EUROPEAN PARLIAMENT

Directorate-General for Research

NOTE ON

THE POLITICAL AND ECONOMIC SITUATION

IN SOUTH AFRICA

[UPDATE OF WIP 2002/09/0113 of October 2002]

WIP 2003/02/0018 13-02-2003

CONTENTS

PageBasic information 1I. Key political players 2II. Political situation and outlook 4III. South Africa's regional role – NEPAD 7IV. Economic situation 8V. EU-South Africa relations 11

BASIC INFORMATION

Official name : Republic of South AfricaForm of state : A federal state, consisting of a national government and nine

provincial governments Legal system : Based on Roman-Dutch law and the 1996 constitution, in force since

4 February 1997. South Africa has one of the most liberal constitutions in the world

National legislature: Bicameral parliament selected every five years, comprising the 400-seat National Assembly and the 90-seat National Council of Provinces

Electoral system: List-system proportional representation based on universal adult suffrage

National elections : 2 June 1999; next election due in 2004Head of state : President, elected by the National Assembly; currently Thabo MbekiNational government: Coalition government of the African National Congress and the

Inkatha Freedom Party, consisting of state president and deputy president from the majority party in the National Assembly, and a cabinet drawn from the majority party and all other parties achieving over 5% of the national vote

Main political parties: The African National Congress (ANC) is the majority party in the coalition government; the minority partner is the Inkatha Freedom Party (Inkatha or IFP). Other parties include the Democratic Party (DP), the New National Party (NNP, formerly the National Party), the United Democratic Movement (UDM), the Freedom Front (FF) and the Pan African Congress (PAC). The DP, the NNP and the Federal Alliance united to form the Democratic Alliance (DA) in 2000

President: Thabo Mbeki (ANC)Deputy president: Jacob Zuma (ANC)

Key ministers: Agriculture & land affairs Thokozile Didiza (ANC)Communications Ivy Matsepe-Casaburri (ANC)Defence Patrick "Terror" Lekota (ANC)Education Kader Asmal (ANC)Finance Trevor Manuel (ANC)Foreign affairs Nkosazana Dlamini-Zuma

(ANC)Health Mantombazana Tsahabalala-

Msimang (ANC)Home affairs Mangosuthu Buthelezi (IFP)Housing Sankie Mthembi-Mahanyele

(ANC)Justice & const.development Penuell Maduna (ANC)Labour Membathisi Mdladlana (ANC)

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Minerals & energy Phumzile Mlambo-Ngcuka (ANC)

Prov. & local government Sydney Mufamadi (ANC)Public enterprises Jeff Radebe (ANC)Safety & security Steve Tshwete (ANC)Trade & industry Alec Erwin (ANC)Transport Dullah Omar (ANC)

Central bank governor Tito Mboweni

I: KEY POLITICAL PLAYERS

President Thabo Mbeki replaced Nelson Mandela as president of the ANC in December 1997 and, following his election victory, became president of the country in June 1999. Since coming to power, Mbeki has proved to be a capable replacement for Mandela and is expected to lead the ANC to another election victory in 2004. In the meantime, Mbeki's attention seems more focused on regional affairs, including the formation of the new pan-African regional, political and economic grouping, the African Union (AU), which replaced the 39-year-old Organisation of African Unity (OAU), and the New Partnership for Africa's Development (NEPAD), the continent's economic recovery project, with which he –along with a number of prominent African leaders (of Nigeria and Senegal) - is associated closely.

Deputy President Jacob Zuma became deputy president of the ANC in December 1997. Despite his low profile upon appointment, Zuma seems to have grown into his job in the two-plus years he has been in the post, continuing to play a leading role in regional diplomatic efforts.

Minister of Home Affairs and Leader of IFP

Mangosuthu Buthelezi, who has retained his position of home affairs minister, was offered the position of deputy president, which he rejected. Buthelezi felt he was being asked to pay a high price, namely giving up the premiership of KwaZulu Natal, the IFP's stronghold, to which it managed to beat the ANC. Despite his position in government, he has the potential to destabilise the state by pursuing the cause of regional autonomy/home rule in the KwaZulu-Natal province.

Minister of Finance Trevor Manuel is the ANC's first, and to date only, finance minister. The foreign business community respects him for his prudent financial reforms and he has also managed to maintain his popularity within his own party.

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Minister of Foreign Affairs Nkosazana Dlamini-Zuma replaced the retired Alfred Nzo after the 1999 elections. Before her appointment to the Foreign Affairs portfolio, the former wife of Deputy President Jacob Zuma served as health minister in former president Mandela's administration.

Central Bank Governor Tito Mboweni became the new governor of the South African Reserve Bank (SARB) when he took over from Chris Stals in August 1999, having been appointed to the post by outgoing president Nelson Mandela in July 1998. In taking over this role, Mboweni became the first black governor of the Reserve Bank and has more or less followed the same monetarist policies favoured by his predecessor. A trained economist, Mboweni's previous experience included guiding the country through a tough period of labour legislation negotiations in his previous role as minister of labour.

OTHER KEY POLITICAL PLAYERSEx-President Nelson Mandela has dominated the political scene in South

Africa since his release from prison in February 1990 and subsequent reign as president. Despite his official retirement from politics following the June 1999 general elections, Mandela still commands considerable respect in his own country and beyond, with his name often being mentioned as mediator in trouble spots around the world.

Leader of the Democratic Party/Alliance

Tony Leon and his Democratic Party became the official opposition to the ANC in parliament, following the results of South Africa's second ever all-race general elections. Leon, who became the leader of his party in 1994, consolidated his position further a year later in June 2000, when the DP merged forces with the former ruling party (the NNP which has since withdrawn from the alliance) and the small Federal Alliance (FA) party to form the Democratic Alliance (DA). Leon is a former lecturer from the University of the Witwatersrand, a lawyer and a Johannesburg city councillor.

