Searching for an Equilibrium: Balancing Economic Development and Market Efficiency

Since the end of apartheid in the early 1990s, South Africa has made progress towards establishing a more equitable society. In particular, advances in areas such as electrification and access to education have increased equality of opportunities. South Africa uses its fiscal instruments to significantly reduce income inequality and poverty through a progressive tax system and highly progressive social spending. Despite the large fiscal redistribution, however, South Africa remains one of the most unequal countries in the world. The chapter examines the role of government intervention in the economy by drawing from the perspective of countries like Poland, Malaysia, Brazil, Nigeria, Venezuela and Singapore. Empirical results support the view that the government size in South Africa is a non-linear (i.e. U-shape) relationship between government intervention and the economy. This infers that at the initial stage, government intervention deteriorates economic growth up to a certain point before the impact is positive. Our analysis further suggests a threshold of 17.9% of government spending to gross domestic product (GDP). The results also suggest that while it is important for government to intervene in the economy in order to direct and regulate to act as catalyst for economic prosperity, social justice and ecological sustainability, too much of government intervention may be detrimental to the economy.