Deregulation has followed as an inevitable consequence of competitive pressures. Particularly in the Anglo-Saxon countries, labour and product market reforms enhanced this structural shift towards a global competitive trading and financial system. This increased flexibility in factor and goods movements coupled with large scale technological innovations led to a boost in productivity which is the ultimate underlying force of potential trend growth. Though the long-term effects of these structural adjustments on the real economy are complex, there is no doubt they have unleashed a powerful dampening effect on prices in many sectors of the economy. Most of you who are present here today are actively engaged in running companies in a global competitive environment. You need no sophisticated economic analysis to tell you that when exposed to fierce global competition, monopoly rents and pricing power decline and prices therefore come under downward pressure. 4. Switzerland: one Country – two Economies  As a small open economy, Switzerland is greatly affected by global cyclical let alone global structural developments. Unfortunately, over the last twenty years, our economy only partly subjected itself to the global market place. It has therefore developed along diverging paths. Our export sector has been fully exposed to the competitive forces of global economic and financial integration. Many of you represent this sector. To remain competitive in the global market place, you have had to innovate your production processes in a continuous attempt to increase your productivity.

BIS Review 44/2003  3  demographics and the pressure this will inevitably exert on our social services and programs, such a shortfall in growth can have debilitating longer-term consequences. (see annex for graph 3) With the post-bubble collapse in the equity markets, a heated political debate has emerged in Switzerland as well as in many other countries about the sustainability of our retirement and social welfare programs. Ideas, concepts and frameworks are being discussed by politicians and frequently commented upon by the media. The fact that these difficult long-term problems which lie at the heart of our social contract are being openly debated is a welcome development. However, short of reneging on promises that are deeply embedded in our cultural and social fabric, the most meaningful way to address these problems in the decades to come is to invigorate our economic growth performance. The challenge for our politicians is a formidable one. The political interests that defend the legislative hurdles which distort the domestic sector of our economy and thus undermine our growth potential are deeply entrenched. Never does this become more obvious than during a parliamentary electoral campaign. Admittedly, painful short-term adjustment problems might emerge once the reform process is initiated. Accelerating productivity growth rates can – in the short term – lead to a further reduction in employment as uncompetitive industries are compelled to restructure. In the longer-term, however, a rise in productivity is unquestionably beneficial. Ultimately, it will lead to higher growth rates.