Academic journal article Global Governance

Pathways through Financial Crisis: South Africa

Academic journal article Global Governance

Pathways through Financial Crisis: South Africa

Article excerpt

When apartheid ended in South Africa in 1994, the incoming democratic administration inherited a political system, economy, and social system infrastructure in profound crisis, as well as an external financial crisis. It did not borrow from the International Monetary Fund. Having fought hard for sovereignty, the new government was unwilling to cede influence to the IMF (or World Bank) or indeed to acquire any dependence on external creditors. Instead, the government of national unity embarked on its own home-grown structural adjustment program. Reconstruction and development, which were planned within fiscal limits that critics allege were far too tight, were accompanied by institutional and policy changes (such as trade liberalization and greater central bank autonomy) designed to encourage international investment. KEYWORDS: financial crisis, South Africa, apartheid, reconstruction, development, contagion, International Monetary Fund, Reconstruction and Development Program.

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When apartheid ended in South Africa in 1994, the incoming democratic administration inherited a political system, economy, and social infrastructure in profound crisis, as well as an external financial crisis. Behind the triumph of the peaceful first democratic election lurked the real and immediate danger that failure to address the economic, social, and financial crises quickly would result in a precipitous decline in economic activity and potentially unravel the political transition the world had just applauded as one of the twentieth century's political miracles.

At stake was the very capacity of the postapartheid state to conduct the regular functions of government and to maintain stability in future crises. Indeed, the government's response to this crisis conditioned the ability of South Africa to weather subsequent economic shocks in 1996, 1998, 2000, and 2001, as it was hit by contagion from the East Asian crisis in 1997, the Russian crisis in the following year, Brazil's exit from its pegged exchange rate arrangement in 2001, and the continuing Argentine crisis.

A decade after the economic crisis of 1994, while critics highlight the ongoing challenges of poverty in South Africa, (1) the country exhibits macroeconomic stability, low budget deficits, confidence in government's ability to manage the public finances, a unified exchange rate, and the lowest level of inflation in two decades. The government debt to gross domestic product (GDP) ratio is declining, gross domestic fixed investment expenditure has revived, and the government has established a track record of social service delivery that in some sectors--notably electrification, clean water provision, and sanitation--approximates international best practice.

This article examines how South Africa dealt with a quadruple economic crisis in 1994 and how the combination of social, political, and economic measures undertaken in the aftermath of 1994 helped the country deal with subsequent crises. The International Monetary Fund (IMF) was not engaged. The country had borrowed from the IMF until 1976, but from 1974 onward the apartheid regime in South Africa was consigned to the handful of pariah states not represented on the executive board of the institution. However, a change in tone occurred in 1982 under the Reagan administration's decision to "constructively engage." The apartheid regime seized the opportunity to request an IMF loan, which was approved on the grounds that the Fund had to be politically neutral, in spite of entreaties from those who were trying to isolate the South African government. The IMF lent again to South Africa shortly before the end of apartheid.

The Crisis

The closing years of apartheid proved extraordinarily expensive and economically crippling. The outgoing administration left in its wake escalating fiscal deficits, extraordinarily high levels of domestic indebtedness by the public sector, and an escalating share of the budget being directed to service interest expense. …

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