ECONOMIC GLOBALISATION AND GOVERNMENT SIZE: TESTING THE COMPENSATION HYPOTHESIS IN SOUTH AFRICA’S PUBLIC SECTOR

Abstract

Globalisation has become one of the most profound processes to influence both developed and developing regions. No more so has this been evident than in the South African economy. The country’s democratic transition attributed the adoption of a less protectionist and liberal economic orthodoxy aimed to facilitate social and economic development. While the introduction of trade agreements and an influx of FDI has contributed to enhanced infrastructure, the impact of globalisation on the role of the state has raised several questions. Some suggest that economic globalisation spurs on fiscal growth by increasing social expenditure (compensation hypothesis). Others theorise that mobile capital in a more competitive financial environment has limited the role of the state (efficiency hypothesis). In light of this debate and concerns of unstainable fiscal growth in South Africa, the study’s primary objective was to analyse the relationship between economic globalisation, social expenditure and tax revenue in the South African economy. Secondary annual time series data from 1995 to 2018 were used. Two ARDL models were employed to test the long-run relationships, while the ECM assisted in estimating the short-run dynamics. Results for both the short- and long-run together with the causality analysis provide evidence that refutes the notion that a more integrated South African economy induces external shocks. The findings rather support the efficiency view. In this regard, competitive financial markets coupled with a high tax burden and fiscal debt concerns have reduced the state’s revenue capacity, limiting the potential to further social development. In addressing these concerns, government needs to proliferate strategies that advance fiscal consolidation and policy certainty, and implement structural reforms that facilitate inclusive growth.

Keywords

• ARDL,globalisation,public sector,South Africa,social development

References

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