LECTURE 1: THE PUBLIC SECTOR AND

THE ECONOMY

ECONOMICS 3D
ECO3DB3
MR JUGAL MAHABIR AND MR FRANK BANNOR
19 JULY 2022
 LEARNING OUTCOMES
• Give a brief overview of different views of the role of
government in the economy
• List key issues confronting southern African
governments regarding their role in the economy
• Distinguish between the main institutional
categories of the public sector
• Discuss salient features of and trends in the size and
composition of the South African public sector
• Discuss various aspects of the relationship between
the public sector and the rest of the economy
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 INTRODUCTION
• Public economics
– Impact of public sector (government) on resource
allocation and distribution
• Two systems in the economy
– Market system
• Price are equilibrating mechanism
– Political system
• Address needs not satisfied by market
• Equilibrating mechanism – voting
• Tax acts as a “price”

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 INTRODUCTION
• Most Southern African countries are parliamentary
democracies
• South Africa has three tiers of government
– National government
– 9 provincial governments
– 257 local governments
• Substantial portion of resources are channelled
through the political process
– Government plays a significant role in the economy

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 LEGACY OF THE PAST IN
SOUTH AFRICA
• Poor economic outcomes just before constitutional
change in 1994
• Poverty and unemployment
• Substantial increase in government’s share in the
economy from 1960 to 1990
– Concerns at the time of the constitutional change
– Rapid growth in government employment

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 POST 1994 FISCAL CHALLENGES
• International policy consensus before 2007
international financial crisis
– Smaller deficits and public debt
– Smaller and more efficient government
– Market-based economies
• In South Africa
– Revamp of public institutions and polices
– Changes to provision and financing of goods
– Changes to interactions between politicians, bureaucrats,
the electorate and interest groups
– Improving economic performance but not adequate
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 POST 1994 FISCAL CHALLENGES
• Relative change in thought post 2007 Crisis
– Review of the appropriate economic role of government
– Review of the nature of economic policies
– Responses to crisis resulted in larger governments, budget
deficits and public debt
• In South Africa
– Government adopted similar response to crisis
– Major set back to good fiscal record since 1994

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 WHAT IS PUBLIC ECONOMICS?
• Study of the nature, principles and economic
consequences of expenditure, taxation, financing
and regulatory actions undertaken by non-profit
making government sector of the economy
• Expenditure, taxation and financing
– Direct role through the mobilisation of scarce resources
• Regulation
– Indirect influence on the allocation of resources

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 ANALYSIS IN PUBLIC ECONOMICS
• Positive public economics
– Nature and consequences of decisions
– What happens to an outcome with a decision
– Relatively free of value judgment
• Normative public economics
– Rationale for government intervention
– Mechanisms for taking public decisions
– What decision should be taken to achieve an objective

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 ROLE OF GOVERNMENT IN
THE ECONOMY
• Individualistic (mechanistic) view
– Objective
• Maximisation of individual welfare
– Role of government
• Correcting market failure
– Policy focus
• Efficiency of resource allocation and economic growth
• Collectivist (public interest) view
– Objective
• Maximisation of social welfare or national interest
– Role of government
• Improving distribution of income
– Policy focus
• Equity and combating poverty
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 ROLE OF GOVERNMENT IN
THE ECONOMY
• Individualistic (mechanistic) view
– Objective
• Maximisation of individual welfare
– Role of government
• Correcting market failure
– Policy focus
• Efficiency of resource allocation and economic growth
• Collectivist (public interest) view
– Objective
• Maximisation of social welfare or national interest
– Role of government
• Improving distribution of income
– Policy focus
• Equity and combating poverty
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 DEVELOPMENTAL STATE
• Elements of both individualistic and collectivist views
• Propagated by ANC Government in South Africa
– Applicability to South African society?
• Characteristics of developmental state
– Determined developmental elites
– Powerful, competent and insulated economic bureaucrats
– Weak and subordinate civil societies
– Effective management of non-state economic interests
• Focus on political and economic power is obtained
and exercised
• Selective government intervention to distort prices
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 COMPOSITION OF THE
PUBLIC SECTOR

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 MEASURE OF THE SIZE OF
THE PUBLIC SECTOR
• Direct and indirect taxes
• Resource use
– Consumption (general government)
– Investment (general government and public corporations)
• Resource mobilisation
– Resource use
– Transfer payments
– Interest on public debt
– Subsidies and current transfers

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 SIZE OF SOUTH AFRICAN
PUBLIC SECTOR

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 RELATIONSHIP BETWEEN PUBLIC
AND PRIVATE SECTOR
• Government supplies public goods and services
• Government purchases goods and services
• Privatisation
• Public-private partnerships
• Financing government expenditures
– Taxes and levies
• Budget imbalances, savings investments balance and
exports-imports balance
• Government borrowing and macroeconomic stability
• Impact of the economy on government

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QUESTIONS, COMMENTS AND
REFLECTIONS?

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