Will Australia be able to catch the fourth economic wave with China?

Europe will never have the political unity that China is likely to continue to have. Nor does Europe have the cultural confidence. The Chinese know who they are and what they are. And they do not need the approval of the US to know what they should do or can do.

The most important thing for us to know about China is that it will be an economy built around the individual and small-and-medium enterprises. It will not be like Korea and it will not be like Japan.

Domestic demand will be the principal driver in China. It will not primarily be an export economy, though it is a big exporting country. What the Chinese economy is going to do is give people a house, a refrigerator, a television set and CD player, plenty of telephones and lots of toys for the kids; an economy much more like Australia's than Japan's or Korea's.

China is a phenomenon and it is our backyard. There is a chance China will change the whole commodity equation in Australia - but are we clever enough on the productivity front to capitalise on it?

I inoculated a generation of treasurers with the surplus needle and none of them have yet found the antidote. They always want to run budgets in surplus, regardless of economic conditions or economic needs, whereas they should be providing public infrastructure to lift our productivity performance. And government debt has never been cheaper. A lot of this investment cannot be done in the private sector. Public investment has to keep up.

If we can keep our productivity up, we will keep the inflation rate down, and with it interest rates. Productivity is not the icing on the cake. It is the cake.

Governments in Australia need to be interested in productivity but they appear fundamentally disinterested. We can not live only by the economic changes of the 1980s and '90s. We will run out of puff unless the underlying components to productivity are understood and improved.

The Americans are now clocking up phenomenal four per cent productivity growth, because all that IT equipment is starting to give the average American business a real productivity boost.

That's the challenge for us: can China provide the lift? Will we slacken back on the oars? Will Australian productivity flag when we are most likely to capitalise on new international trading conditions?