This paper aims at quantifying the macroeconomic and distributional impacts of product market reforms and additional public investment using a DSGE model. The model reflects specific features of the South African economy. Tradable and non-tradable product markets are modelled separately, and a segmented labour market is designed to reproduce the labour market duality in South Africa between skilled and unskilled workers. The role of public investment on total factor productivity and its financing modality are taken into allowing the quantification of the net benefits of reforms.

Our results show that enhancing competition in the non-tradable sector has a short run recessionary impact while deregulating the tradable sector is expansionary. Overall, the latter has a bigger impact on GDP. From a distributional perspective, a product market reform in both sectors benefits all income deciles. Finally, additional public infrastructure investment, either financed by raising VAT or capital income tax, increases GDP in the short-term less than product market reform in the tradable sector but is more expansionary in the long run, so a combination of both reforms would boost living standards.