After Apartheid: Reinventing South Africa?

Macroeconomic Policy and Its Governance after Apartheid

Macroeconomic Policy and Its Governance after Apartheid Janine Aron THE OBJECTIVES OF MACROECONOMIC POLICY The last decade and a half have been notable for South Africa’s greater integration with the international economy, domestic political stability, and the gains made in the governance and stability of macroeconomic policymaking . This essay reviews the institutional changes that have aligned the conduct of monetary and fiscal policy closely with recent international practices designed for more transparent, credible, and accountable policy and operating over a longer horizon. It also evaluates the significant improvements in fiscal and monetary performance—remarkable given the initial conditions faced by the postapartheid government and a volatile external economic environment. These gains are likely to be sustainable within the new frameworks for policy, if evolving institutional design helps entrench the practices. The notable success in the management of financial stability by the National Treasury and the South African Reserve Bank (SARB), as well as the “fiscal space” created by a prudent fiscal policy, has left South Africa relatively well placed to weather the 2008–9 global financial crisis. This situation contrasts with that of many emerging market countries, and indeed of some industrialized countries, such the UK, where regulation and financial supervision has been far too lax and fiscal policy far too loose for the past five years. Following the elections of April 1994, the initial objectives of macroeconomic policy were detailed in two highly publicized macropolicy plans. The broad goals of the Reconstruction and Development Programme (RDP), Macroeconomic Policy after Apartheid 137 launched by the African National Congress (ANC) in January 1994, were reinforced by the ANC government’s Growth, Employment and Redistribution strategy (GEAR), announced in June 1996.1 Fiscal prudence, tax reform, increased transparency of administration, a reorientation of spending to social sector spending, and longer-term expenditure planning were hallmarks of both the RDP and the GEAR plans. There has been a remarkable consistency in fiscal policy since 1994. The well-articulated fiscal objectives of these plans were entrenched in the 1996 constitution,2 and subsequent legislation addressed the many constitutional imperatives, including the restructuring of key organizations, such as the (renamed) Revenue Authority. Extensive tax reform followed the recommendations of a specially appointed commission , the Katz Commission, and successive annual budgets sought to meet the fiscal objectives. The inherited fiscal position after apartheid was believed to be unsustainable , with a large and growing domestic debt and budget deficit (the latter reaching nearly 8 percent of GDP by 1992–93).3 Historical intergovernmental relations were dysfunctional, with overly complex provincial and municipal structures. Both plans sought to cut the budget deficit through fiscal consolidation, improved debt management, and more efficient tax collection (while also reducing the tax burden), with the objective of reducing inflationary pressures and ultimately real interest rates. In creating greater macrostability, the aim was to reduce uncertainty for investment as well as to cut the cost of capital. A more realistic fiscal position was also seen as facilitating the sustainability of the RDP over time. Both plans aimed to decrease government dissaving, which was contributing to the nation’s very low domestic savings rate, thus entailing greater dependence on “foreign savings” in the form of volatile capital inflows to fund investment. Both plans also aimed (though initially observing fiscal constraints) to substitute investment for consumption expenditure (e.g., spending on infrastructure), and to alter the composition of expenditure from military expenditure and debt service toward social expenditure, such as health, pensions and grants, housing, and education. The spending goals and some of the redistribution goals aimed to address the pervasive supply-side constraints on mediumterm economic growth. The fiscal aims of the two plans were reinforced by global pressures, as the postapartheid economy progressively opened to trade and capital flows and international credit markets. Sovereign ratings and capital flows are strongly influenced by international perceptions of the soundness of fiscal and monetary fundamentals. Financial globalization has created pressures 138 Janine Aron to reform fiscal policy institutions and budgetary systems, to reduce deficits , to engage in tax reform to broaden the tax base (while lowering marginal rates), and to restructure public sector enterprises (Abedian 1998; Calitz 2000). In contrast to the detailed fiscal policy objectives, there was a rather cursory treatment of monetary policy in the RDP and GEAR plans. After 1994, monetary policy continued to be governed by the South African Reserve Bank...