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Cablegate: Input for Agoa Eligibility Review of South Africa

This record is a partial extract of the original cable. The full text of the original cable is not available.

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.

-----------------------
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.

----------------------

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.

--------------------------------------------- ----
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.

--------------------------------------
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.

-----------------------------
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.

---------------------------
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

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