tronic equipment, transportation equipment, and other manufacturing sectors are not significantly different from those in other major sectors of the economy.

Extent of U.S. Investment in Selected Industries.-U.S. Direct Investment Position Abroad on an Historical Cost Basis-1993

11994 figures are all estimates based on monthly data as of June 1994. 2GDP at factor cost.

'Department of Commerce statistics.

Statistics depending on population data are unreliable; official black population and unemployment rates are understated. While the Central Statistical Services no longer attempts to quantify black unemployment, most economists believe the rate is in excess of 40 percent. Unemployment among other racial groups is lower.

1. General Policy Framework

South Africa is a middle-income developing country with a modern industrial scctor, well-developed infrastructure, and abundant natural resources. Most economists agree that South Africa has the potential to grow at an annual rate above five percent; yet annual economic growth over the past decade averaged less than one percent in real terms; no new net jobs were created in the manufacturing, mining, or agricultural sectors; and per capita incomes declined sharply. The rate of real GDP growth turned negative in early 1989, and contracted by one-half percent in both 1990 and 1991. The decline in the economy became more severe in 1992, as the nation battled the longest recession in over eighty years. Besides being affected by the recent worldwide recession and the worst drought of the century, the South African economy's poor performance during this period could be explained by several structural factors:

-Apartheid policies led to inefficient use of human resources, underinvestment in human capital, labor rigidities, and large budgetary outlays for duplicative layers of government and facilities;

-Consumer inflation persisted at double digit levels (since the early 1970s) until 1993 when it dropped into the single digits;

-Labor productivity was low and declining, outstripped by high average wage in

creases;

-The government intervened extensively in the economy to protect inefficient industries, provide employment to its constituents, and combat foreign economic sanctions;

-Foreign and domestic investment was limited by political uncertainty, continuing violence, labor unrest, and the concern over the role of the private sector in a post-apartheid South Africa.

In 1993, GDP registered positive growth for the first time in four years with 1.1 percent growth. Two principal factors, including a substantial increase (six percent) in the volume of merchandise and net gold exports and a significant recovery in agricultural production made a major contribution to this revival in economic activity. Although the agriculture sector accounted for most of the growth during the early part of 1993, the increase in economic activity spread to other sectors in the second half resulting in growth in the mining, manufacturing, electricity, gas and water, and commerce and finance areas. In 1994, the economy got off to a sluggish start due to uncertainty surrounding the election and transitional period and a large number of public holidays. Economists estimate that the South African economy will register 2-2.5 percent growth over the full year of 1994.

The new South African government has already taken steps to address some of the structural problems within the economy. While there is a long way to go in eliminating apartheid's legacy and meeting the black community's aspirations, some

progress has been made in reducing economic distortions caused by the past's racial policies. Legal restrictions which prevented black South Africans from owning businesses, obtaining skilled jobs, or living in major urban centers have been lifted. Black trade unions have been recognized. Spending on socio-economic development for blacks, including education and health care, has increased in recent years, although it still remains far below spending on white services. Much remains to be done, and the effects of past policies, particularly the legacy of the "bantu" education system, will be felt for many years.

Over the last decade, quantitative credit controls and administrative control of deposit and lending rates largely disappeared. The South African Reserve Bank now operates similarly to Western central banks. It influences interest rates and controls liquidity through its rates on funds provided to private sector banks, and to a much smaller degree through the placement of government paper. In the past three years, restrictive monetary policy-primarily the maintenance of a relatively high central bank lending rate has sought to curb domestic spending on imports and to reduce inflation. Nevertheless, high growth in the money supply along with large increases in food prices have resulted in higher producer and consumer inflation which are now approaching double digits.

Traditionally, South Africa has adopted conservative fiscal policy. In the late 1980's, however, revenues lagged behind spending, leaving large deficits to be financed through borrowing and putting pressure on private capital markets. After 1990, the government of F.W. de Klerk adopted more restrictive fiscal policies, and the new Government of National Unity (GONU) has continued a fiscally conservative approach. Although the 1993/94 budget ended in a deficit of R31.4 billion (approximately 8.6 percent of GDP as spending outpaced revenues), estimates for the deficit before borrowing in fiscal 1994/95 are somewhat lower reaching R29.3 billion, roughly 6.8 percent of GDP. (These figures are based on a GDP growth rate of 3 percent). The GONU says it will resist pressure to use fiscal policy to address socioeconomic needs in education, health care and housing for the majority of South Afri

cans.

The South African government controls substantial portions of the economy, including much of the petroleum, transportation, armaments, electric power, communications, aluminum, and chemical sectors. Privatization of some state assets has gained favor more recently, particularly as a way to reduce the government's high level of indebtedness and to pay for the new government's Reconstruction and Development Program (RDP).

