for granted. and, of course, if the assumptions we are making about the world economy turn out to be too optimistic, all bets would be off. i now come to the second part of my testimony, in which i attempt to answer the question of why we have done better than most other countries in asia or the pacific rim. in doing so, i am conscious that the story is not yet over, so this is really an interim report. i think a number of factors have been involved and i will list them in no particular order. as we go through them, it will become apparent that they are all intertwined. first, i think the asian crisis hit at a time when the australian economy was in good shape, partly for cyclical reasons. by mid - 1997, the economy was growing strongly and inflation was lower than our target. had we not received a contractionary impulse from the asian crisis, we may have been facing the need to tighten policy because of a potential overheating. no - one will ever know, but it is a possibility. i am conscious that attributing our performance over the past 18 months to our good starting point is rather superficial because it does not explain why the starting point was so good. but i will come back to that later. second, i think we have benefited from the flexibility of our exporters, who have switched from the contracting asian markets into the expanding north american and european ones, and into a number of other markets we do not usually think of as being important to us. the nature of our exports - with so much of them being commodities - has helped, but the efforts of our marketing companies and authorities should not be ignored. even so, it has not proved possible to prevent exports from falling, and over the year to the september quarter they fell by 2 per cent in volume. third, australia has benefited from a greatly improved perception of the soundness of its economic policies. the fact that the budget has moved back into surplus - where it should be in the mature phase of an economic expansion - has been important. so has nearly a decade of low inflation. also important on this occasion has been the recognition that australia scores well on such factors as its regulation of banks, other financial institutions and stock exchanges, and that its underlying body of commercial law and accounting practice is at or close to world best practice. not only have the international capital markets taken a better view of australia, but we also seem to have more confidence in

manufacturing industry has little choice but to move up the value - added chain in order to compete. this is, of course, a lot easier to say than to do. it means difficult changes for many firms and those who work for them. it also means ongoing investment in human capital and the latest machinery and equipment and constant attention to improving productivity. one piece of evidence that things are moving in this direction is in the abs business characteristics survey, which asks firms a series of questions about innovation. in this survey the manufacturing sector clearly stands out as one where firms are actively reviewing their business practices and, over recent times, they have been doing this more frequently ( graph 4 ). no doubt, more of this will be required over the years ahead. bis central bankers ’ speeches graph 4 the changes within manufacturing are also evident in the export figures. while, in aggregate, exports of manufactured goods are little changed from their level in 2007, there has been strong growth in some categories including specialised industrial machinery and professional and scientific instruments ( graph 5 ). these are both areas where human capital and specialised skills are important. in contrast, exports of motor vehicles and construction materials are well down on their earlier levels. graph 5 another area of the economy where the high exchange rate is having a noticeable effect is the tourism sector. as is the case in the manufacturing sector though, the story is not uniform across the industry. indeed, the structural change that is occurring in the economy is taking place not just across industries, but within industries as well. bis central bankers ’ speeches the boost to real incomes from the mining boom has clearly increased australians ’ ability to travel. however, the high dollar has contributed to a decline in travel to the traditional domestic holiday destinations, with australians travelling overseas in ever increasing numbers. this has created quite difficult conditions for parts of the industry with, for example, room occupancy rates along the queensland coast having fallen over recent years ( graph 6 ). in contrast, conditions are noticeably stronger in the accommodation sectors in some of the large cities which are benefiting from an increase in business travel and an apparent shift in preferences by overseas tourists for city - based experiences. in sydney, for example, room occupancy rates are at quite high levels. graph 6 household spending and borrowing a second general factor that has been driving changes in the structure of our economy is the adjustment in household borrowing and spending behaviour. the rba has talked frequently about this issue over recent years, and the flow -