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FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 0842
INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUCPDC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 04 PRETORIA 000109 
 
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TREASURY FOR OAISA/BCUSHMAN 
USTR FOR PCOLEMAN 
 
SENSITIVE 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EINV EFIN ETRD ELAB PGOV SF
SUBJECT: The Accelerated and Shared Growth 
Initiative: A Preview 
 
REF: A) 05 Pretoria 5009  B) 05 Pretoria 4012 
 
     C) 05 Pretoria 2161  D) 05 Pretoria 2599 (NOTAL) 
     E) 05 Pretoria 2343  F) 05 Pretoria 5010 (NOTAL) 
 
Sensitive but Unclassified; Protect Accordingly.  Not 
For Internet Distribution. 
 
¶1.  (SBU)  Summary.  The Accelerated and Shared 
Growth Initiative (ASGI), a new government economic 
strategy to be unveiled in February, aims to push 
growth to a sustained six percent annually.  It is 
expected to focus on improving coordination and 
implementation.  Key elements will be infrastructure 
investment through state-owned enterprises, labor 
market reform, improved service delivery, skills 
development, a revamped industrial policy and small 
business support.  Overall, ASGI's focus is 
reasonable and needed.  The SAG can directly 
influence most of the key elements, but with the 
unions, the SACP and groups within the ANC opposed, 
labor reform is unlikely in the short-term.  Still, 
successful implementation of the other ASGI 
initiatives could move South Africa's long term 
growth rate to a higher level.  End Summary. 
 
Strategy for Higher Growth 
-------------------------- 
 
¶2.  (U)  Over the last half of 2005, a SAG 
ministerial team led by Deputy President Phumzile 
Mlambo-Ngcuka has developed a new government economic 
strategy, the Accelerated and Shared Growth 
Initiative (ASGI).  It focuses on microeconomic 
policies and replaces the Growth, Employment and 
Redistribution (GEAR) strategy that has been the 
basis for South Africa's macroeconomic stability. 
ASGI is designed to push economic growth to a 
sustained six percent annually, twice its ten-year 
average and the level commonly accepted as necessary 
to reduce the country's high unemployment, by 2010. 
Although widely commented on in the media, ASGI is 
still under review.  A government ministerial retreat 
(lekgotla) in mid-January is expected to formally 
adopt the strategy, which will be unveiled in 
February in President Mbeki's State of the Nation 
address and Finance Minister Manuel's budget 
presentation. 
 
¶3.  (U)  ASGI is not expected to include major policy 
shifts but rather to focus on improving coordination 
and implementation.  The strategy will include some 
new initiatives, such as to increase investment and 
hire and train workers, and incorporate policies 
already announced, such as an emphasis on state-owned 
enterprises (SOE's) to boost growth.  Mlambo-Ngcuka 
recently emphasized to Parliament that the strategy 
will not be a "quick fix."  It will take time to push 
investment to the target of 25 percent of GDP, as 
well as growth to over 6 percent. 
 
¶4.  (SBU)  In developing ASGI, ministers in the 
cabinet's economic cluster identified six constraints 
to higher growth: currency volatility, infrastructure 
bottlenecks, the regulatory environment, service 
delivery, skills shortages and import-parity pricing. 
All of the constraints are well known and frequent 
subjects of debate.  In practice the first and last 
are likely to receive limited attention in the new 
strategy.  Rand stability has largely been achieved 
over the last three years (ref A).  Government 
jawboning will be the major policy tool to address 
import-parity pricing, characteristic of relatively 
few industries; e.g., steel, plus high costs and poor 
service from Eskom and Telkom, respectively the 
electricity and telecommunications monopolies.  A 
business ADSL line, for example, is 150 percent more 
expensive than the international average. 
 
