The Impact of the Global Economic Crisis on Sub-National Government – Lessons from the Free State Province in South Africa

A provincial computable general equilibrium model for the Free State province in South Africa is used to quantify the channels by which the recent global economic crisis affects the province. The analysis allows focus on three levels through which provincial economies and their people are impacted by a global economic crisis, namely the macro-economic level, the meso-economic level and the micro-economic/household level. The novel features of the paper are mainly applying this methodology at sub national government level. The decrease in world prices combined with the drop in world demand lead to a fall in production for most sectors in the province. There is a negative impact on institutions, and households see their incomes drop. Though the crisis seems to be petering out now, there are lessons for intergovernmental financial relations that this paper has highlighted and long run effects of the crisis that the province needs to confront.