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Political transition in a small open economy: Retracing the economic trail of South Africa’s long walk to democracy

This paper seeks to offer an economic explanation for the emergence of democracy in societies with high income inequality and narrow middle-class such as Apartheid South Africa. The presence of a credible threat of capital flight is shown to render democracy less unpleasant to the elites by making future tax concessions possible. However, inequality should be sufficiently low for the poor to have enough incentive to concede less redistribution to avoid capital flight. The development of the finance sector in South Africa in the later years of Apartheid made the exit option a major part of the democratic bargain.

Working paper 458
1 September 2014
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