, however, that it is those countries with the highest quality institutions that benefit the most in terms of growth, that is, institutions need to be strengthened along with financial development, for without this, markets can become fragile and pose a threat to financial stability and ultimately growth. key in this regard is good governance frameworks, transparency and accountability. well - functioning capital markets are particularly important to a country ’ s long - term financing needs as they help mobilise resources and efficiently direct the flow of savings and investment inside an economy in a manner that facilitates the accumulation of capital and the production of goods and services. in a similar way, the existence of robust financial markets and institutions also facilitates the international flow of funds between countries. deep and liquid capital markets not only help provide finance for government but also increase the benefits of financial integration and improve the resilience of countries against shocks. in the absence of well - developed financial markets, it becomes costly to raise capital, information tends to be limited and there is a lack of financial transparency, which means that information is not as readily available to market participants, and risks are likely to be perceived to be higher than in economies with more fully - developed financial systems. the g20 has recognised the importance of developing local currency bond markets and in this vein adopted an action plan to support the development of local currency bond markets ( lcbms ) in 2011. the action plan recognized that financial deepening in general, and lcbm development in particular, could enhance the stability of the international monetary system by ( i ) raising capacity of economies to absorb volatile capital flows and intermediate them efficiently and safely ; ( ii ) reducing reliance on foreign savings ; ( iii ) attenuating external imbalances ; ( iv ) mitigating the need for large precautionary reserve holdings ; and ( v ) improving the capacity of macroeconomic policies to respond to shocks by allowing balance sheets to adjust more smoothly. a recent guest post by jingdong hua of the international finance corporation notes that capital markets have been a driver of china ’ s economy, which has displayed remarkable growth of roughly 10 per cent over the past three decades. china has introduced a number of innovative reforms to spur the development of its domestic markets, including amongst others, increasing the ceiling on its qualified foreign institutional investor ( qfii ) programme, and doubling the amount of domestic stocks and bonds that foreign institutional investors are allowed to buy. bis central bankers ’ speeches some steady progress has been made over the past number

commonly dominated by a few big firms. and labour markets are uncompetitive because of skills shortages, restricted entry, and extended industry or sectoral determinations. the result is that prices and wages are only flexible in an upward direction, and are otherwise rigid. this rigidity problem constrains our efforts to improve outcomes and permanently lower interest rates. our inflation outcomes appear to have settled at around the top of the target range, close to 6 per cent. this implies that nominal market interest rates will never fall much below 9 per cent. this cannot be an acceptable end point of macroeconomic policy, but it also cannot be changed easily with shifts in the monetary policy stance. if we want lower interest rates and we want them without going through a recession, then we have to lower inflation outcomes arising from administered price processes and, above all else, the way in which prices and wages are determined in our collective bargaining system. simply reducing the inflationary impulse from price and wage setting, to something around the middle of the inflation target range, would help to create jobs economy - wide and ease constraints on policy. conclusion in conclusion, i have spoken today about some key challenges facing the south african economy. the solution probably isn ’ t going to emerge from rising commodity prices or a big rebound in world growth which helps exports. it also cannot come from yet more fiscal or monetary stimulus. macroeconomic policy is already doing what it can, but the constraints are tightening ; we are running out of room to borrow and we have too much inflation to lower interest rates. this leaves us with the option of reforms. south african product markets are ripe for change ; opening up network industries would in particular have widespread growth benefits. labour markets for skilled people could be made more competitive, helping growth and reducing inequality at the same time. our wage bargaining institutions could be more supportive of better economic outcomes. less nominal wage pressure on prices would help us to lower inflation and the overall level of interest rates. our institutions could also be less hostile to small firms, the kinds of companies which create lots of jobs – and which are also scarcer here than they are in other countries. getting more people into jobs would lower dependency ratios, reducing the urgency of high real wages which themselves price many people out of work entirely. finally, we need to think about the kind of conversation we are having. the reform discussion can be difficult, partly because of vested interests and partly because of a shortage of trust between parties. given our difficult situation,