Melboure. It's a town of services, not manufacturing

MELBOURNE'S future is here. In the past decade, new professional services firms have mushroomed in inner Melbourne, becoming the state's strongest source of growth in private sector jobs, a conference on Victoria's future has been told.

The Victoria at the Crossroads conference, co-sponsored by The Age, heard that new firms in Victoria's two fastest-growing industries finance, and professional and scientific services are overwhelmingly choosing to set up in the CBD and inner suburbs, in the buzz of the city.

By contrast, new workplaces in transport, warehouses and wholesale trade are springing up in outer western and northern suburbs, along the Western Ring Road, Professor Bruce Rasmussen of Victoria University said.

These clusters of emerging industries hold the key to Victoria's future producing food, services and tourism, and education opportunities for the booming economies of Asia conference speakers agreed.

The secretary of the Department of Business and Innovation, Howard Ronaldson, said new infrastructure such as a Melbourne metro and the east-west link "is arguably the biggest single factor that will make us more productive".

Mr Ronaldson said most big cities now have metro systems, freeing up inner-city road space for commercial vehicles. Melbourne should do the same, he said: "It's a fair bet that most of the high-value-added jobs will be generated in and around the CBD. One of the big demographic shifts recently has been that close to half of all Melburnians live in the suburb they work in, or close to it."

The conference was convened by Victoria University, the Committee for Melbourne and The Age after the high dollar and high interest bills sent Victoria's economy sliding on a wide range of indicators: jobs, investment, retail and housing.

It ended, however, with a consensus that while the high dollar had created real problems for the state in the medium term, its long-term future looked good after a decade of strong growth in knowledge-intensive industries.

"When the Chinese no longer pay as much for iron ore and coal, what will we sell to the Chinese and other middle-class consumers to our north?" asked economist Saul Eslake, of Merrill Lynch. "The answer is likely to be: agricultural commodities, and commercial and personal services. Victoria is better placed than many other states to cater for the likely sources of export demand in the next 20 years."

Also at the conference, Prime Minister Julia Gillard lashed out at the Baillieu government's $300 million cut to TAFEs, using a speech on the Victorian economy to call it "crazy" and a threat to the state's competitiveness.

Ms Gillard also rejected suggestions from business and commentators that industrial relations reform was a "magic bullet" for boosting productivity, instead nominating strong education and training as a far more powerful avenue.

But Ms Gillard did not address demands for more Commonwealth infrastructure spending in Victoria, including calls from state Treasurer Kim Wells to bring money to the table for the east-west road tunnel project.

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CSL. The science experiment that paid off

At 33, Brian McNamee was chosen to run the Commonwealth Serum Laboratories: a small government enterprise manufacturing plasma, antibiotics, flu vaccines and other medicaments for Australia and its neighbours.

This week CSL announced its first $US1 billion ($954 million) global profit for 2011-12. It is now Australia's most successful manufacturing business, and by a long way.

While CSL too is being belted by the high dollar, the annual earnings report a "foreign currency headwind of $108 million", its global structure, with manufacturing plants in four countries, its high productivity and premium products have allowed it to withstand those headwinds, and remain highly profitable. (Its $US1 billion profit was achieved on just $US4.6 billion of sales.)

It has been an amazing journey that few would have expected when, in late 1989, the industry minister John Button headhunted the young McNamee to become director of CSL, with the ultimate aim of privatising it to be a flagship for the fledgling Australian pharmaceutical industry.

It is an unusual story, of a most unusual company, in which the cultures of the scientific researcher and the corporate carnivore have somehow merged to create an enterprise that in some ways defies modern fashions and in other ways anticipated them.

It is now very much a global company, on the verge of becoming one of the world's top 20 pharmaceutical companies, and with 90 per cent of its revenues coming from outside Australia. Yet it is based in an unpretentious old building in Melbourne where CSL has been since 1918. Its head office has only about 20 staff.

Its big markets are the US and Europe, with a fast-growing trade in Asia. But it is led by an Australian-dominated board, chaired by molecular biologist Professor John Shine, carries out half of its vast research and development activity in Melbourne, employing 400 to 500 researchers, and credits Australian research for much of its global revenue.

It is not just McNamee who has been with the company for decades. Most of his senior executive team have also been there for decades, either with CSL itself, or in the companies it has acquired. McNamee's main interest is in strategy, and he is happy to delegate and trust his deputies. In conversation, he habitually uses "we", not "I", to explain his thinking. For a top 20 company, it sounds remarkably collegial.

"People think we're scientists bubbling away with test tubes", he says with self-deprecation. "But we think we're also pretty good at business. We've been financially conservative but, operationally, very bold and aggressive."

McNamee always envisaged CSL becoming something like this. His goal, he says, was to create "a great Australian company". He's done that, and after 23 years at the helm, plans to hand over in July next year to Paul Perrault, now head of CSL Behring, its Philadelphia-based plasma subsidiary.

A doctor by training, McNamee drifted into pharmaceuticals in his 20s, while in Germany after a brief try at emulating his brother Paul on the professional tennis circuit. At 27 he was recruited back to Australia by Fauldings, helped Button draft the "Factor f" pharmaceuticals industry plan, then ran Pacific Biotech before being conscripted to CSL.

