high levels and this will put the focus back onto productivity growth and economic reform as the drivers of increasing living standards. the second issue is the importance of ensuring that the economy remains flexible, and can respond to unexpected developments. my colleagues at the reserve bank and i have spoken at length on previous occasions about the key elements here. having a flexible exchange rate has been one of the great stabilising forces in the australian economy over the past 30 years. labour market flexibility is also important. so too is retaining the flexibility of both monetary and fiscal policy to respond quickly to unexpected developments. to this list, i would add the importance of having a highly trained and educated workforce. not only does education help lift productivity, but it also makes the economy more flexible and this helps lower risk. the third element that affects the nature of the risks is the way that investment is financed. historically, much of the external funding for business investment has come from banks. while bank financing is likely to remain important for many firms, a greater share of investment is likely to be financed from other sources than has been the case in the recent past. this may not be welcome news for the banks, but having investment financed from a variety of different sources helps reduce aggregate risk. over the years ahead, foreign direct investment and capital market raisings by firms in the resources sector are both likely to play a more important role than they have over the past decade. this means that some of the risks – and, of course, some of the expected returns – from the rapid increase in australia ’ s capital stock will be shared with foreign investors. the fourth element of risk management is the response of domestic consumption to the improved outlook. the textbook says that if future income prospects improve, the level of national consumption – either private or public – should increase now. but the textbook also says that the lower our appetite for risk, or the greater the uncertainty about the future, the smaller should be any immediate adjustment in consumption. it also says that the more uncomfortable we are about the possibility of a future decline in consumption if things do not work out well, the smaller should be adjustment now. if we look back at our own economic history, the early 1980s provides a good example of what can happen if the adjustment is too quick. in the first couple of years of that decade, there was much optimism about the future of the resources sector, largely reflecting the rise in oil prices as a result of opec ii. this optimism was translated quickly into higher

the activities of hedge funds you were regarded as paranoid and you received a sermon on the dangers of shooting the messenger, etc. now, no one has got a good word to say for them, and they are likely to soon be brought into either : • • the disclosure net, or some form of supervision via their connections with banks. second, i see a clear improvement in future crisis management in the way the imf is talking with brazil. unlike the asian crises, i don ’ t see any country in future putting itself in the hands of the imf without knowing pretty clearly beforehand what the imf conditions will be. if it doesn ’ t like the conditions, for example, because they are too wide - ranging, it will not go to the fund. if it is comfortable with the conditions, it will be able to sign up from day one. this way, we should be able to avoid the long periods of semi - public haggling over conditions that characterised the asian crises and did so much to frighten the markets into pushing exchange rates down excessively.