Infrastructure 
-------------- 
 
¶5.  (SBU)  Neglected for decades, upgrading and 
improving the efficiency of South Africa's 
infrastructure will be the cornerstone of ASGI.  In 
 
PRETORIA 00000109  002 OF 004 
 
 
addition to high input costs from Eskom and Telkom, 
the deteriorating and capacity-limited roads, 
railroads and ports are a major constraint on growth, 
and particularly exports.  Finance is not expected to 
be an issue.  Several of the major SOE's can use 
retained earnings or borrow at reasonable rates, 
given South Africa's improved credit ratings.  In 
addition, the SAG could fund as much as R370 billion 
($58 billion) over three years for infrastructure 
development, much of which will go through public 
private partnerships.  Public Enterprises Minister 
Alec Erwin believes that in addition to improving 
infrastructure, the policy will add employment, offer 
skills development and provide new technology.  The 
emphasis on SOE's enjoys wide support, particularly 
from the trade unions, who see it, only partially 
correctly, as an abandonment of the SAG's drive to 
privatization (refs B and C). 
 
Labor Reform 
------------ 
 
¶6.  (SBU)  The "regulatory environment" constraint is 
often shorthand for labor market reform, although 
concern also exists about the regulation of the 
financial sector and general price collusion. 
Independent economists and organizations such as the 
World Bank and IMF have long argued that South 
Africa's relatively rigid labor market needs reform. 
In fact, the IMF estimates that the easing of labor 
market legislation would add 0.5 percent to the 
growth rate.  Senior SAG officials, including Finance 
Minister Manuel and Reserve Bank Governor Mboweni, a 
former labor minister, have publicly urged more 
flexibility but so far to no avail.  ASGI will take 
another run at labor market reform, but little 
progress is likely.  At the ANC's National General 
Council meeting in mid-2005, COSATU, the leading 
trade union federation; the SA Communist Party; and 
the ANC Youth League blocked debate on liberalization 
proposals which emphasized creation of a two-tier 
labor market that had been presented in a discussion 
document drafted by the Deputy Finance Minister. 
Many feel ASGI is unlikely to be different (refs D 
and E). 
 
Service Delivery and Skills Development 
--------------------------------------- 
 
¶7.  (SBU)  Government's ability to improve municipal 
service delivery will be a central issue of the ASGI. 
While the ANC government has done an admirable job in 
providing housing, water and sanitation, electricity 
and other services to poor communities, it has not 
met expectations.  On numerous occasions throughout 
2005, residents of poor communities took to the 
streets to protest the lack of service delivery. 
President Mbeki acknowledged in last year's State of 
the Nation address that many South Africans are still 
waiting for public services, and the Finance Minister 
allocated additional resources in the budget, even 
though resources are not the key problem.  For 
example, in FY 2004 provincial government failed to 
spend 17 percent of their capital budgets.  In fact, 
the SAG conceded in Parliament that 136 of 284 
municipalities are "underperforming."  The underlying 
causes of municipal failure rest with a lack of staff 
and trained professionals.  Ref F documents the many 
problems of service delivery in one municipality.  If 
the ASGI is to succeed it must produce results in 
this area. 
 
¶8.  (SBU)  Investment in education and skills 
development is also likely to be a major emphasis of 
ASGI and to receive special attention when Finance 
Manuel presents his new budget.  For example, the 
minister may call for a recapitalization of education 
and training colleges with an emphasis on increasing 
math and science graduates.  Manuel has been publicly 
critical of the education system for its failure to 
produced sufficient skilled individuals, such as 
artisans, engineers and IT specialists, which he 
views as a major constraint to higher growth.  He has 
asserted that a focus on improving the high school 
 
PRETORIA 00000109  003 OF 004 
 
 
graduation exam (matric) pass rate has discouraged 
students from taking difficult subjects; i.e., math 
and science.  Manuel has also criticized unions for 
blocking proposals to pay a premium to math and 
science teachers. 
 
¶9.  (SBU)  To help address the skills gap in the 
short term, the SAG has quietly embarked on a program 
to encourage skilled South African expatriates to 
return and retirees to re-join the work force. 
Public Enterprises Minister Erwin pointed out in 
September that this initiative is already paying 
dividends in the electricity generation sector.  The 
SAG has also said it would hire foreign labor when 
needed.  During a visit to India, the Minister of 
Public Services and Administration raised the 
possibility of work in South Africa, particularly in 
the education sector. 
 
