South Africa’s transition from apartheid to democracy stands as one of the past century’s most important political events. The major hurdle to the transition was for the poor majority ANC to provide a credible promise not to exploit the full economic resources of the then ruling economic elite. The new constitution adopted a form of federal governance that has the potential to provide such protections by specifying an annual policy game where the new majority and the minority elite each control one policy instrument of importance to the other. Provided the majority is sufficiently patient and not “too demanding” in their preferences for redistribution the game has a stable equilibrium with less than maximal redistributive taxation. Our analysis makes these restrictions on preferences precise. The new, more radical ANC and the Zuma presidency challenge this equilibrium.

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.