa's 
anticorruption regulatory framework is excellent, the 
enforcement of anticorruption laws and the creation of a 
corruption-free corporate culture within government must 
occur to overcome this perception. 
 
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Protection of worker rights 
--------------------------- 
 
13. (U) The South African Department of Labor (SADOL) 
completed work on its Child Labor Action Program (CLAP). 
SADOL is now in the process of both costing out the various 
action items, after which the program will be presented to 
the Cabinet, and of putting together the priority 
recommendations for immediate implementation.  Due to the 
growing number of AIDS orphans, the problem of child labor 
has increased, particularly in the areas of commercial 
agriculture and street vending.   Sexual exploitation of 
children is also increasing.  The text in last year's report 
regarding labor, child labor and human rights remains 
accurate. 
 
14.  In light of the above developments, Post recommends 
South Africa's continued eligibility for AGOA. 
FRAZER