and standardisation quite early in the development of that system. but despite the benefits that brought, co operation, standardisation and innovation in australia ’ s eftpos system have not progressed as far as is desirable. the eftpos system has essentially remained unchanged since its establishment in the 1980s. the fact that the system is built on bilateral links between all the major participants means that there is no one standardised communications protocol between the participants. furthermore, co operative efforts to innovate or upgrade the system are complicated because they require all bilateral relationships to be renegotiated. this is, in fact, a difficulty with many of australia ’ s payment systems – they are based on bilateral links, with no established mechanism to foster improvements and expansion in the network. so left to their own devices, networks may stop short of an efficient level of co - operation. incomplete standardisation may result, and innovation or movement from one standard to a superior one may be difficult because of co - ordination problems, even where the benefits to society outweigh the costs. the literature points to several reasons for this potential outcome, some of which are evident from the example i have already given. the first is the classic economic externality. firms within the network may be concerned that if they agree a common standard with a competitor, that competitor may be able to capture some of the benefits of moving to that standard. why would i pay all the cost of converting my railway line to a gauge that can connect with another railway, when my competitor will gain as much of my rail traffic as i will of his? the implication is that competitors in a network might not individually make decisions that are optimal for the network as a whole. the second is the ineffectiveness of voluntary strategies for achieving co - operation in a network industry owned by competing firms. establishment of industry bodies to agree standards is a common approach, but the success of these bodies has been mixed. agreement tends to be delayed where there are vested interests and, in some cases, non standardisation is used as a barrier to entry by competitors. 3 third, there is often a tendency towards “ excess inertia ” in standards. 4 problems with coordinating the movement from an old standard to a superior standard ( such as the movement to new system architecture in a payment system ) may mean that the movement does not occur, or occurs very slowly, even where the benefits to society outweigh the costs of switching. these co ordination problems may be caused by

in the australian figures on foreign investment and it is also showing up elsewhere, including in the us figures on capital movements, where net capital movements have returned to outflows after a few years of heavy inflows. this is the note on which i think i should finish. we cannot predict the future : all we can do as a country is to try and make sure that we have an economy that is resilient enough to handle the shocks that it will inevitably face. we have done so successfully twice in recent years when we faced the asian crisis of 1997 / 98 and the world recession of 2001. this should give us some confidence that we can handle the next one - whatever it is - as successfully.