FROM THE OFFICE OF PUBLIC AFFAIRS

It is a pleasure to be at this very timely seminar on SouthAfrican investment prospects. I’ve sensed some of the sameoptimism here today that I came across on my recent trip to SouthAfrica itself -and that’s good. Because the attitudes andactions of the international investment community -Americaninvestors particularly -are going to play a vital role in seeingSouth Africa through the next stages of its transition.

The government’s determination to press ahead with theGrowth, Employment and Redistribution (GEAR) strategy unveiledlast summer has already won it a good deal of credibility here inWall Street and financial markets generally. The goals laid downin the GEAR for 6 per cent annual growth in GDP, and a 400,000annual increase in new jobs by the year 2000 are pretty ambitiousby the standards of South Africa’s recent past. But Idon’t think they are beyond reach for a government committedto deep structural reform -in an economy whose very past failureshave left it heaving with untapped potential.

Whether South Africa realizes that potential is of vitalconcern to this Administration -and to this country.America’s fortunes are closely bound to South Africa’s-by our strong trading links, by our belief in its historictransition to democracy, and, not least, by our hopes for arevitalized African Continent. That was the message of VicePresident Gore’s latest round of highly constructive talkswith Deputy President Mbeki in Washington this week. And it willbe the message of my remarks today as I describe what I believewill be some of the main challenges involved in making the GEARobjectives a reality. I would, however, like to start mycommenting briefly on that broader, regional context of the SouthAfrica’s reforms.

For it is not just South Africa that is at a cross-roads.There has been a major shift in outlook -and confidence -in manycountries of Sub-Saharan Africa of late. Eight years ago I was inChicago and I was so surprised to find a phone in my car that Icalled my wife to share the news. Cut to 1997, and sitting in acanoe in Cote D’Ivoire I am handed a cell phone; someone inWashington had a question for me. A few days later a MozambiqueInternet provider - an Internet provider - took me aside to tellme he was worried about being swamped by the competition. Africais changing -and we in the Administration are working hard tosupport that long overdue transformation.

I. Africa on the move?

The biggest change is that Sub-Saharan Africa has begun togrow. You would not always think so, reading the newspapers ornight-time news, but the region’s annual growth rates rosefrom 1.4 percent in the years 1991-1994 to 4 per cent in 1995,and did as well or better in 1996. A number of others haveachieved good results over longer intervals.

These tentative signs of growth are all the more encouragingwhen set against the dismal economic record of the last 25 or 30years as a whole, which has left large parts of the continentdeeply marginalized and impoverished. Today, on the brink of anew millennium, in large parts of Sub-Saharan Africa a child ismore likely to be malnourished than learn to read, and morelikely to die before the age of 5 than go to school.

Some people think the Sub-Saharan economy is doomed tocontinue this dismal performance. They saw Africa is different:somehow incapable of the kind of economic take-off we have seenin other parts of the world in recent years. But the results ofcareful studies give grounds for greater optimism. When theconditions are right, these suggest African countries cangrow rapidly. The difficulties of tropical agriculture, closureof some export markets and high debt burdens are all obstacles togrowth -but these can and have been overcome, in Sub-SaharanAfrica and elsewhere. They can no longer serve as excuses forslow growth.

II. A New Partnership

The powerful examples of growth based on market reforms inMauritius, Botswana, Uganda, Ghana, to name a few, and thediscouraging results of aid during the last 25 years, haveunderpinned the thinking of the Clinton Administration’sproposed Partnership for Economic Growth and Opportunity inAfrica. Presented in April to our Congress, the partnership isnot another donor-inspired Africa Initiative, as some may see it.Rather, it is our response to the actions that Africangovernments are taking for themselves, to turn their economiesaround.

Its core ideas are, first, that the reforms countriesundertake bring their own rewards, and, second, that the best waythe United States can support those countries is by making tradeand investment -- not just aid -- the centerpiece of our economicrelations.

The emphasis throughout will be on selectivity, thoughbeneficiary countries, through their own reform actions, will, ineffect, be self-selecting. We haven’t yet agreed oneligibility criteria with our Congress, but no one I’veheard has disagreed with the notion that South Africa should beeligible, despite its very different level of development fromthe rest of Sub-Saharan Africa.

This is not simply a matter of South Africa’s stature onthe Continent. We want to reinforce the principle that thisprogram is about winners: countries that succeed with reformsshould capture more benefits from their trade and investmentlinks with us, not less.

Yet it goes without saying that South Africa’s status inthe African economy makes it far more than a potentialparticipant in the Partnership program. In fact, we would hope tosee it become the driving force of a region-wide recovery; withits most important contribution to that process being theacceleration of its own growth.

III. South Africa: growth with integration

Economic performance has improved since the new governmenttook office. After a decade in which per capita GDP fell moreoften than it rose, the Mandela era has brought both economicgrowth and -recent blips notwithstanding -single digit inflation.Growth has averaged a little over 3 per cent during the past 3years, compared to an average of 2.3 per cent in the 1980s.

So the economy is doing better. But -as the GEAR Strategyrecognizes -it must do better still. Even the more rapid growthwe have seen since in recent years is barely fast enough to keeppace with the annual 2.7 per cent growth in the nation’slabor force. In fact, employment has actually fallen in recentyears. Official black unemployment rates are 45-50 per cent-higher still in many of the townships.

From what I know of the GEAR strategy it appears to provide astrong framework for confronting the major structural impedimentsto growth. But it is worth remembering what achieving that extragrowth would mean. The difference between 3 per cent and 6 percent annual growth is the difference between doubling nationalincome in 24 years -and doubling it in 12. Assuming a constantpercentage of GDP devoted to education, it is the differencebetween spending R450-odd billion, in 1995 prices, on education,over the next 10 years, and spending over R80 billion more thanthat.

