economic activity has depended on two - way foreign trade. even for the small settler communities at the end of the earth 150 years ago, it never made sense to attempt to self - sufficiently meet all their own material needs. self - sufficiency makes so much less sense today, if we value prosperity and opportunity at all. with all due respect to the christchurch technology sector, and i have a great deal of respect for it, think of the inefficiency and waste involved if we ’ d had to develop and maintain our own microsoft, meeting only new zealand needs, our own boeing, our own vodafone. and equally, the prospects for our own innovators – tait electronics or aoraki corporation, say – would have been bleak had they been limited to new zealand sales alone. as a nation, we turned inwards in the late 1930s, taking the protectionist route to development. the advocates of that change were unquestionably well - motivated. they too recognised that in the longrun agriculture was unlikely to sustain first - world living standards and strong growth. but equally clearly it was a wrong turning that delayed our adjustment, our shift to a high - tech globally - integrated economy, by several decades. we pay the price for that now, in at least two ways. first, our economy and people are less able to take advantage of the opportunities that beckon this decade than we might have been if we ’ d avoided the by - ways of protection. but, second, we face the very real human and social costs of adjusting away from the industry structures which the protective policies of the 1930s onwards bequeathed us. there are no easy answers to the practical questions of just how fast we should move away from that protectionist route. much of the work has already been done, even though the current government and its predecessor have answered slightly differently the questions about the protective barriers that remain. trade matters – it is simply vital to our future – but i believe there is also a strong recognition of the need to bring people along. speaking only a couple of weeks ago of the changes new technology is bringing about in the us, alan greenspan – himself an enthusiastic advocate of the market economy – noted : but as we seek to manage what is now this increasingly palpable historic change in the way businesses and workers create value, our nation needs to address the associated dislocations that emerge, especially among workers who see the security of their jobs and their lives threatened.

a sense, that is just what the new provision in the policy targets agreement recognises. we didn ’ t seek the change, and yet its addition helpfully, and more formally, reminds us that there are, in the short - term, sometimes trade - offs. if that is so, then we need to think seriously about the implications for the short - term variability of output, interest and exchange rates when deciding on the ocr needed to ensure that medium - term price stability is maintained. in some circumstances, accepting a bit more short - term variability in inflation may mean a bit less variability in interest and exchange rates, and vice versa. i say may, because it isn ’ t the case in all circumstances. in many situations, the best way to minimise fluctuations in inflation, output, interest rates, and the exchange rate will be to adjust the ocr firmly and promptly to guard against imbalances emerging in the economy. none of this – in fact, nothing – will alter the fact that a growing and prosperous new zealand economy will always live in an uncertain world subject to shocks and surprises. monetary policy can assist in responding to shocks – moving to stimulatory mode as asia struck, moving back towards neutral now, heading for restraining mode as and when growth begins to put strain on capacity and threatens to reignite inflationary pressures. but we won ’ t – indeed can ’ t – remove the economic cycle, or the bulk of the big cycles in interest and exchange rates. in all this, i hope i don ’ t appear defensive when i remind you – as i must often remind myself – that in a world of huge uncertainty a very considerable element of art is involved in reaching monetary policy decisions. that means it will often only be with the benefit of very considerable hindsight that the final verdict can be delivered on whether or not the best decisions were made at the time. conclusion improving our economic growth performance is a big part of what the public look to governments and their officials to provide. but while sustained strong growth inevitably involves governments, there are severe limitations on what governments alone can do. firms, individuals and markets generate growth. and yet firms and individuals are affected in so many ways by what governments do that without a cohesive society and good government it is almost impossible to have sustained and broadly - based economic growth. much has been done in new zealand in recent decades as governments, firms and individuals have begun to awaken to the implications of the world economy for new zealand