Leader of the New National Party (NNP)

Marthinus van Schalkwyk inherited the discredited NNP from his predecessor and former President FW de Klerk. Having seen his party trounced at the 1999 general election, Van Schalkwyk formed a short-lived alliance with the DP which came to an abrupt end in November 2001. Van Schalkwyk has now got his party in alliance with its former foe, the ANC, to govern its Western Province power-base.

Former Secretary-General of the ANC

Cyril Ramaphosa was once considered to be former president Nelson Mandela's chosen successor and natural heir to the presidency. However, in the race to become deputy president to Mandela and eventually succeed him as president, Mbeki outflanked the former trade union leader. Despite his decision to leave full-time politics, Ramaphosa remains immensely popular within the ruling ANC, which he served as secretary-

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general between 1991 and 1997. Ramaphosa is still a member of the ANC's 60-strong National Executive Committee, winning the greatest number of votes in party elections in 1997. He became the first magnate of South African black empowerment and is also considered its wealthiest.

II. POLITICAL SITUATION AND OUTLOOK

The last general elections, which took place on 2 June 1999, resulted in a landslide victory for the African National Congress (ANC). The ANC returned to office with an increased majority of 66.37% (from 62.65% in 1994), securing the party 266 out of the possible 400 seats in the National Assembly. The vote has once again left the party just short of the two-thirds mandate it wanted to which, under the interim constitution, would have allowed its members to draft and adopt a new constitution unilaterally.

The Democratic Party (DP) came in second place with 9.56% of the votes and 38 seats, and is now confirmed as the official opposition to the ANC. The Zulu-backed Inkatha Freedom Party (IFP) led by Mangosuthu Buthelezi took third place with 8.58% of the popular vote, which secured it 34 parliamentary seats. (in January 2003 a last-minute compromise between the ANC and the IFP averted a crisis in the KwaZulu-Natal province where violence had claimed thousands of lives.) The New National Party (NNP) - the Apartheid party which governed the country prior to the country's first ever all-race democratic elections in 1994, was beaten into fourth place with a humiliating 6.87% of the votes and now has just 28 seats in the new Assembly. In all, a total of 13 parties will be represented in the new Assembly, replacing the seven in the last term.

Following the smooth transition of power in June 1999, the new president has gone on to stamp his own personality on the presidency, taking some difficult and at times controversial decisions in the process. Among the decisions he has taken include reaffirming commitment to the government's Growth, Employment and Redistribution (GEAR) macro-economic programme introduced under Mandela, a commitment to speed up the government's privatisation programme and a proposal to amend the current labour laws.

While these measures are all deemed to be beneficial in the long term, due to the high number of job losses and increasing level of poverty, they have proved to be unpopular in the short term, alienating President Mbeki and his government among the rank and file of the ANC. The government's relations with its tripartite partners, the South Africa Communist Party (SACP) and the umbrella labour movement, the Congress of South African Trade Unions (COSATU) has also become increasingly strained.

Despite internal difficulties, the ANC is by far the most politically dominant entity in South Africa. Furthermore, the party's huge majority means that parliamentary opposition to its agenda will be ineffective. Political opposition will thus largely come from the different factions within the ANC and its political partners and labour unions. This lack of an effective opposition has led to fears that too much power will be concentrated within the ANC. The margin of the ANC's election victory raises the question that the result could lead to the de facto formation of a one-party state: the main opposition party, the DP, only won less than

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10% of the votes. This has left the DP and other opposition parties as bit-part players just looking to exploit potential rifts within the ANC itself in order to succeed in parliament.In an effort to present a viable opposition to the ANC, the DP announced its merger with the NNP and the small Federal Alliance (FA), both predominantly white-backed parties, to form the Democratic Alliance (DA) in June 2000. The merger of the three parties represents the most significant realignment in South African politics since 1994 when the apartheid era ended and the ANC displaced the NNP as the ruling power. At the time of their merger the parties claimed that amalgamation would 'strengthen multi-party democracy' and prevent South Africa from becoming a one-party state - a reference to the ANC's strong grip on power.

However, the NNP withdrew from the alliance, effectively bringing an end to the DA. Whilst all three parties enjoy a predominantly white support-base, the merger was never a natural alliance, being only a marriage of convenience. The liberal DP, which was only formed in 1989, displaced the NNP as the country's main opposition at the last elections, winning the votes of many disenfranchised white voters who did not wish to vote for the black-dominated ANC. However, once the two parties got together under the DA umbrella policy and personality differences between DP leader Tony Leon and his NNP counterpart Marthinus van Schalkwyk made the alliance unworkable.

Since ending its alliance with the DP, the NNP has got itself into another alliance, this time with its historical foe the ANC, to govern its stronghold of Western Cape province. Unlike the DA however, the ANC/NNP alliance is only restricted to the Western Cape and is unlikely to develop into an alliance at a national level.

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Parliamentary Elections (2 June 1999)Party % SeatsAfrican National Congress (ANC) 66.35 266Democratic Party (DP) 9.56 38Inkatha Freedom Party (IFP) 8.58 34New National Party (NNP) 6.87 28United Democratic Movement (UDM) 3.42 14African Christian Democratic Party (ACDP) 1.43 6Freedom Front (FF) 0.80 3United Christian Democratic Party (UCDP) 0.78 3Pan Africanist Congress of Azania (PAC) 0.71 3Federal Alliance (FA) 0.54 2Minority Front (MF) 0.30 1Afrikaner Eenheids Beweging (AEB) 0.29 1Azanian People's Organisation (AZAPO) 0.17 1TOTAL 100.00 400Source: Independent Electoral Commission (IEC): www.elections.org.za.

