lot about that in the late 1980s and early 1990s, and that learning experience has served us well over the past decade. the best single measure of this aspect of financial stability is shown by the level of bad debts of the banking sector. as you can see from graph 3, these have fallen from their peak of 6 per cent in 1992 to less than 1 per cent at present. this is about as low as they can realistically be expected to go. graph 3 banks ’ impaired assets share of total assets % % structural policies turning to structural policies, i would like to start by showing a graph of productivity. this graph shows the average increase in productivity in each of the last three economic expansions, i. e. the 1970s, the 1980s and the 1990s. the measure of productivity used is multi - factor productivity. this measure of productivity cannot be increased simply by shedding labour and replacing it with capital. it can only be increased by using both labour and capital more productively. as you can see from graph 4, productivity growth has been much faster in the 1990s - nearly 2 per cent per annum - than the rates of increase achieved in earlier expansions - about 1 per cent per annum. whilst we cannot draw very specific conclusions from this improvement, it seems to me that it tells us that we must have been doing something right. my guess is that the main things behind this improvement have been the various micro - economic reforms that have been aimed at increasing the competitiveness of the australian economy. these include : • the substantial lowering of tariffs ; • the deregulation of financial markets ; • the introduction of a more stringent regime for competitive policy ; • the privatisation of a lot of public utilities, banks, insurance companies ; and • the introduction of a good deal more flexibility into wage bargaining. graph 4 multi - factor productivity 1996 / 97 = 100 ; non - farm economy index index 1. 9 % p. a. 1. 1 % p. a. 1. 0 % p. a. i think we made a lot more progress in these areas than we were ever given credit for internationally. each of these changes met with resistance, and in many cases compromises were made which would not please the purists. but taken together, along with the private sector restructuring that was occurring at the same time, they have amounted to a major set of reforms, and have made the australian economy leaner, more flexible and more competitive. whilst these measures make the economy more

slide, australia has the lowest ratio of any oecd country, and it is still declining. table 2 : general government debt per cent of gdp, 1998 italy belgium 119. 4 117. 3 japan canada sweden spain netherlands france germany denmark ireland united states united kingdom finland new zealand norway australia 99. 9 90. 0 73. 1 72. 0 67. 9 66. 4 62. 6 59. 3 56. 6 57. 4 57. 2 52. 5 37. 6 37. 1 37. 0 source : oecd one aspect of australia ’ s recent economic performance that has received favourable comment is the behaviour of the exchange rate. when the asian crisis erupted, the exchange rate fell so that at its low point in august last year it had fallen by a very significant amount. unlike a number of countries in the region, interest rates were not raised to defend the exchange rate. i would like to make two observations about the exchange rate : • the first is that under our floating exchange rate regime, the exchange rate is allowed to vary quite a lot with cyclical developments in the world economy. one of the reasons that we are comfortable with this degree of variability is that we know that it takes place around a basically flat trend. this can be seen from graph 1 which shows the australian dollar against the us dollar. graph 1 australian dollar exchange rate against us dollar us $ us $ 1. 1 1. 1 0. 9 0. 9 0. 7 0. 7 average since 1986 0. 5 0. 5 • my second point is that some people have tended to exaggerate the size of the fall in the australian dollar over 1997 / 98 by looking only at the australian dollar / us dollar rate. at least half of the story over that period was us dollar strength rather than australian dollar weakness. this is illustrated in graph 2 which shows the australian dollar in trade weighted terms, where the fall was much less pronounced. again, i would not want to place too much weight on this measure either, because it tends to be pushed up by the large depreciation in a few asian currencies. the truth probably lies somewhere between the two. graph 2 australian dollar trade - weighted index index index average since 1986 recent events in asia and elsewhere have highlighted how important financial stability is in determining macro - economic outcomes. although there are many factors which underlie financial stability, one very important one is the prudential supervision of the banking system. in australia, we learnt quite a