Parts of the GEAR strategy are already being implemented -including some fiscal consolidation, as we saw in the budgetpassed in March, privatization, and increased incentives forprivate investment. We would like to see all these effortsprogress further -especially privatization, which is potentiallya powerful tool for spurring private sector development, as wellas a magnet for foreign capital and expertise.

And yet, some of the largest obstacles to faster growth haveyet to be addressed. One of these -labor market reform to reducerigidities in employment and pay to encourage rapid job growth -will involve some very tough political and economic decisionswhich I would not like to pre-judge here today. I would, however,like to comment on the two other major prerequisites for fastergrowth in South Africa: not least because both are areas where Isee similarities between South Africa’s challenges and ourown.

Investing in people

The first is a desperate need to invest in the South Africanpeople. Like America, South Africa both face high unemploymentrates that are coincident with race, and a need to find ways toexpand economic opportunity for those who lack it, whilepreserving the market’s uncontestable ability to generateopportunity in the first place. In each country this argues infavor of concerted efforts to improve training and skills at thelower end of the income scale -though, given South Africa’slow starting point, the immediate returns to such investmentthere will clearly be far higher.

This year’s World Productivity Report ranked South Africa44th out of 45 developing economies in terms of its humanresource development. No country has ever taken off economicallywith an adult literacy rate below 50 per cent. Yet SouthAfrica’s was 18 per cent in 1995. Years of developmenthistory show us that a dollar spent on female education, inparticular, pays for itself many times over in reduced fertility,healthier populations and higher wages.

Realizing the benefits of closer integration.

Deeper and closer integration with the rest of the world -and,especially, the rest of the Continent - is the second keychallenge. As the Economist magazine put it last week, ASouthAfrica has spent the past three years unpicking the protectionistmesh that was knitted around the apartheid economy@. Investmentand trade restrictions have been lowered substantially -and thegovernment has pledged to do more in recent policy pronouncementsand in its commitments to the World Trade Organization.

I’m proud to say that fully one third of the R30 billionin foreign investment that has been committed to South Africasince the 1994 elections has been by American firms. Yet therewould be significant benefits -in terms of South African jobs,and incomes -to liberalizing further, faster. I don’t needto tell this audience how the continued presence of complicatedtariffs and other restrictions can blunt the incentive to makelong-term investments. Not only do these reduce the size of thepotential local market, but they send an unfortunate -and, Ithink, misleading -signal that the new government is wary ofmaking a clean break with the country’s insular past.

The government and the Reserve Bank have particular concernsabout more rapid removal of the remaining restrictions ondomestic investors’ investments abroad. All I would say isthat most in this room probably share a desire to see thesedisappear sooner rather than later. The way domestic investorschoose to invest their money can be a powerful -and positive-signal of South African investment possibilities. But clearly,it is only meaningful if unconstrained.

We would hope that the increased access to US markets includedin the Administration’s Partnership proposals would addmomentum to South Africa’s own moves to integrate moreclosely with its neighbors. With the NAFTA example in mind,I’m convinced that the South African Development Communityhas tremendous potential to benefit all parties, despitesubstantial differences in the level of development among theSADC members.

Mexico, with an economy only 1/20th the size of the U.S. and aper capita income of about 1/7 of ours, imported substantiallymore goods from the U.S. in 1996 than it did in 1993, the yearbefore NAFTA. And this was despite a very substantial devaluationof the peso in end-1994 and a deep recession in 1995. I shouldalso mention that Mexico’s export sector has increased to32% of its economy since NAFTA, up from about 24% in just threeyears, and real wages are on track to rise 5% this year whileinflation is coming down.

As you know, NAFTA has served another important purpose inhelping all three members to resist the pleadings of domesticproducers that seek -- and might otherwise get -- specialprotection that is costly to the economy. We believe the SADCoffers the same advantages to South Africa as an anchor for itsown trade reforms.

The Administration’s Partnership proposals, which includea provision for a new USAID Initiative for Southern Africa, whichwill devote up to $25m a year to promoting trade andtransportation protocols, the harmonization of investmentpolicies and strengthening of regional business associationswithin the SADC.

Our main concern about any free trade agreement is not aboutdisparate levels of economic development, but that the degree ofliberalization should at least match that of the most openeconomy among the contracting parties, not the most closed. Andall of the parties should use regional trade integration as astep toward, rather than a substitute for or diversion from,global integration.

IV. Conclusion: A Joint Challenge

The US and South Africa face essentially the same policychoice as the less developed countries of Sub-Saharan Africa inconsidering our economic relationship to them. Unless we embracethe economic opportunities and meet the domestic challengescreated by global integration, our economies will stagnate and,ultimately, lose their capacity to generate good jobs for ourrespective populations. Neither country can carry on as if aglobal economy didn’t exist -any more than the Sub-Saharaneconomies can.

For South Africa this implies a great virtue in spurringstrong growth and strengthening its trading links with itsAfrican neighbors. For the United States, it implies a strongcommitment to reorient our economic relations with Africa so thatwe can invest in and trade with what may become 47 emergingmarkets. And, of course, it gives us an even stronger stake inSouth Africa’s success. Our vision of rapid growth for theregion -like the South African government’s plans for itsown economy -is optimistic by the standards of the past record.But it is no more than the continent deserves after so many yearsof divergence -nor, I think, than it is capable of realizing.