US embassy cable - 05PRETORIA2343

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