Berkeley Program in Law and Economics

South Africa’s transition from apartheid to democracy stands as one of the past century’s

most important political events. The transition has been successful to this point because the

new constitution adopted a form of federal governance that has been able to provide

protection for the economic elite from maximal redistributive taxation. Appropriately

structured, federal governance creates a “hostage game” in which the majority central

government controls the tax rate but elite run province(s) control the provision of important

redistributive services to a significant fraction of lower income households. At least to

today, the political economy of South Africa has found a stable equilibrium with less than

maximal redistributive taxation. Moreover, the move to a democratic federalist system has

improved the economic welfare of both the white minority and the black majority. Whether

the federal structure can continue to check maximal taxation depends crucially upon the rate of time preference of the majority and their demands for redistributive public services. A

new, impatient and more radical majority (ANC) party threatens the current equilibrium.