Over the years to come the political situation will be increasingly dominated by a power struggle within the ranks of the tripartite alliance – the African National Congress (ANC), the Congress of South African Trade Unions (COSATU) and the South African Communist Party (SACP). Tensions ran particularly high ahead of the ANC's consultative congress of December 2002. Held every five years, the ANC party congress gives an insight into the political thinking of the ruling elite and is a good indication of the direction of policy in the medium term. The consultative congress can be an opportunity for the diverse elements that make up the ANC to steer policies in a particular direction and to influence both party and government thinking. Many contentious matters, however, were discussed behind closed doors, but Mr Mbeki used the conference to launch an attack on left-wing critics of the government's market-oriented reforms. There are fears that in the run-up to the 2004 presidential and general elections, rising tensions (with left-wingers within the ANC leadership and ANC's political partners) might lead to political instability and result in a split in the tripartite alliance. For the time being, however, the three members of the alliance are interested in keeping the alliance intact and Mr Mbeki's reelection for a second term in office as well as ANC's position are not under threat. A political risk is seen in the growing extra-parliamentary opposition from both black and white political groupings. Several issues will dominate the ongoing debate within the ANC, including the direction of economic policy in the battle to create jobs and reduce poverty, and the most effective way of tackling the HIV/AIDS epidemic. The strong backing given to Mr Mbeki by the former president, Nelson Mandela, can be seen as an advance payment for the change in HIV/AIDS policy, where the President's unorthodox views on the link between the killer AIDS disease and the HIV virus had made him an unpopular figure.

As expected, the consultative conference produced no major changes of policy.

The ANC's GEAR policy document will continue to drive policy, ensuring a stable fiscal and monetary environment. A number of microeconomic programmes should help to stimulate the economy, but the key will be the government's ability to press ahead with the privatisation programme and reducing the public sector, in the face of opposition from organised labour. Black empowerment will emerge as a policy focus across all sectors – most controversially in the mining industry. Privatisation and economic liberalisation will gain momentum in growth and, ultimately, to create jobs. The unbundling of entities such as Eskom and Telkom, will create opportunities for private-sector participation in electricity generation and transmission, and telecommunications. One problem is that in the short to medium term more jobs will be lost in the restructuring of state assets than are created elsewhere, which makes macroeconomic reform a difficult balancing act. Nevertheless, reform can be expected to accelerate, though questions remain about the pace of progress and it is far from certain that foreign investors will regain interest if the process continues to drag on.

Foreign policy will continue to be shaped by the New Partnership for African Development (Nepad) – an ambitious plan to rebuild Africa, trough the principles of democracy and good governance. Mr Mbeki has pinned his hopes on its success. However, developments in Zimbabwe continue to cast a shadow over the Nepad project and the government's attempts to attract foreign direct investment inflows to South Africa and to the region. The efforts of South Africa and Nigeria to find a solution to the political impasse through negotiations between Robert Mugabe's ruling party, the Zimbabwe African National Union – Patriotic Front (ZANU-PF), and the opposition, the Movement for Democratic

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Change (MDC), collapsed. Nonetheless, neither Mr Mbeki nor the Nigerian president, Olusegun Obasanjo, has given up on this approach. Worried that the lack of progress in Zimbabwe may lead to EU and US withholding support for Nepad, they are keen for a breakthrough.

III. SOUTH AFRICA'S REGIONAL ROLE – NEPAD

South Africa is actively involved in finding solutions to the conflicts in the Great Lakes area.

A key development since the signing of the Lusaka Cease-fire Agreement in 1999 was the hosting of the Inter-Congolese Dialogue at Sun City from 25 February to 19 April 2002 which adopted a number of important resolutions on the integration of opposing armed forces, the economic reconstruction of the country, national reconciliation and a humanitarian assistance programme.

This was followed on 30 July 2002 by the signing in Pretoria of the Peace Agreement Between the Governments of the Democratic Republic of the Congo (DRC) and Rwanda on the withdrawal of Rwandan Troops from the Territory of the DRC and the Dismantling of ex-FAR and Interahamwe Forces in the DRC. The Namibian army has already completely withdrawn from the territory of the DRC.

As far as Burundi is concerned, South Africa engaged in efforts to obtain a cease-fire agreement between the armed groups and the Transitional Government of Burundi. Ex-President Mandela has been instrumental in bringing about these negotiations. A Ceasefire Agreement was reached on 26 August 2002 between the Transitional Government of Burundi and the National Council for the Defence of Democracy / Forces for the Defence of Democracy (CNDD-FDD) of Colonel Jean Bosco Ndayikengurukiye, culminating in the signing of a Memorandum of Understanding.

South Africa, as a member of the United Nations (UN) and the Southern African Development Community (SADC) as well, as chair of the African Union (AU), intend to play a positive role in the peace process in the region.

Aware of its vital interest in bringing about peace and stability in the region, South Africa is willing to deploy troops in the DRC under a UN Security Council mandate.

The search for peace and security is in keeping with South African commitment to Nepad (New Partnership for Africa's Development) principles of democracy and good governance. South Africa, together with Nigeria and Senegal, is one of the main sponsors of Nepad. The Nepad initiative, with its strong focus on key issues such as human rights and good governance, including the peer review mechanism, is overshadowed by the political and humanitarian crisis in Zimbabwe. Zimbabwe is seen as a crucial test case for Nepad's credibility. President Mbeki has been criticised for his soft stance on the Mugabe regime.In a recent resolution (5 September 2002), the European Parliament said that President Mbeki, as Zimbabwe's most powerful neighbour and economic partner, as chairman of the African Union and as a member of the Commonwealth charged with dealing with Zimbabwe, has the opportunity and the responsibility to show leadership in bringing about urgent change for the better in Zimbabwe. It called on him to take the initiative in bringing pressure to bear on

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Zimbabwe through effective regional initiatives and to demand new presidential elections under international supervision.

Nepad's future is hanging in the balance as long as there is no substantial proof that Nepad supporters are getting to grips with rogue leaders and halt the tragedy in Zimbabwe.

