FEDERAL INSTITUTIONS AND THE DEMOCRATIC TRANSITION: Learning from South Africa by

We present a political economy model of a peaceful transition from autocracy to democracy, motivated by, and calibrated to, South Africa at the time of its own successful transition from white, elite rule under apartheid to today’s multi-racial democracy. The primary barrier faced by South Africa in its transition is symptomatic of a central barrier to peaceful transitions generally: How can the emerging majority credibly promise not to economically exploit the once ruling elite? South Africa found its answer in a “democratic federalism” constitutional system. The constitution creates an annual policy game where the new majority and the old elite each credibly control one policy instrument (fiscal policy) of central importance to the other. The majority-controlled central government controls general tax policy, while provinces, at least one of which is politically controlled by the old elite, are assigned responsibility for providing important redistributive services. In effect, the federal constitution creates a policy “hostage game ” between the new majority and the old elite in which each can check policy abuses by the other. We show that for plausible specifications of the political economy, this annual policy game has a stable, less-than-full