francois groepe : structural reform to promote economic growth address by mr francois groepe, deputy governor of the south african reserve bank, at the economics and beyond seminar, university of south africa, pretoria, 5 august 2013. * * * introduction the bank for international settlements ’ 2013 annual report released in june this year argues that monetary policy has provided space and time for governments to undertake structural reforms to raise growth and productivity. the key structural reforms, they argue, relate to enhancing labour and product market flexibility and reforming the financial sector. both the imf, in the 2012 article iv report on south africa and the oecd, in their 2013 report on south africa raised labour and product market rigidities as the main constraints to faster economic growth and employment creation. when talking about structural economic reforms, there is generally universal agreement that we require deep structural reforms to improve our economic performance but there are a myriad of different interpretations of what is needed. there is however little consensus on which reforms are needed and should be implemented and how these should be implemented. there is furthermore a robust debate about what the key structural impediments are to higher growth and employment. this is not just the case in south africa where the debate takes on a distinctly ideological tone, but globally too. global economic developments before i expand on the structural constraints to higher growth, allow me to present a short overview of the issues facing the monetary policy committee ( mpc ) and the south african reserve bank ( the bank ) in general. the global economic environment remains weak, with most of the major advanced economies growing below potential. while there are signs of positive economic growth and rising employment in the us, this growth is still too low to significantly close their output gap. furthermore, a number of downside risk to their growth outlook remain, particularly in the form of further fiscal consolidation, the debt ceiling levels, and the impact of rising long - term bond and mortgage interest rates in response to expectations of a tapering of asset purchases by the us federal reserve. the eurozone continues to experience recessionary conditions, with real output contracting by 1, 1 per cent in the first quarter of 2013. the imf has reduced its forecast for eurozone growth by 0, 2 percentage points to – 0, 6 per cent, with a weaker recovery than previously forecast in 2014. the japanese economy recorded strong growth in the first quarter of 4, 1 per cent, but it remains too soon to assess the efficacy of the various stimulus measures that were

economy into higher value added goods and services. rodrik further argues that while fundamental capabilities are important, countries can achieve structural transformation in a relatively short period of time even without strong fundamental capabilities. china is a good example of structural economic change without a number of the elements that we often associate with fundamental capabilities. despite these weaknesses in fundamental capabilities, they have been able to achieve a noteworthy level of structural transformation over the past two decades. in order to sustain the pace of development, they would have to invest in fundamental capabilities but these requirements are not mutually exclusive or sequential and the skills and attributes required to invest in one is not necessarily the same as those required to invest in others. there have also been several cases where countries have sound fundamental capabilities but have not been able to engineer structural change associated with rising incomes. new zealand is such an example. the structure of the economy in general, in the literature, refers mainly to the pattern of what is produced. how big is the primary sector in relation to the manufacturing sector? what manufactured goods are being produced? how complex are these products? how diverse is the economy? what is the productivity level of various sectors? what are the principle exports? these are critical questions. in south africa, the phrase ‘ structure of the economy ’ also has a broader distributional connotation. the question, ‘ who benefits from what is produced? ’ is frequently asked. debates often revolve around who owns what and how this has changed. it also revolves around the share of labour remuneration in gdp relative to the gross operating surplus and therefore the relative returns from growth to labour and capital. the skewed income distribution frequently features in debates about the structure of the economy. apart from sectoral patterns of growth and the distribution of benefits that accrue from growth, there is a third area of focus when discussing structural reform in south africa. this area relates to the efficiency or lack thereof of various markets. high unemployment is clearly the most glaring example of a mismatch in supply and demand. there are other types of market inefficiencies. monopoly pricing, cartel - like behaviour and high cost structures, all impact on the structure of the economy and indeed all warrant attention from economic policy makers. for example, high prices in the telecoms sector impacts on costs in other sectors, thereby reducing their size and productivity. market inefficiency impacts on the structure of the economy, for example a lack of competition often translates into higher prices and higher