IV. ECONOMIC SITUATION

South Africa has a two-tiered economy; one matching other developed countries and the other with only the most basic infrastructure. It therefore is a productive and industrialised economy that exhibits many characteristics associated with developing countries, including a division of labour between formal and informal sectors - and uneven distribution of wealth and income. The formal sector, based on mining, manufacturing, services, and agriculture, is well developed.

South Africa's abundant mineral and energy resources form the core of the country's economic activity. Much of manufacturing is based on mining, and exports are led by gold and diamonds. Economic growth remains slow and employment remains stagnant. In the post-apartheid era, the government has focused on controlling the deficit while striving to step up spending on social programs to combat inequality. The central bank has used tight macro-economic policies to control inflation.

While South Africa's per capita GDP of about $3,020 places it among the middle-income countries, its income disparities are among the most extreme in the world. Thirteen per cent of the population (about 5.4 million people) lives in "first world" conditions. At the other extreme, 53 percent of the population (about 22 million people), live in "third world" conditions. In this group only one quarter of households have access to electricity and running water; only half have a primary school education; and over a third of the children suffer from chronic malnutrition. Reducing inequality and poverty, and tackling unemployment, among the highest in the world, are some of the key challenges faced by the post-apartheid government.

The transition to a democratic, non-racial government, begun in early 1990, stimulated a debate on the direction of economic policies to achieve sustained economic growth while at the same time redressing the socio-economic disparities created by apartheid. The Government of National Unity's initial blueprint to address this problem was the Reconstruction and Development Program (RDP). The RDP was designed to create programs to improve the standard of living for the majority of the population by providing housing - a planned 1 million new homes in 5 years - basic services, education, and health care. While a specific "ministry" for the RDP no longer exists, a number of government ministries and offices are charged with supporting RDP programs and goals.

The Government of South Africa demonstrated its commitment to open markets, privatisation and a favourable investment climate with its release of the crucial Growth, Employment and Redistribution (GEAR) strategy--the neoliberal economic strategy to cover 1996-2000. The strategy had mixed success. It brought greater financial discipline and macroeconomic stability but has failed to deliver in key areas. Formal employment continued to decline, and despite the ongoing efforts of black empowerment and signs of a fledgling black middle class

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and social mobility, the country's wealth remains very unequally distributed along racial lines. South Africa's budgetary reforms such as the Medium-Term Expenditure Framework and the Public Finance Management Act - which aims at better reporting, auditing, and increased accountability - and the structural changes to its monetary policy framework - including inflation targeting - have, however, created transparency and predictability and are widely acclaimed. Further improvements in tax collection and privatisation receipts, particularly in 2003-04, will bolster the government's finances. Trade liberalisation also has progressed substantially since the early 1990s. Average import tariffs in South Africa have declined to 14.3% in 1999 from more than 30% in 1990. These efforts, together with South Africa's implementation of its World Trade Organisation (WTO) obligations and its constructive role in launching the Doha Development Round, show South Africa's acceptance of free market principles.

Financial Policy

South Africa has a sophisticated financial structure with a large and active stock exchange that ranks 18th in the world in terms of total market capitalisation. The South African Reserve Bank (SARB) performs all central banking functions. The SARB is independent and operates in much the same way as Western central banks, influencing interest rates and controlling liquidity through its interest rates on funds provided to private sector banks. Quantitative credit controls and administrative control of deposit and lending rates have largely disappeared. South African banks adhere to the Bank of International Standards core standards.

The South African Government has taken steps to gradually reduce remaining foreign exchange controls, which apply only to South African residents. Private citizens are now allowed a one-time investment of up to 750,000 rand in offshore accounts. Since 2001, South African companies may invest up to R750 million in Africa and R500 million elsewhere.

In 2001 the rand had lost 37% of its value against the US dollar and has regained about 40% in 2002.

Trade and Investment

South Africa is the world's largest producer and exporter of gold and platinum and also exports a significant amount of coal. During 2000, platinum overtook gold as South Africa's largest foreign exchange earner. The value-added processing of minerals to produce ferroalloys, stainless steels, and similar products is a major industry and an important growth area. The country's diverse manufacturing industry is a world leader in several specialised sectors, including railway rolling stock, synthetic fuels, and mining equipment and machinery.

Primary agriculture accounts for about 4% of the gross domestic product. Major crops include citrus and deciduous fruits, corn, wheat, dairy products, sugarcane, tobacco, wine, and wool. South Africa has many developed irrigation schemes and is a net exporter of food. South Africa's transportation infrastructure is well developed, supporting both domestic and regional needs. The Johannesburg International Airport serves as a hub for flights to other Southern African countries. The domestic telecommunications infrastructure provides modern and efficient service to urban areas, including cellular and internet services. In 1997, Telkom,

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the South African telecommunications parastatal, was partly privatised and entered into a strategic equity partnership with a consortium of two companies, including SBC, a U.S. telecommunications company. In exchange for exclusivity to provide certain services for 5 years, Telkom assumed an obligation to facilitate network modernisation and expansion into unserved areas. A Second Network Operator will be licensed to compete with Telkom across its spectrum of services in 2002. Three cellular companies provide service to over 9 million subscribers.

The economy grew by 3% in 2002. On the supply side of the economy, the manufacturing sector increased output by 3% year on year, comparing unfavourably with year on year growth of 5.5% in the fourth quarter of 2001. Although certain industries, notably chemicals, machinery and equipment, continued to grow strongly, output of iron and steel and transport equipment (owing to a fall in demand for new cars and other motor vehicles) was particularly weak. Agricultural output in the first quarter was 4.5% higher than in the first quarter of 2001, partly because in 2002 most of the wheat crop was harvested in the first quarter. The mining sector showed no change from the fourth quarter of 2001 (0%); increased output of diamonds and iron ore was offset by a decline in platinum output. Platinum output was held back by a weaker price and the return of Russian producers to the market.

