US embassy cable - 05PRETORIA4109

UNCLAS SECTION 01 OF 04 PRETORIA 004109 
 
SIPDIS 
 
SENSITIVE 
 
DEPT FOR AF/EPS/CTRIMBLE, AF/S 
USDOC FOR 4510/ITA/IEP/ANESA/OA/JDIEMOND 
TREASURY FOR BCUSHMAN, BRESNICK 
DEPARTMENT PLEASE PASS TO USTR FOR CHAMILTON 
 
E.O. 12958: N/A 
TAGS: ETRD, EAID, ECON, EFIN, PREL, XA, SF 
SUBJECT: SOUTH AFRICA: POST'S VIEWS ON ANNUAL AGOA 
ELIGIBILITY 
 
REF: SECSTATE 170577 
 
(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 
expenditures. 
 
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 
enterprises. 
 
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 
deportation. 
 
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. 
TEITELBAUM