Australia’s make-it-or-buy-it challenge

Sometimes it takes an outsider to remind us of something important.

While it is the strength of Australia’s mining sector that has our economy perfectly positioned to negotiate the current global slowdown, this morning’s papers carry some fascinating comments from Andrew Liveris, the head of US manufacturing giant Dow Chemical, about why Australia needs a strong and vibrant manufacturing sector.

Liveris, who is an Australian by birth, argues the country has become too reliant on the mining sector and must to do more to encourage manufacturing.

“We have great entrepreneurs and innovators. What we have lacked is the domestic sector to scale it up,” he told The Australian.

“I think it would make great sense for Australia to adopt an advanced manufacturing agenda to value-add its resources.”

“The boom-bust cycle of commodities is not the only thing we should rely on.”

Liveris wants to see the creation of an advanced manufacturing taskforce to work on this issue, similar to one that he has been involved with in the United States (although US President Barack Obama has struggled to get initiatives in place due to the difficult political situation there).

The taskforce does sound like a good idea – anything to get this issue back on the agenda.

Because Liveris is right. While our mining sector is carrying us right now, the cyclical nature of the resources industry means we cannot rely on it forever.

And when the mining industry starts to slow, what then?

A strong, innovative manufacturing sector that is focused on exports would be one of the key to helping us through a resources bust. But our manufacturing sector has shrunk dramatically in the last 20 years and continues to struggle.

For a good part of the last decade, the decline of manufacturing sector hasn’t seemed like a huge issue.

Our retail sector boomed, both in terms of revenue and employment. Education and tourism grew strongly. Financial services emerged as a crucial part of the economy, fuelled by superannuation contributions.

But now retail is under pressure and likely to become smaller. Education and tourism are great long-term industries that are underpinned by innovation and education, but a lengthy global slowdown will make things hard. Financial services remains a huge and important industry, but could also be challenged by a market slowdown.

A stronger, more innovative manufacturing sector wouldn’t necessarily save us from a slowdown, but it would help add stability.

The other important thing about manufacturing is that it can support a lot of jobs.

It’s no coincidence that in the US and Europe where unemployment is holding back the chances of economic recovery, the manufacturing sector has been hollowed out as it has been in Australia – with accompanying job losses.

To be clear, this is mainly because American, European and Australian manufacturers could not compete with lower labour rates in places like China.

But in Europe and North America, policy makers are wondering what they could have done – and what can be done now – to revitalise, restructure and refocus their manufacturing sectors.

We should be doing the same right now – while the resources sector gives us the time and space to do so.