Pathways through financial crisis: South Africa.

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Pathways through financial crisis: South Africa.

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, gr...

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