Industrial Policy and Small Business Development 
--------------------------------------------- --- 
 
¶10.  (SBU)  Although not identified as a constraint, 
ASGI is expected to include in some form a revamped 
industrial strategy.  In practice, this will be the 
Department of Trade and Industry's (DTI) 
contribution, and it will likely feel compelled to 
propose a more active governmental intervention in 
promoting industrial and service industry 
development.  Although Manuel says the new policy 
will not be about picking winners but rather 
identifying obstacles and removing them, ASGI will 
likely contain policies to promote mineral 
beneficiation (e.g., diamonds), advanced 
manufacturing (e.g., aerospace), light manufacturing 
(perceived as labor intensive), and providing the 
outsourcing needs for foreign business services 
(e.g., call centers).  The DTI planners will be 
trying to replicate the highly regarded Motor 
Industry Development Plan (MIDP) in other sectors, 
although some analyses suggest that the costs of MIDP 
outweigh its benefits. 
 
¶11.  (U)  ASGI will also contain policy and program 
initiatives that give more attention to small and 
medium size business development.  More government 
procurement will be directed toward small businesses 
(e.g., through the new Small Enterprise Development 
Agency), and the SAG's small and medium size business 
finance agencies (e.g., the Industrial Development 
Corporation, Khula Enterprise and National 
Empowerment Fund) will be rationalized by market 
segments.  Commercial banks, widely regarded as risk 
averse in the SMME sector, will be expected to 
provide more credit in context of their Financial 
Sector Charter obligations.  Again, the emphasis is 
expected to be on improved implementation. 
 
¶12.  (SBU)  With the exception of investment in labor 
intensive sectors and financing for small business 
development, the private sector's role in ASGI, 
although assumed to be large, is unclear.  It is, 
however, not expected to receive significant new 
incentives; e.g., a lower corporate tax rate, new tax 
deductions for investment or training, or a quicker 
pace in lifting the remaining exchange control 
regulations.  While these would be positive 
developments, they currently are not major 
disincentives to investment, and Manuel is opposed to 
all.  He also opposes tax incentives for specific 
sectors, industries or for specific actions, which 
have not proved successful in South Africa or 
elsewhere, but ASGI may contain such proposals if DTI 
views hold sway. 
 
Missing Ingredients 
------------------- 
 
¶13.  (SBU)  Three key ingredients are currently 
missing from the proposed strategy: foreign direct 
investment, trade liberalization and HIV/AIDS.  ASGI 
apparently assumes that FDI will increase as South 
Africa achieves a sustained increase in its growth 
rates and currency stability continues.  Major 
 
PRETORIA 00000109  004 OF 004 
 
 
investments in 2005 by Barclays Bank and Vodafone 
lend credence to this view (ref A).  Both were, 
however, acquisitions.  Will "greenfield" investments 
follow?  As a small, open economy -- and one that has 
benefited from trade reform since 1994 -- the 
omission of trade liberalization is hard to explain. 
Technical level officials at National Treasury are 
reportedly lobbying for its inclusion.  HIV/AIDS, of 
course, has major workforce implications, but given 
the SAG's tendency to downplay the significance of 
HIV/AIDS, the omission is not surprising. 
 
¶14.  (SBU)  Comment.   With the exceptions noted 
above, ASGI's focus is reasonable and needed, 
although perhaps ambitious.  The SAG can directly 
influence several key elements: infrastructure, 
skills development and service delivery.  The 
challenge will be to bring improvements quickly. 
Labor market reform, however, remains the political 
hot potato.  Without the cooperation of COSATU, the 
SACP and ANC elements such as the Youth League, 
progress on this issue is unlikely.  Still, 
successful implementation of the other ASGI 
initiatives could move South Africa's long term 
growth rate to a higher level.  TEITELBAUM