These trends persisted over the course of 2002, supported by a nascent recovery in external demand in the second half of the year. The domestic economy emerged from recession from the middle of 2002 and entered 2003 with good momentum, which could allow the rate of real GDP growth to match the previous year's level and to achieve 3.5% in 2004. Real private consumption, which typically accounts for just over 60% of GDP, is expected to grow by 2.9% in 2002 and 3.4% in 2003. Inflationary pressures (particularly in 2002), high unemployment and the recent interest rate increases will limit the overall growth of private consumption. Government has admitted that it is unlikely to meet its own inflation target of 3-6% before 2004.

Exports reached 29.1% of GDP in 2001, up from 11.5% a decade ago. South Africa's major trading partners include the United Kingdom, the United States, Germany, Italy, Belgium, and Japan. South Africa's trade with other Sub-Saharan African countries, particularly those in the Southern Africa region, has increased substantially. South Africa is a member of the Southern African Customs Union (SACU) and the Southern African Development Community (SADC). In August 1996, South Africa signed a regional trade protocol agreement with its SADC partners. The agreement was ratified in December 1999. Implementation began in September 2000. It intends to provide duty-free treatment for 85% of trade by 2008 and 100% by 2012.

South Africa has made great progress in dismantling its old economic system, which was based on import substitution, high tariffs and subsidies, anticompetitive behaviour, and extensive government intervention in the economy. The new leadership has moved to reduce the government's role in the economy and to promote private sector investment and competition. It has significantly reduced tariffs and export subsidies, loosened exchange controls, cut the secondary tax on corporate dividends, and improved enforcement of intellectual property laws.

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V. EU – SOUTH-AFRICA RELATIONS

The rationale for EU involvement is based on the assumption that South Africa is a pole for the development of peace, democracy and economic growth for the entire Southern Africa region. If South Africa is to play this role, it must still overcome major social and economic challenges which have started to be addressed, during the past five years:

- 50% of the population are defined as poor using a SA poverty line equivalent to about $2,40 per person per day;

- poverty is mainly rural (72% of the poor live in rural areas);- poverty is mainly present within black communities and in particular the female-headed

households;- South Africa's income inequality is among the highest in the world (the poorest 20% of

the population receive 3,3% of income while the richest 10% receive 47,3%). There are extreme variations in human development indices between races and provinces (Eastern Cape, KwaZulu Natal and the Northern Province being the provinces where poverty is most severe).

The social challenges remain staggering. As indicated above, lack of basic infrastructure (housing, water and sanitation, electricity), high unemployment, widespread AIDS, high level of crime and violence against women and children and poor education need to be tackled through comprehensive programmes, in order not to achieve a higher rate of economic growth in the long run but to improve income distribution and reduce poverty and social discrimination.

A Country Strategy Paper for South Africa for 2000-2002 has been approved by the Member States. This document identifies major challenges and constraints to development in South Africa. It was the basis for the negotiation of a Multiannual Indicative Programme (MIP)2000-2002, agreed upon in June 2000. On 20 January 2003 a new Multi-annual Indicative Programme was formally adopted by the Commission and is currently in the approval process with the South African Government.

The programme is the result of intensive negotiations with the South African authorities, of co-ordination with other donors, primarily the EU Member States, and of consultations with the civil society in the country. It sets aside an indicative amount of € 386 million for the next three years. A one-year extension, with an additional amount of € 129 million, is foreseen.

The main objective is to support the South African government's policies and efforts to reduce poverty and mitigate the impact of HIV/AIDS. It focuses on four major areas of co-operation:

- equitable access to and sustainable provision of social services- equitable and sustainable economic growth- deepening democracy and- regional integration and co-operation

Complementing the support in the form of grants from the Commission budget, is the European Investment Bank's Memorandum of Understanding, which was signed in 2001 and provides for loans in the average amount of € 115-120 million p.a.

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Regulation (EC) No. 1726/2000 of the European Parliament and of the Council has been adopted for the 2000-2006 period and constitutes the legal base for budget line B7-3200. This legal base covers the administrative, procedural and legal aspects of implementing the EPRD in South Africa.

The European Parliament has dealt with South Africa on many occasions and supported access to pharmaceutical products for AIDS victims at affordable prices. It has called on Member States, the EU Commission, the European Investment Bank and the International Community to offer their assistance to South Africa in combating HIV/AIDS and eradicating poverty and unemployment, in enhancing sustainable development and raising the living standards of the majority black population (Resolutions B5-0489, 0500, 0509, 0511 and 0522/2001).

Objectives of EU aid are:

- poverty alleviation;- better integration of South Africa in the regional and world economy;- further consolidation of human rights and the democratic processes.

To define its specific interventions, the following main criteria apply:

- coincidence with the key priorities as defined in the Medium Term Expenditure Framework;

- clear policy in the sector or sub-sector concerned and sufficient capacity of the relevant department or partner organisation;

- lessons learnt from past experiences of the EU in the sector concerned as reflected in Midterm evaluations of projects or sector reviews;

- complementarity with other donors and with EU Member States in particular;- EU internal capacity to manage and monitor programmes.

In application of those overall objectives and criteria and taking into account the international development targets, specific target areas of cooperation are the following;

- Poverty reduction through improved social service delivery with focus on water and sanitation, health and housing and through stimulation of local economic development;

- Private sector development with focus on improvement of internal and external competitiveness;

- Consolidation of democracy through increased awareness and promotion of human rights and improved law enforcement mechanisms;

- Support to regional cooperation and integration in line with the priorities agreed under the 8th EDF and Future Regional Indicative Programmes.

Drawing the lessons from past experiences in the implementation of a wide range of projects, the EU will limit its interventions under the next MIP in each of the goal areas to a maximum of two or three sector support programmes, and/or innovative pilot projects. Wherever possible, EU interventions will also be focused on specific and most deprived geographical areas (Eastern Cape, Northern Province, and KwaZulu Natal).

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EU support and complementarity with other donors

As a result of a dialogue with the relevant South African authorities and of consultations with EU Member States and other donors, EU support to poverty reduction will focus on four main themes, where past involvement of the EU has been considered positive.

