I Overview and Summary
  • 1 0000000404811396https://isni.org/isni/0000000404811396International Monetary Fund
  • | 2 0000000404811396https://isni.org/isni/0000000404811396International Monetary Fund

Abstract

This study focuses primarily on the redistributive and growth policies that will be needed in a new South Africa, on the budget options available to effect such policies, and on the opportunities for outward-looking policies in the external sector that would result from the eventual elimination of trade and financial sanctions. The remainder of this introductory chapter provides a brief overview of the ensuing chapters and indicates the main conclusions that are to be drawn.

This study focuses primarily on the redistributive and growth policies that will be needed in a new South Africa, on the budget options available to effect such policies, and on the opportunities for outward-looking policies in the external sector that would result from the eventual elimination of trade and financial sanctions. The remainder of this introductory chapter provides a brief overview of the ensuing chapters and indicates the main conclusions that are to be drawn.

The poverty profile of South Africa (Chapter II) highlights the contrast between the first-world living standards enjoyed overwhelmingly by the white minority and the third-world conditions of poverty in which the majority of the black population lives. It also illustrates how the reduction of economic growth in the 1980s, which accompanied international financial sanctions and increased domestic uncertainty, resulted in a slowing of the earlier trend toward a more equal distribution of income and led to a sharp rise in the proportion of the black labor force outside the formal sector of the economy, to its present level of over 40 percent. The main conclusion to be drawn is that poverty in South Africa is so severe that redistribution policies, which alone will not be adequate to counter it, must be supported by policies designed to place the economy on a higher growth path. Only then could the economy be expected to generate the resources necessary to satisfy the needs of the least privileged sectors of society on a sustained basis.

The production function analysis of the effects of apartheid on income distribution (Chapter III) concludes that the narrowing in the “wedge” between white and nonwhite wages for jobs in similar skill categories was largely responsible for the improvement of the nonwhite income share over the past two decades. For purposes of policymaking, this finding suggests that future improvements in income distribution between races will need to derive mainly from better training and better employment opportunities for nonwhites rather than from a further compression of the wedge between wages for different racial groups.

The medium-term economic scenarios (Chapter IV) aim at determining which macroeconomic policies would be needed to foster rapid growth of output and employment. These scenarios, which were based on the estimation of a production function and the use of a savings and investment framework, suggest that if economic growth were to be raised to about 3½ percent a year—or to the minimum rate that would be required to reduce the level of unemployment given the rapid prospective growth of the labor force—the investment-to-GDP ratio would need to rise to about 27 percent from its present level of 19 percent. Such an increase in investment would need to be supported by a major domestic savings effort, particularly in public savings, even if South Africa were to again become a significant net user of external savings. The basic implication for budget policy is that if South Africa were to attain a higher growth path, the effort to redress social backlogs would need to focus on reorienting spending priorities rather than on resorting to deficit financing.

The analysis of recent trends in budget spending (Chapter V) in South Africa reveals that over the past several years there has been a basic shift in spending priorities toward social ends. Moreover, a comparison of South Africa’s overall level of social spending with that of other countries at a similar stage of development suggests that it is relatively high by international standards, both as a percentage of GDP and as a proportion of total budget outlays. This comparison also suggests that the scope for further compressing nonsocial spending in South Africa is limited and therefore implies that social expenditures will need to be reordered if the budget is to attend to the needs of the least privileged groups of society without significant resort to deficit financing or to higher taxes.

The examination of the per capita level of social spending by different racial groups (Chapter V) indicates that, despite some progress in recent years, South Africa’s budget still reflects very marked differences between the races. The estimates clearly suggest that equalizing spending levels at the present white level would result in an overall level of social spending dramatically beyond the capacity of the budget. Moreover, these estimates show that equalizing such spending rates at levels consistent with maintaining budget discipline would result in a substantial decline in benefit rates for nonblacks but only limited increases, from relatively low levels, in benefits for blacks. The corollary to this finding is that redistribution policies will need to be firmly supported by growth-oriented policies if the social spending gap is to be effectively bridged.

The comparative analysis of the tax system (Chapter VI) suggests that the overall South African tax burden and its marginal tax rates cannot be judged to be low by international standards; indeed, the tax burden on the white community appears to be relatively high even by industrial country standards. This would argue against raising tax rates in South Africa and running the risk of heightening disincentive effects. Revenue would be more effectively raised through substantially reducing tax expenditures, broadening the tax base, and changing the mix between direct and indirect taxes.

The review of external policies (Chapter VII), instituted since 1985 in response to the application of trade and financial sanctions, highlights South Africa’s increased reliance on exchange rate and demand-management policies to effect the needed shift in its external current account balance. Moreover, the review brings out the increased impetus that sanctions have given to such inward-looking policies in South Africa as the introduction of an import surcharge, the reintroduction of a dual exchange rate, and the negotiation of a “standstill” arrangement on commercial debt. The review examines the scope for a shift toward more liberal trade and payment policies as international sanctions are eliminated.

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