2. Exchange Rate Policy

Faced with large scale capital outflows in 1985, the Reserve Bank reimposed comprehensive exchange controls, including a dual exchange rate. The Bank maintains one exchange rate (the financial rand) for foreign investment flows and outflows, and another (the commercial rand) for all other transactions. This effectively cushions the economy from the effects of international capital flows.

Under South African exchange regulations, the Reserve Bank has substantial control of foreign currency. The Reserve Bank is the sole marketing agent for gold, which accounts for about 30 percent of export earnings. This provides the Bank with wide latitude in influencing short term exchange rates. Except for a period in 1987 when the bank followed an implicit policy of fixing the rand against the dollar, monetary authorities normally allow the rand to adjust periodically with an aim to stabilize the external accounts.

The ailing foreign reserve position of the country and socio-political uncertainties caused the nominal effective exchange rate of the commercial rand to depreciate by 4.1 percent in the first quarter of 1994 and by a further 8.3 percent by the end of July 1994. (The real effective exchange rate of the rand declined by 7.5 percent from December 1993 to July 1994). In this period the rand depreciated against all of the currencies of South Africa's main trading partners. However, it also depreciated fairly sharply against the U.S. dollar and British pound over this period. Concern over political developments, labor unrest and profit-taking led to a sharp depreciation of the financial rand in the beginning of 1994 to an all time low of R5.58 per dollar in April 1994. However, when it became apparent that the political transition would be achieved peacefully, the finrand appreciated again to R4.55 per dollar in May. The most recent data put the discount of the financial rand to the commercial rand at about 10 percent.

Pressure and speculation on abolishing the dual currency system has been intense. Nevertheless, Bank Governor Chris Stals and other leading economists dispute its eminent abolition.

3. Structural Policies

Prices are generally market determined with the exception of petroleum products. Purchases by government agencies are by competitive tender for project or supply contracts. Bidders must pre-qualify, with some preferences allowed for local content. Parastatals and major private buyers, such as mining houses, follow similar practices, usually inviting only approved suppliers to bid.

The primary source of government revenue in South Africa is income tax. Although the government planned to lower both individual and company tax rates over five years, the present recession-induced revenue crisis ended the plan after its first year. The 1994/5 budget kept the maximum personal income tax rate at 48 percent on incomes above R80,000 for married and R56,000 for single taxpayers. However, it reduced the corporate primary income tax rate to 35 percent from an earlier rate of 40 percent. Corporations' secondary tax rate on dividends was nevertheless increased by 10 percent. The 1994/95 budget also imposed a "once-off" levy of 5 percent on all income (both corporate and individual) over R50,000 to pay for transition

cost overruns.

In September 1991, the government shifted from a 13 percent general sales tax to a 10 percent value added tax levied on many additional goods and services that had been exempt from GST. In April of 1993, the VAT rate increased to 14 percent in an attempt to cover the shortfall in current government revenues and to meet increasing demands for social spending. The government is also negotiating with labor and consumer groups over the taxation of basic foods. South Africa raises additional revenue through customs duties, excise taxes, import surcharges, and through estate, transfer, and stamp duties. There are no export taxes, but import duties as high as 100 percent in the case of certain luxury goods protect local industry and provide substantial revenue.

4. Debt Management Policies

South Africa's external debt situation has continued to improve in recent years. At the end of 1993, foreign debt amounted to $16.7 billion, with the private sector accounting for about 10.7 billion of this total. The ratio of total foreign debt to GDP in 1993 was 14.2 percent, and interest payments to total export earnings was 7.1 percent. Debt repayment obligations in 1994 are estimated to be R4 billion to R5 billion, although increasing access to international capital markets should allow South Africa to refinance at least one half of that debt.

In 1985, faced with large capital outflows, intense pressure against the rand, and a cutoff of its access to foreign capital, the South African Government declared a unilateral standstill on amortization payments. Interest payments were continued, and amortization payments due to international organizations and foreign governments were not affected, obviating the need for a Paris Club rescheduling. The debt "standstill" was regularized in an arrangement with private creditors in 1986. In 1990, South Africa and its private creditors negotiated a third extension of that arrangement through the end of 1993. In September of 1993, the government, with the consensus of South Africa's major political parties, finalized a debt agreement with major Western banks on $5 billion worth of mostly private debt caught inside the "standstill net."

South Africa is a member of the World Bank and International Monetary Fund (IMF) and continues Article IV consultations with the latter organization on a regular basis. With the establishment of a democratically elected government, South Africa is now eligible for Bank loans. Moreover, after some twenty-seven years of relative economic isolation, South Africa became another IMF borrower country. In December 1993, the IMF approved the government's application for a $850 million drought reserve loan. Gaining access to the drought facility enabled the government to replenish its foreign exchange reserves and normalize relations with the international financial community.