In water and sanitation, EC involvement will concentrate mainly on community rural water supply and sanitation in the Northern Province and Eastern Cape to consolidate previous programmes, which have been considered as effective. The ongoing EC support which amounts to 64 million Euro is provided mainly to the three provinces (Eastern Cape, KwaZulu Natal and the Northern Province) and aims at increasing the coverage of the provision of water and sanitation services to previously disadvantaged communities through a partnership between the three levels of governments and the NGOs. In the future, the emphasis will be on consolidation of institutional development and capacity building, focussing on planning, maintenance and monitoring in the three Provinces already benefiting from EC support. Institutional capacity of local authorities and of water services authorities and Community participation will be strengthened, as it is crucial for the sustainability of water schemes.

The Department of International Development (DFID) of the United Kingdom and the Danish International Development Agency (DANIDA) have expressed interest in joining the EU in a sub-sector support programme in this field.

In the field of health, four main areas of support have been identified: - health system development including health financing, - improvement of hospital efficiency and ability to promote equity; development of district health system and primary care and HIV/AIDS, STDs and TB control. Combating HIV/AIDS is becoming South Africa's chief social and economic challenge and is having an impact on the health, welfare, education and financial systems. DFID and Belgium have expressed interest in a coordinated approach, which will have to include other donors such as USAID.

In the area of housing, focus will be on stimulation and capacity building of social housing associations and research to provide alternative and innovative solutions to accelerate mass rental housing delivery. Positive past experiences gained notably through EC support to networks of specialised NGOs will be used in order to move from a small scale to a wider and more integrated approach promoting public-private (non profit) partnerships with a view to developing appropriate responses to the needs of disadvantaged communities.

In the field of education, the government's focus in 2003 will be teacher training, education management and increasing the quantity of learning support materials provided to schools.

In the field of local economic development, EC support concentrates on the three most deprived provinces mentioned above, and promotes income generating activities, social development of communities and the provision of basic economic utilities through support of partnership between local authorities and all local development agents.DFID, Germany, DANIDA, Italy, Sweden, The Netherlands and Belgium are also present in the sector and have expressed interest in further coordination and sharing of experiences.

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Past development programmes have included improving living standards for the poor in historically disadvantaged areas, support for small and medium-sized enterprises, capacity building in public services, and infrastructure projects. While these priorities continue to be addressed (e.g. the government's January 2003 decision on a food security programme for 150 000 households), new and ongoing projects focus on education and training, improvement and access to water and sanitation, health care, as well as local economic development, aimed at job creation.

Since South Africa's accession to the Lomé Convention, South African NGOs and other institutions have been eligible for funding under EC budget lines within Chapter B 7-6. Under budget line B7-6000, EU contribution towards schemes concerning developing countries carried out by non-governmental organisations, a number of European NGOs working together with South African NGO partners have been eligible for co-financing of up to 50% of their project costs. Other budget lines from which South Africa has benefited include B7-7021 Human rights and democracy in Southern Africa, B7-6211 AIDS control in Developing countries, B7-6200 Environment in the Developing Countries, and B7-6210 North-South cooperation schemes in the context of the campaign against drug abuse.

Framework for long-term cooperation

Negotiations on building a long-tem, comprehensive and stable framework for cooperation between the EU and South Africa started in June 1995, after a period of intense preparatory work by the Commission, EU Council and the government of South Africa

In recognition of South Africa's unique circumstances, and taking into account the interests of other countries in the region, the EU offered a framework for cooperation around 2 pillars:

- Qualified membership of the Cotonou Agreement

South Africa's qualified membership of the (then) Lomé Convention had been approved on 24 April 1997. It came into effect on 1 June 1998. While not eligible for non-reciprocal trade preferences and access to funding from the European Development Fund (EDF), South Africa participates fully in the Cotonou institutions and its firms have access to tenders and contracts for EDF projects in all ACP countries.

- Bilateral Agreement on Trade, Development and Cooperation (TDCA) between South Africa and the EU

This Agreement was approved by the European Council in Berlin on 24 March 1999 and was signed in October 1999 and entered into force in 2000 under provisional arrangements. The Agreement covers all subjects that are not dealt with in the context of South Africa's Cotonou membership, such as development cooperation, political dialogue and trade and economic cooperation. It will lead, after a period of transition of 10-12 years, to a Free Trade Area between the EU and South Africa and covers around 90% of trade between the EU and South Africa.So far, only 7 countries (Denmark, The Netherlands, Sweden, Germany, Finland, Ireland and Spain) have ratified the Agreement.

In addition, 2 separate agreements have been negotiated on the following areas:

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- Science and Technology, which came into force in November 1997,- Wine and Spirits, concluded in January 2002.

Negotiations on a fisheries agreement have stalled. The EU's purpose is to secure access to South-African fishing grounds for the European fishing fleet, whereas the South-African side would rather guarantee access to "historically disadvantaged communities". On resumption of talks on 5 March 2001, it appeared that the standpoints were as far apart as ever and negotiations have been suspended since.

In January 2002, South Africa and the European Union signed a long-awaited deal on wine and spirits that will bring more duty-free South African wine to the EU market. The agreement, signed at the Nederberg Wine Estate in Paarl, ensures the phasing out of the use by South African producers of the names port, sherry, grappa and ouzo.

This is of particular importance to the EU. The agreements provide better protection for EU appellations of origin than the protection available at multilateral level, i.e. the TRIPs Agreement. They will provide exclusive protection for the EU wines such as "Champagne", "Chianti", "Mosel", "Port" and "Sherry". As regards "Port" and "Sherry", South Africa will refrain from using these terms for their own wines after transitional periods of twelve years on its domestic market and after five years on export markets, whereby the periods already started from 1 January 2000. They also provide for the elimination of conflictual trademarks, considered as misleading as to the origin of the wine, and which were acquired before the entry into force of the TRIPs Agreement for "non-originating" wines. In the spirits sector, all European traditional names will be protected, including, after a transitional period of five years, "Grappa" and "Ouzo".

