Editor's note: This article was adapted with permission of the La Follette School of Public Affairs, University of Wisconsin-Madison. It was published originally in the La Follette Policy Report, Vol. 12, No. 1, Spring-Summer 2001.
Around the world, the move from authoritarian regimes to democratically elected governments has often been accompanied by a movement away from fiscally centralized government to decentralized fiscal systems. Subnational governments have been given a substantial increase in responsibility for the provision of public services and the raising of revenues. This is certainly true in South Africa where, with the election of Nelson Mandela as president on April 27, 1994, a nonracial government with democratically elected subnational governments serving all citizens was established.
Race was the dominant factor in explaining all aspects of life in apartheid South Africa (1949-1993), including the system of public finance. For whites, South Africa under apartheid was characterized by democratic institutions of government, a well-developed system of public infrastructure, and a full array of public services, generally on a par with governmental services in developed nations of the world. Blacks had very few economic and political rights, benefited from no effective democratic representation in government affairs, and had very limited access to government-provided services. For Asians and those of mixed-racial heritage, the reality was somewhere in between.
A major challenge in building democratic, non-racial government in South Africa is to establish truly democratic subnational governments, and a system of government that guarantees that all South Africans, regardless of race, receive a set of basic public services. Both objectives were incorporated in the constitution adopted by the Constitutional Assembly in October 1996. The constitution set the ground rules for democratically elected provincial and local governments, and it established the right of all South African citizens to a set of basic public services.
The new South African constitution established a system of "cooperative government" with three separate "spheres"--national, provincial, and local. Furthermore, the constitution specifies in considerable detail, which public services are to be provided by each level of government, and which taxes each sphere can use. This level of specificity about tax and expenditure assignment has the effect of removing from political debate many of the issues that have led to conflict in other nations actively involved in fiscal decentralization.
The challenge faced by the South Africans is to build a system of public finance that fosters the delivery of basic social services in an efficient and fair manner across the entire country, while allowing a measure of fiscal decentralization. Critical to meeting this challenge is the development of an efficient and equitable system of intergovernmental finance. To advise the government and parliament on the design of its intergovernmental system, the constitution created the Financial and Fiscal Commission (FFC) as a permanent, 22-member, independent advisory body. In 1996, the FFC issued its first set of recommendations for the design of an intergovernmental system. Many of its recommendations were accepted by the government, and the current grant system clearly reflects the influence of the FFC. In mid-1999, the FFC undertook Project 2001, with the purpose of conducting a comprehensive review of the current intergovernmental system and, where necessary, making recommendations for improving the system. The authors joined a team of international advisers who assisted the FFC staff. The focus of this work was the development of a new approach for allocating revenue to the provinces.
The Fiscal Environment
The clear legacy of apartheid was a system of public finance where the level and quality of public services was primarily a function of one's race and place of residence. …