5. Significant Barriers to U.S. Exports

Under the terms of the Import and Export Control Act of 1963, South Africa's Minister of Trade and Industry may act in the national interest to prohibit, ration, or otherwise regulate imports. Current regulations require import permits for a wide variety of goods, including foodstuffs, clothing, fabrics, footwear, wood and paper products, refined petroleum products and chemicals. Surcharges on imported goods, which range as high as 40 percent on some items, are the most significant barriers for U.S. exports. The Department of Trade and Industry is attempting to simplify its system of tariffs, but some tariffs have been increased in the process, including hikes of up to 180 percent on certain steel products. Local content requirements also apply in certain industries, most notably in motor vehicle manufacturing.

The lifting of Title III sanctions in the Comprehensive Antiapartheid Act eased restrictions on the import of certain U.S. products into South Africa and permitted U.S. nationals to make new investments in South Africa. With the removal of the arms embargo against South Africa in May 1994, U.S. firms may now export to the South African police and military organizations, excluding Armscor/Denel and any of their subsidiaries. The State Department currently maintains a denial policy on these firms pending the satisfactory resolution of a criminal case involving Armscor. At this time, American firms are prohibited from trading munitions list items with these companies.

Responsibility for administering controls on dual use nuclear technology rests with the Directorate of System Co-ordination with the Department of Trade and Industry. Legislation on the regulation of such technology is however still pending and has only recently been published for public comment (October 14, 1994).

6. Export Subsidies Policies

South African Government incentives to export are divided into four categories: compensation for a portion of import duties; a proportion (10 percent) of value added during manufacture; financial assistance for activities such as market research and trade promotion; and income tax allowances. Other direct and indirect export subsidies are available to local manufacturers, particularly for factories located in designated development areas. Subsidies include electricity and transport rebates, export finance and credit guarantees and marketing allowances, although these export policies are presently under review.

Several different programs provide incentives for local exporters. The General Export Incentive Scheme (GEIS) encourages the export of manufactured products with a high value-added content. The South African Government recently revised GEIS on October 1, 1994. Under this most recent revision, subsidies for fully manufactured products will be lowered from 25 percent to 14 percent of export value on October 1; 12 percent on April 1, 1996 and 10 percent on April 1, 1997. The subsidy for partially manufactured goods will drop from 12.5 percent to 3 percent on October 1; 2 percent on October 1, 1996 and zero a year later. The subsidy for raw materials will drop from 7.5 percent of export value to 2.5 percent on October 1 and below 2 percent on April 1, 1995. The subsidy for raw materials will drop from 7.5 percent of export value to 2.5 percent on October 1 and below 2 percent on April 1, 1995. Provisions of the Income Tax Act provide tax allowances for capital goods and property used to add value to base metals and intermediate products for export. Income tax allowances are also provided for expenses incurred in promoting or maintaining an export market. The Export Marketing Assistance Scheme, a limited program, provides assistance for export market research and trade fairs and missions. The Structural Adjustment Program provides export incentives tailored to specific industries, most notably motor vehicles and textiles and clothing. Under the Regional Industrial Development Program, a new or relocating business can apply for establishment incentives or tax breaks under a uniform, five year program by locating anywhere outside the Johannesburg-Pretoria and Durban areas.

7. Protection of U.S. Intellectual Property Rights

South Africa's attendance at meetings of the World Intellectual Property Organization (WIPO) was barred in the past by a resolution of that organization, but it remains a member. As with South Africa's participation in all UN specialized agencies, its status is currently under review. The country is also party to the Paris and Berne Conventions. South Africa's intellectual property laws and practices are generally in conformity with those of the industrialized nations, including the United States. There is no discrimination between domestic and international holders of intellectual property rights. The basic objective of South African government policy with respect to foreign intellectual property rights holders is to secure access to foreign technology and information. Copyright legislation in 1992 provides further protection for computer software.

Nevertheless, software piracy occurs frequently in South Africa. The Business Software Alliance (BSA), a worldwide body with active anti-piracy programmes in over 50 countries, estimates that as much as 60 to 70 percent of South Africa's software is pirated. Its investigations reveal that for every legal software program in use, between three and four are illegal. In October 1993, the BSA brought the first legal action against software pirates under the terms of the new copyright legislation. The U.S. motion picture industry also reports that piracy, including unauthorized public performance, video piracy, and "parallel imports" pose a problem for doing business in South Africa. U.S. pharmaceutical firms operating in South Africa express similar concerns regarding “parallel imports."