the euro should enhance the economy ’ s potential to grow faster. the elimination of exchange rate risk and currency conversion costs should result in increased trade, while the lower interest rate and inflation environment of the euro area should make for reduced business costs and greater macroeconomic stability. combined with the fiscal discipline associated with monetary union, this is expected to translate into higher credit ratings and better investment prospects. from a central banker ’ s viewpoint, moreover, a key benefit of euro area membership will be the elimination of the costs inherent in managing a small, vulnerable currency like the maltese lira and their replacement by the greater security and credibility afforded by a strong international currency. euro adoption necessary but not sufficient viewed from this perspective, therefore, the euro is but one element in a continuum of changes necessary to enhance the international competitiveness of the maltese economy. the benefits of the single currency will not suffice, especially in the presence of downside risks to global growth such as higher oil prices, a potentially disorderly unwinding of current account imbalances and the rise of protectionism. although the ongoing preoccupation with the level of the external reserves will cease once we join the euro area, moreover, any imbalance between what we buy and sell abroad will continue to cause the depletion of assets or the accumulation of liabilities, and be reflected in the country ’ s international investment position. any loss of competitiveness, therefore, will still result in slower growth. raising productivity a key challenge in setting out to overcome this challenge, a primary objective should be the correction of existing macroeconomic imbalances. output growth must, therefore, match spending growth more closely, and a key element in bridging that gap is increased productivity. put differently, since we are price takers in the markets that matter, notably those for electronics and tourism, we must have a cost structure that does not discourage investment. domestic inputs, particularly labour, must be competitively priced. and since the cost of labour in malta is relatively high, we must increase the value of output per employee. once again, the only way forward is through productivity growth. in this regard, there is much room for improvement. the level of productivity has remained roughly unchanged since 2001, while it is projected to increase at an annual rate of only 1 % to 2 % in 2007 and 2008. for a country that is highly dependent on exports, this is not good enough when many of our competitors are achieving faster productivity growth. faced with

mr brash gives an address on the building blocks of economic growth speech given by dr donald t brash, governor, reserve bank of new zealand, to the canterbury employers ’ chamber of commerce, in christchurch on 28 january 2000. introduction and retrospective over the past few years, as this speech has become an established part of my diary, i have used the occasion to address various issues of the day, such as developments with the exchange rate, the balance of payments and the reserve bank ’ s inflation target. since this is my first public speech of the new millennium, the temptation is to step back much further than usual and attempt to place current economic and monetary policy matters into the context of the past thousand years. instead i want to speak on a subject that is of rather more immediate interest, economic growth. what drives it, what will help us do better, and where does monetary policy fit into the scheme of things? to get ahead of myself for just a minute, there won ’ t be too much about monetary policy. good monetary policy is important, but even the best monetary policy in the world will not of itself generate growth. but as topical as growth is, history matters when we think about growth. so let me indulge just briefly in a piece of millennium contextualising. in an excellent survey a few weeks ago, the economist magazine1 reviewed humanity ’ s experience of economic growth over the past 1000 years. that survey observed that the steady rise in living standards that we in the western world now take for granted is, in fact, a fairly recent phenomenon. had i lived at the turn of the last millennium, for example, my life would almost certainly have been – in the famous words of thomas hobbes - “ poor, nasty, brutish and short ”. my lifestyle would have been essentially unchanged from that of my ancient grandparents and great grandparents. prior to about the middle of the 18th century, economic growth was so slow that it was often imperceptible within the span of a lifetime. the staggering growth of the last two or three centuries has supported a huge increase in population. and, in the west, ours is the first age in which affluence has been enjoyed by more than just a tiny fraction of the population. even the less well - off can have access to things that were scarcely dreamed of by even the wealthiest at the beginning of the twentieth century – things like an electric washing machine, a television, a stereo, a computer