developer of new products, the main source of innovation and the main employer of people. of course, the environment in which private businesses take and implement their decisions is heavily influenced by the public sector. as gary banks, the former head of the productivity commission, has pointed out, the public sector has an important influence on the incentives that firms face and on their ability to respond to those incentives. in effect, it helps set the “ rules of the game ”. 5 there is no shortage of ideas on how to boost our productivity. last year gary banks also provided us with a very useful “ to do ” list and the business council of australia has also recently contributed to the debate. 6 the difficulties are in deciding which ideas to pursue and in generating the political support for changes that are in the national interest but may disadvantage some sections of the community. investment in infrastructure rather than recite the long list of possibilities, i instead want to focus on just one issue – and that is infrastructure. this is not to imply that infrastructure is necessarily the most critical issue. but it is an important one and it is one that is quite closely connected to the world of finance. i also want to make it clear that my comments are primarily about the medium term, rather than being focused on the short - term cyclical situation. see banks g ( 2012 ), “ productivity policies : the ‘ to do ’ list ”, speech at the economic and social outlook conference, “ securing the future ”, melbourne, 1 november. see business council of australia ( 2013 ), action plan for enduring prosperity, july. bis central bankers ’ speeches i suspect few of you would disagree with the idea that improving our infrastructure is important if australia is to compete successfully in international markets in the years ahead. over recent times, we have done quite well in building the infrastructure needed to export resources to the rest of the world. but we need to do more if we are to achieve that same success elsewhere. in the years ahead, it is unlikely that australia ’ s comparative advantage will lie in the production of standardised mass - produced manufactured goods for the global market. instead, we have tremendous opportunities in a range of more specialised high value - added goods and services, where it is the quality of our ideas and the quality of our execution that is the key. whether or not we can seize these opportunities depends critically on our human capital and our infrastructure. looking back at our recent experience with infrastructure, i find it difficult to escape the conclusion that

the source was strong productivity growth, as is evident from the relatively steep slope of the blue line. over these years, we benefited from a noticeable pick - up in productivity growth, partly due to a period of substantial economic reform. however, the story over the past decade is quite different, with productivity growth being noticeably slower. 1 the good news is that this did not lead to slower growth in our living standards ( this is apparent in the two lines moving apart gradually ). the reason for this is the very substantial increase in australia ’ s terms of trade over this period. with rapid growth in asia pushing up the prices of commodities, australia ’ s export prices increased substantially relative to our import prices. as glenn stevens has pointed out, over time we have been able to buy more and more flat screen televisions for each ton of iron ore that we have sold overseas. 2 it is this increase in the average value of what we produce per hour of work – not so much an increase in the average amount that we produce per hour – that has been central to the increase in our living standards over the past decade. before i discuss the implications of this, i would like to add one further line to this graph ( graph 2 ). this third line shows how real income per capita ( the orange line ) – as opposed to per hour worked – has increased over time. as you can see, the rise in real income per capita has been even faster than the rise in real income per hour worked, which has been faster than the rise in productivity. since 1993, average real income per capita has increased by almost 70 per cent, or nearly 2¾ per cent per year on average. again, this is much faster than we experienced in earlier decades and faster than in other advanced economies ( graph 3 ). by way of comparison, over this same period, there has been a cumulative increase in real income per capita across the g7 economies of just 28 per cent, or around just 1¼ per cent per year on average. the slowdown in productivity growth is discussed in d ’ arcy p and l gustafsson ( 2012 ), “ australia ’ s productivity performance and real incomes ”, rba bulletin, june, pp 23 – 36, and connolly e and l gustafsson ( forthcoming ), “ australian productivity growth : trends and determinants ”, australian economic review, december 2013. see stevens g ( 2010 ), “ the challenge of prosperity ”, address to the committee for