Address by Dr Chris Stals, Governor of the South African Reserve Bank, at a Conference arranged by the Department of Economics, Massachusetts Institute of Technology, Washington DC.1. The pastDevelopments over many years created a distorted economy in South Africa. The present economic structure reflects the effects of the unrealistic political ideologies of the past, unsustainable social tension over a long period of time, and globally supported international punitive actions applied against the country.When the Government of National Unity was elected in April 1994, it had to contend not only with major political and social reforms, but also with reforming an economy that suffered from a long drawn out cyclical recession and various structural deficiencies. From 1982 up to and including 1992, the average annual rate of growth in gross domestic product was only ½ per cent, accompanied by an average decline of ½ per cent in total real gross domestic expenditure.Furthermore, from 1985 up to 1993, persistent capital outflows to the rest of the world added up to an accumulated figure of R48 billion. In the process, the country's net gold and foreign exchange reserves were fully depleted. The capital outflows forced South Africa throughout this period to maintain large surpluses on the current account of the balance of payments which could, of course, only be accomplished by keeping the domestic economy depressed.The difficult external situation, exacerbated by international sanctions, boycotts and disinvestment campaigns, provoked the South African Government into introducing and gradually extending exchange controls which by 1993 restricted outward capital transfers by both South African and foreign residents.In its isolation, the South African financial sector had to cope with many stresses and strains, but also developed rapidly within the environment of a hothouse with a growing pool of funds trapped by exchange controls to remain within the country. In the longer run, the money and capital markets suffered from a lack of international competition and missed out on participating in the worldwide thrust towards multilateralism, globalisation and universal liberalisation.Government itself had little difficulty in financing from internal sources a growing deficit in the budget. In the fiscal year 1993/94, the deficit in the budget of the central government exceeded 8 per cent of gross domestic product, and the borrowing requirement of the overall public sector exceeded 10 per cent of gross domestic product.The most urgent economic challenge facing the Government of National Unity in April 1994 was the massive unemployment that accumulated in the country. With average economic growth of less than 1 per cent per annum over the preceding decade, and an addition of approximately 2-½ per cent to the total population every year, unemployment increased throughout the eighties and the early nineties. Only about 45 per cent of the economic active population found employment in the formal non-agricultural sectors of the economy, and best estimates of informal sector employment indicated total unemployment of approximately 30 per cent of the labour force at that stage.Some of the other more basic economic structural deficiencies inherited from the past included:A relatively skew distribution of income with about 20 per cent of the population earning just more than 60 per cent of total income. The Gini coefficient for South Africa gives a skewed distribution of about 0,58.A relatively inefficient labour force with many undeveloped skills, lack of experience and insufficient training in the past.A dire shortage of infrastructure in certain basic social services such as education, health care, and recreation facilities.An over-protected domestic economy with high tariff-barriers and other protective measures that were deliberately introduced or developed by themselves as part of the international isolation programme.A spatial maldistribution of population concentration, leading in the post-1994 election period to a massive movement of u