economic institutions and prevailing economic cultures and social models? since the late 1990s, increasing attention has been paid by economists and policy - makers to finding answers to these questions. recent economic research – both analytical and empirical – is seeking to further explore how the economy ’ s performance is influenced by institutions and values ; and, more generally, how the economy ’ s functioning may change if we relax some of the simplifying assumptions about ( 1 ) the behaviour of a seemingly “ valueless ”, perfectly rational homo oeconomicus ; and ( 2 ) the functioning of markets that are “ perfect and complete ”, characterised by full information, rational expectations and largely unaffected by cultural and social values. in my presentation, i will address some of these issues by examining how and to what extent institutions and values may be affecting the performance of the european economy. to this end, i will first sketch out a simple conceptual framework indicating how economic performance, the functioning of markets, institutions and human values relate to each other. second, i will show how the growth performance of the european economy – compared to that of the united states – can be accounted for by differences in the trend growth rates of productivity, labour utilisation and population ; and then i will discuss – on the basis of the empirical evidence available – the role of economic institutions, social preferences, values and attitudes in explaining, at least partly, these differences. a key issue of practical and policy relevance is whether european economic performance can, in fact, be improved without giving up values or preferences that are considered to be quintessentially european. but since there is no unique “ european social model ”, i will then explore how differences in economic institutions, reflecting different cultural values and social models, may explain the divergence in the growth performance of european countries. finally, i will focus on the other important dimension of economic performance and a central policy objective : price stability. i will demonstrate the crucial role of the institutional frameworks for central banking and fiscal policy implementation in ensuring the preservation of price stability and the sustainability of economic growth. ii. economic performance, markets, institutions and values : a simple conceptual framework before addressing the issues i have raised, it will be useful to define the various concepts more precisely and to specify a simple framework that describes their likely relationships and potential effects. needless to say, the aim is not to formulate a comprehensive theory but to sketch out a conceptual structure that can help organise our thinking and analysis. this is illustrated in slide 3

one basic reason : the prime concern of any regulator is not to close a bank for the wrong reason but to save an ailing bank from collapsing. the regulator ’ s challenge is to turn an ailing bank into a really good and performing bank. in this challenge the board of directors of the ioib and the sbi team have played an instrumental - indeed a decisiverole. non - performing loans in the books of banks are an animal that the bank of mauritius has been combating since july 1999. one of the many reasons that motivated the bank to combat this animal in the balance sheets of banks is the need to prevent lending rates of banks from rising inordinately. you will appreciate that the bigger is this animal in the books of banks the higher the lending rates. good and productive borrowers pay for bad borrowers. and lending rates have never been generous in mauritius. you may wish to note that in 1999 housing loans made by banks carried an interest rate of between 14 and 15 per cent. today such loans carry interest rates that are below 10 per cent. i suspect the reduction in the size of non - performing loans in the books of most banks has had some positive impact on the level of lending rates. hopefully with the reduction of non - performing loans on an industrywide basis would eventually help bring down lending rates in mauritius thereby alleviating interest cost burden to the real sector of the economy. prospects for improving loans quality are bright more so when there are 900 to 1000 queries per day by banks at the mauritius credit information bureau. only yesterday i was given to understand that a habitual delinquent borrower had applied for additional credit facilities from a bank. rather than obtaining an additional credit facility, the delinquent borrower was made to repay a large chunk of his debt – thanks to information culled from the mauritius credit information bureau. i am confident that the ioib along with all the other banks operating in the country would successfully bring down the level of nonperforming loans thereby creating scope for bringing down lending rates to realistic levels. the ioib, in particular, has made important strides in this area. may i wish the board of directors, the management and the staff of the bank the very best of success in their new endeavour.