That is, an environment where competition increases the supply of new ideas and pushes frontier firms to innovate and produce new technology; where well-functioning markets  BIS central bankers’ speeches  5  diffuse that technology, causing it to be adopted more widely; and where resources are quickly reallocated from failing to growing firms, so that the economy as a whole can reap the returns of innovation, and entrepreneurs have the financial incentives to undertake risky projects. So, when thinking about how to raise productivity, it is helpful to think in terms of these three categories: innovation, adoption and reallocation. And in each case, our policy frameworks are at present not as effective as they could be, especially in comparison with the US. In terms of innovation and competition, recent research shows that size of entering and exiting firms tends to be smaller in the US than in Europe, and successful young firms tend to expand relatively more quickly in the US than elsewhere. In other words, successful firms in the US grow faster and unsuccessful firms shrink faster.13 These differences are in a large part due to labour and, in particular, product market regulations that affect firm entry and turnover. Despite recent improvements, according to the OECD index of product market regulation the euro area still lags some way behind the US. The obstacles in the euro area are in part structural – that is, legally protected professions. But they also stem from a generally onerous business environment.
Distinguished Ladies and Gentlemen, the contribution of financial services to individual entrepreneurs as well as small and medium sized businesses cannot be over-emphasised. As you are no doubt aware, following the liberalization of the financial sector in the early 1990’s, the financial sector in Zambia has evolved rapidly spurred by increasing competition. Similarly, policies and the legal and regulatory frameworks have been developed to take into account the fast changing liberalised environment. These developments have resulted in a considerable increase in the number of banks and other financial service providers. Therefore, the banking sector has over the last few years, witnessed significant growth in consumer lending. As a matter of fact, on a sectoral basis the “personal loan” category has been the largest recipient of total credit in the recent years and accounted for 22% in November 2009. Small and Medium Enterprises have also significantly benefited from credit expansion. The resultant credit expansion has no doubt brought significant benefits to the economy as resources are increasingly channeled through to the lower end of the market. However, most of the credit extended by banks and microfinance institutions is targeted at individuals in formal employment or already established enterprises. Only an insignificant amount is extended to start-up initiatives or the informal sector. This has been exacerbated by the inability of entrepreneurs to articulate and sell bankable projects through robust business plans.