|
...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.
**********
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. The increasingly poor quality of expenditure and an inability to reduce deeply rooted and structural inflationary pressures aggravated the situation. A macroeconomic crisis and a desperate need to invest in domestic social and economic infrastructure mixed with an urgent financial crisis that had taken root in an earlier period.
In September 1985, the country experienced a debt crisis brought about by a mismatch in the maturity structure of the country's private sector debt. Compounding the situation, Chase Manhattan Bank refused to roll over its loans, alarmed by increasing violence and the stubborn refusal of the apartheid government to agree to any political change. What followed was an escalating set of financial sanctions that cut off South Africa from global capital markets.
The apartheid government responded to the 1985 crisis with exchange controls and increasing intervention by the central bank (the South African Reserve Bank), particularly in the form of long-term forward currency transactions. The Reserve Bank had long operated in the forward foreign exchange market, swapping rand for US dollars with a commitment to repay the dollar liability at the forward rate once the contract matured. This enabled the Reserve Bank to operate in the foreign exchange markets in excess of its reserves and unutilized foreign credit facilities. The result was a net open forward position (NOFP), which represented the central bank's forward US dollar liabilities less its forward US dollar assets (the "open" position), less the central bank's holdings of international reserves. A sizable depreciation of the currency after 1985 caused these contracts to incur substantial losses. When South Africa's new government came to office in April 1994, the NOFP stood at US$16 billion--a level that risked default by the central bank on its forward commitments and therefore constrained external investor confidence.
The macroeconomic challenges confronting the new government were no less daunting than the financial crisis. The new government came to power at the end of a four-year recession, which commenced in the first half of 1989. During 1989-1993, real GDP declined by 0.5 percent, 1 percent, and 2 percent per annum, respectively. Aggregate real gross domestic fixed investment also declined significantly during the recession.
The new government also inherited a low and declining rate of gross domestic saving. During the 1980s, the ratio of gross domestic saving to GDP had averaged approximately 24.5 percent. However, from 1990, this ratio contracted sharply, and as the new government took office, the ratio had declined to an average of 18 percent per annum. At the same time, the economy suffered from significant capital outflows. In the twenty-one-month period immediately preceding the installation of the Mandela administration in April 1994, the country had witnessed a capital outflow of R20.4 billion (20.4 billion rand). These conditions severely circumscribed the range of options available to the government for financing the country's shift away from its apartheid legacy.
Confronted with an absence of new inward capital, with low and declining reserves, and with persistent and significant recorded and unrecorded capital outflows, the apartheid government was obliged to maintain significant current account surpluses. Accordingly, from the beginning of the recession in March 1989 until the first quarter of 1994, the cumulative current account surplus amounted to R24.1 billion, or...
NOTE: All illustrations and photos
have been removed from this article.
More articles from Global Governance
Pathways through financial crisis: Turkey., October 01, 2006
Pathways through financial crisis: Argentina., October 01, 2006
Pathways through financial crisis: Malaysia., October 01, 2006
Reform or reinvent? The IMF at a crossroads., October 01, 2006
Looking for additional articles?
Search our database of over 3 million articles.
Looking for more in-depth information on this industry?
Search our complete database of Industry & Market reports by text, subject, publication
name or publication date.
About Goliath
Whether you're looking for sales prospects, competitive information, company
analysis or best practices in managing your organization,
Goliath can help you meet your business needs.
Our extensive business information databases empower business
professionals with both the breadth and depth of credible,
authoritative information they need to support their business
goals. Whether it be strategic planning, sales prospecting,
company research or defining management best practices -
Goliath is your leading source for accurate information.
|
