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

wages and increased spending, and the economy grew strongly for a while. but, the optimism turned out to be short lived and the result was a significant hangover, which required a substantial adjustment in spending and real wages over the following years. by way of contrast, the current experience looks quite different. despite the considerable optimism about the future, household spending has been relatively restrained over the past couple of years and the appetite for debt has declined. partly as a result, the pace of household borrowing has slowed significantly ( graph 11 ). one interpretation of this is that the household sector, after having increased its debt levels for many years and witnessed the problems elsewhere in the world, has a better appreciation of the risks. graph 11 if this interpretation is correct it is likely to be a good thing from a risk - management perspective. i say this for two reasons. first, restraint now provides some insurance against the possibility that things do not work out as well as expected. in doing so, it can help lower the probability that costly adjustments will be required at some point in the future. second, given that there is currently a relatively limited amount of spare capacity in the economy, the risk of upwards pressure on inflation would be increased if investment and consumption were both to increase very strongly over the next few years. in summary then, while we can do little to control the external environment that australia faces, the choices that we make on productivity, flexibility, financing and national consumption will influence the overall risk - profile of the australian economy. so while we look forward with considerable optimism about our medium - term prospects, we also need to be alert to the risks and how we might best manage them. conclusion i would like to close with just a couple of observations on what all this means for the collection of statistics. first, we need high - quality and comprehensive statistics if we are to understand the structural changes that are taking place in the economy. one obvious area where the demand for statistics is increasing is the resources sector. we need to understand where the investment is going, and how both production volumes and prices are changing. but we also need to understand how these developments are affecting other parts of the economy – what are the linkages and how are they changing. second, the abs ’ s work is also important in helping us understand some of the riskmanagement issues i spoke about. we need to continue making progress on the measurement of productivity and improving our understanding of what drives increases in output per head. and on the financial