Each side agreed also on a procedure to accept in future new practices introduced by the other, on the basis of strict requirements such as health and consumer protection and the preservation of good wine making practices. Moreover, South Africa will allow EU wine that has undergone specific practices (such as enrichment) or wine with particular analytical composition (e.g. late harvest or high quality wine from grapes affected by noble rot) to be marketed in its territory. In return, the EU will authorise the import of specially treated South African wine, taking into account specific climatic conditions.

Both parties have agreed on the mutual recognition of licences issued by the exporting country. The technical details will be laid down in a separate exchange of letters.

The concluding negotiations also agreed on adjusting the annual volume of the duty free tariff quota for South African wines imported in bottles. The new volume will be 420,000 hl (as opposed to 320,000 hl), effective from January 2002.

€ 15 million of Commission aid for restructuring of the South African wine and spirit industry will also come into effect when the wines and spirits agreements take effect.

A Joint Committee consisting of the Commission and South African representatives will be set up to monitor and manage the correct operation of the agreements.

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In 1999, EU wine imports from South Africa amounted to € 201 million, while its wine exports to South Africa totalled only € 11 million. By contrast, the EU had a bilateral trade surplus in spirits with EU exports amounting to € 90 million as compared with € 4 million worth of imports.

For Commissioner for Development and Humanitarian Aid, Poul Nielson, "This agreement removes an irritant from South Africa-EU relations and paves the way for more constructive and mature cooperation between the two sides".

As regards the entry into force of the Wine and Spirits Agreements, South Africa informed the Commission that the agreements could only enter into force after ratification by the South African Parliament. Therefore, those agreements should be applied on a provisional basis pending their definitive entry into force.

The most ambitious provisions of the TDCA with South Africa are those concerning the establishment of a Free Trade Area (FTA) between the EU and South Africa. Effectively, at the end of the 10-year transition period 95% of EU imports from South Africa will enter into the market free of duty. The respective figures on the South African side are 12 years and 86%.

Other areas of cooperation covered by the Agreement include :

- arrangements for cumulation of origin - cooperation between customs services - cooperation in the field of competition policy and public aid - securing the protection of intellectual property rights - cooperation in the area of public procurement - promotion of standardisation and conformity assessment - liberalisation in the field of services - cooperation in the field of statistics - cooperation in the field of transport, including international maritime transport - trade promotion (in particular in favour of small and medium-sized enterprises)

Under the Agreement, the EU and South Africa will develop cooperation in a wide range of economic and industrial matters, to their mutual advantage, and in the interest of the Southern African region as a whole. This will focus on :

- diversifying and strengthening their economic links - promoting sustainable development in their economies - supporting patterns of regional economic cooperation - promoting economic cooperation between small and medium-sized enterprises - protecting and improving the environment

Cooperation in the areas of industry, investment promotion, telecommunications and information society, energy, mining, tourism, agriculture, fisheries, consumer policy and services, including financial services will be promoted by this Agreement.

The TDCA also provides for continued financial assistance for development activities at a substantial level for the duration of the Agreement. As the Agreement is open-ended in

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character, this paves the way for long-term development cooperation between the two sides. The modalities regarding the funding criteria and the implementation of the financial assistance is not specified in the TDCA. These will be decided in the context of the ongoing dialogue between the Community and the Government of South Africa.

In addition to trade, economic and financial cooperation, the TDCA also covers cooperation on environment, cultural contacts, information and media as well as social cooperation, human resource development, health, data protection and the fight against drugs and money laundering.

The regular political dialogue may cover all subjects of mutual interest and it should encourage the support for democracy and the rule of law, respect for human rights and the promotion of social justice, creation of acceptable conditions to eliminate poverty and all forms of racial, gender, political, religious and cultural discrimination. This political dialogue will take place at Ministerial and other levels. On general matters of foreign policy, particularly with a view to promoting peace and long-term stability in Southern Africa, the political dialogue could be extended to include all countries in the SADC region.

As a result of its qualified Cotonou membership South Africa already participates in political dialogue arrangements within the ACP-EU framework.

The negotiation of a long-term cooperation agreement between the European Union and the Republic of South Africa is also an important new step in strengthening EU-Southern African relations.

The EU-South Africa TDCA has been designed with a strong regional component, so as to be of benefit not just to South Africa but to Southern Africa as a whole. For South Africa’s immediate neighbours in Botswana, Lesotho, Namibia and Swaziland (the BLNS states) the provisions concerning the establishment of a Free Trade Area between the European Union and the Republic of South Africa will be especially significant since these countries belong to a customs union (SACU) with South Africa.

As members of the Cotonou Agreement, Botswana, Lesotho, Namibia and Swaziland have preferential access to the EU market for their exports. Botswana, Namibia and Swaziland also benefit from the special Trade Protocols for Beef and Sugar. This will remain unaffected by the FTA between the EU and South Africa.

There may be sectors of the economy, both in South Africa and in other SACU countries, that might suffer adjustment costs from the gradual opening up to competition with EU producers. Some of them may actually require continued protection. In order to minimise any possible adverse effects for the BLNS countries, most sensitive products, i.e. beef and sugar, are excluded from the FTA. Furthermore, the Agreement provides for a safeguard clause that can also be invoked for protection of new industries in both South African and the BLNS states.

At present the budgets of the BLNS countries rely heavily on customs revenue from the common SACU pool account. As with any trade liberalisation programme, the FTA would undoubtedly lead to a decrease in this source of income.

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However, there is already acknowledgement within SACU that this present system of financing is inefficient and unsustainable. In order to promote long term economic growth, the SACU countries need to move towards other sources of income. The EU has offered support to alleviate possible transitional difficulties.

Trade Flows under the TDCA

In the 2-year period since the TDCA came into force, trade flows between South Africa and the EU have shown strong growth and have benefited trade in both directions.

