Prescribed asset requirements as a second best solution: the South African experience

Abstract

This paper explores the feasibility and desirability of the South African Government imposing a policy of prescribed asset requirements on contractual savings. This would serve as a short-term measure to secure finance for investment in high priority development projects. Such a policy would encourage contractual savings institutions to become active participants in the process of development by requiring them to diversify their assets to include claims on either the government or other identified institutions engaged in the above projects. The first section of this mini-thesis discusses some features of the South African economy focussing broadly on recent political changes and economic challenges facing the country. The second section of the paper reviews current literature on issues related to the thesis, exploring topics in public finance and financial liberalisation. The third section analyses the nature of tax concessions on contractual savings, the effects of tax distortions on the savings behaviour of individuals and problems that have arisen because of tax concessions. The fourth section uses a microeconomic approach to illustrate the bias that individuals have toward contractual savings. The fifth section develops analytical models, which illustrates how prescribed asset requirements could constitute a second best solution. Section six explores possible solutions based on the modelling exercises. Finally, section seven highlights some of the main conclusions reached.