Growth in trade:

In the first year, South African exports were up by 35 percent, while imports into South Africa from the EU grew by 20 percent. Despite the international slow-down in 2001, these figures only dampened slightly. In the first 10 months of 2001, South African exports increased by 21 percent and imports from the EU into South Africa grew by 7 percent.

This has further widened the trade surplus in favour of South Africa from R6 billion in 1999, R17 billion in 2000 and R25 billion in the first 10 months of 2001. These figures are in line with the accelerated tariff concessions on the EU side.

Increasing importance as trading partners:

South Africa has become a more important trading partner for the EU. In the last two years, exports to and imports from South Africa grew at a higher rate than the average total trade of the EU with the rest of the world. This made SA to climb up from being the 19 th to the 15th

most important exporting nation to the EU overtaking such countries as Algeria, Malaysia, Singapore and Saudi Arabia. Also in the other direction, the EU’s shares of total SA exports and imports have continued to rise while other major trading partners have experienced declines in their shares of total SA trade.

10 most traded product, first 10 months of 2001:

SA export to EU - Percentage share EU exports to SA - Percentage share1. Diamonds 15.2% 1. Automotive parts 6.5%2. Coal 12.3% 2. Motor Cars 6.4%3. Gold 12.0% 3. Electrical machinery, 8471 3.7%4. Catalytic converters 5.9% 4. Medical supplies 3.4%5. Platinum 5.6% 5. Electrical machinery, 8525 3.3%6. Motor Cars 3.7% 6. Electrical apparatus, 8517 2.9%7. Ferro-Alloys 2.9% 7. Diamonds 2.9%8. Citrus fruits 1.9% 8. Automotive parts, other 2.7%9. Wine 1.9% 9. Electrical machinery, 8407 1.5%10. Precious metal ores 1.5% 10. Tractors 1.0%

The rapid increase in the export from South Africa of catalytic converters (up by 63%) can be explained by the abolition of tariffs at the day of entry of the TDCA. Motor cars (25%) and citrus (36%) also received considerable concessions in the first or second year of the

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agreement. Diamonds (61%) already entered duty-free before the entry of the TDCA. Wine and apples increased, although tariff concessions for these products will only apply from the 3rd to the 5th year of the TDCA.

ACP-EU JOINT PARLIAMENTARY ASSEMBLY, CAPE TOWN

The 4th ACP-EU Joint Parliamentary Assembly took place in Cape Town from 18-22 March 2002.

This meeting was dominated by events in Zimbabwe, but the session also focused on Trade. One of the most significant actions taken by the Assembly was the unanimous adoption of the Cape Town Declaration on the forthcoming ACP-EU trade negotiations.

The Cape Town Declaration was tabled by the ACP – on the initiative of the South African and Namibian representatives to the Assembly – and sets clear benchmarks by which the forthcoming ACP-EU trade negotiations, which under the terms of the Cotonou Agreement are set to begin by September 2002, should be monitored.

The Declaration outlines the priorities and concerns of Joint Parliamentary Assembly members about the preparations, scope and conduct of the forthcoming ACP-EU trade negotiations. This initiative builds on the work which has already been done by the Joint Parliamentary Assembly on ACP-EU trade. The Resolution also makes clear that the deliberations should reflect the inter-connected nature of the ACP/EU trade negotiations and the WTO agenda.

The Cape Town Declaration in particular highlights the importance of conducting the trade negotiations in an open, transparent and inclusive manner, the need to ensure that wider development objectives relating to poverty eradication and sustainable development are the central focus of the trade negotiations, the need to ensure that the new trading arrangements contribute to the structural transformation of ACP economies, and provide a basis for the integration of ACP economies into the global economy, the importance of ensuring that no ACP state is left worse off in terms of market access under any successor arrangements to the current Cotonou trade provisions, the importance of respecting, and safeguarding, the right of least developed countries to non-reciprocal trade preferences, the need to establish comprehensive programmes of assistance which are designed to tackle the supply side constraints facing ACP producers, and the importance of developing comprehensive programmes of support for fiscal diversification in any move towards free trade with the EU.

EP Resolutions

In its resolution of 5 July 2001 on the situation in South Africa, the European Parliament called on the South African government to make the necessary efforts to enhance sustainable development and raise the living standard of the majority of the black population, called for a greater, straightforward policy commitment to fighting poverty and social inequalities and to create jobs, since poverty, inequality, poor education and unemployment are all factors working against the consolidation of democracy, urged the South African government to face up to its responsibility and do everything in its power to combat the HIV/AIDS problem, and

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called for a clearly defined project to be set up to deal with prevention, care and treatment of HIV/AIDS.

In an earlier resolution of 15 March 2001, the European Parliament expressed its support in the fight against HIV/AIDS by calling for the development of a system allowing developing countries equitable access to medicines and vaccines at affordable prices, while expressing its solidarity and support for the governments of South Africa and Kenya in their struggle to use WTO-compliant legislation to gain access to the cheapest possible life-saving medicines. It also called on the Commission to work with the Member States to show international leadership in the struggle for life-saving medicines by encouraging technology transfer and support for the strengthening and/or development of local production capacity.

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Sources:

- Economist Intelligence Unit, EIU Country Report, December 2001.- World Markets Country Analysis – Country Report, September 2002.- Country Strategy Paper for South Africa 2000-2002, EC DEV/985/99-EN,

December 1999.- U.S. Department of State, Background Note: South Africa, April 2002.- Department of Foreign Affairs, Republic of South Africa:

Answers to questions by Deputy President Zuma, 12 September 2002.- European Union in South Africa (www.eusa.org.za).- EC Country Information Sheet, January 2002.- UNAIDS/WHO Epidemiological Fact Sheets (2000 update (revised))- Human Rights Watch reports on South Africa, Vol. 12, No. 5(A), October 2000.- Jane's Defence Weekly and www.defence-discovery.com.

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