From the outset, McNamee set his sights on building a global business, created by specialising, building scale, innovating, exporting - and making strategic takeovers. They began at small scale, even before CSL was floated on the stock exchange in 1994, valued at $300 million. It is now valued at about $20 billion.

"Most of Australia's assets are stressed: small assets, low scale", he says. "It's either get bigger, or get out. You either consolidate, or get consolidated. We elected to be the consolidator."

CSL developed its expertise in mergers and acquisitions through smaller takeovers before astounding critics in 2000 by taking over a firm roughly its own size, its Swiss counterpart ZLB Bioplasma, at a time when McNamee was desperately sick and fighting testicular cancer. Four years later it followed that up by acquiring a second big target, US-based Aventis Behring. A third ambitious bid, for rival Talecris, was blocked by US regulators in 2009.

Many other Australian firms have made ambitious foreign purchases, only to come a cropper. McNamee says CSL succeeded because it was patient, disciplined and had worked out how the merged companies would fit together.

"Most acquisitions fail, in my view, because people overpay," he says. "We were very disciplined about what we bid and we had a very clear idea of how we would add value to it. You're always looking at things, but you have to be patient. You only buy a business when they're suffering; if they're not suffering, you overpay.

"You have to decide why you are the natural owner of that business. We never wanted to be a big company. We wanted to be a fine company that was very good at what it did."

CSL is now organised into a global supply chain, collecting and processing plasma and manufacturing a range of products. Its plants in Melbourne supply Australia, Asia and the Pacific. Its factory at Kankakee, near Chicago, produces plasma intermediaries for all CSL plants and supplies North America, and its plants in the Swiss capital Berne and Marburg in central Germany, supply Europe and the rest of the world.

Mergers were only part of McNamee's game plan. At the outset, he moved to lift productivity sharply by slashing CSL's staff. He made exports a prime goal. He cut out low-margin products, and - with some exceptions for the Australian market - narrowed CSL's product range to those where it could be globally competitive. And he was lucky that at Broadmeadows, the Hawke government was already building a global-scale plasma plant.

With Australian manufacturing now under so much pressure from the high dollar, those remain his core strategies. "You have to set your focus on world markets", he says. "We need to focus on being good at a smaller number of activities. We have to be in the premium products end.

"Switzerland and Germany have worked out how to deal with the problems of an overvalued currency, and that's primarily the problem we face. If the high dollar is here to stay, we need innovative industries and clusters. We're very fortunate to be in the Parkville area - the [research] networks it created have been very important for us."

One other thing McNamee firmly believes Australia must learn from Germany and Switzerland is the importance of wage restraint, to keep manufacturing globally competitive. CSL has just been through an unusually bruising wage negotiation in which its unions used strike action to win wage rises of 3.75 to 4 per cent over each of the next three years.

This was very different from the way its enterprise-based unions in CSL's Swiss and German plants operate. Germany entered the euro with an overvalued deutschmark, but won back its lost competitiveness with 15 years of wage restraint. Swiss workers have wage restraint ingrained in them. The OECD reports that in the 15 years since 1995, average wages have risen 22 per cent in Germany, 33 per cent in Switzerland - but 107 per cent in Australia.

So far, CSL has been able to cope with a dollar above parity, but McNamee warns that is no longer inevitable: "If you combine a high dollar with wages growth that sits ahead of the global competition, it's inevitable that will put many assets at risk - including CSL's."

But this time next year, that will be someone else's problem. Brian McNamee is not sure what he'll be doing, but at 55, he's got a lot of life in him.

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For Victoria, it's a case of life in the slow lane

THE problem with the Australian economy is that there isn't one. Rather, there are two of them, or arguably several. The data groups them as one, which makes it a misleading guide.

You know the story, but even so, the data is astonishing. Half of Australia's growth is coming from investment in one sector, mining, which generates just 7.5 per cent of our output. In the past year, on the latest figures, mining investment grew by 80 per cent. This is the biggest mining boom we've seen.

The other half of Australia's growth comes from the rest of the economy. Growth in the mainstream of our economy is just 1 to 2 per cent, in line with population growth. To put it another way: take out mining and its offshoots and growth per head in the rest of the economy is about zero.

Take out mining from the capital expenditure figures, and they show business investment in the rest of the economy has slumped to its lowest level in almost 40 years: less than 5 per cent of GDP. At last report, non-mining business was forecasting a further fall in 2012-13.

If they were some minor part of the economy, you might say, so what? But this is not minor: it's the mainstream of the economy, it's High Street, it's Victoria, New South Wales, south-eastern Australia, south-eastern Queensland. It's us.

Victoria is at the centre of it. After 20 years of surprisingly solid, even enviable, growth, this state is now at the crossroads. The forces that drove its growth in recent years have gone into reverse. The headwinds it has struggled against have grown stronger and more dominant. It is not clear where the state's next drivers of growth will come from.

The story is certainly not all bleak. Victoria's housing industry is no longer running at record levels, but it's still the shining light in a weak national outlook. A couple of big hospital projects saw the state also lead Australia in 2011-12 in new non-residential building approvals. The Baillieu government has budgeted for record infrastructure spending in 2012-13 and is looking for ways to accelerate that in future. And the state continues to outperform the rest in attracting new visitors.

All through Victoria, creative minds are finding ways to overcome the problems heaping up on them: the overvalued dollar, the new wave of consumer restraint and cost-cutting by other businesses and governments. Despite the dollar, many are building or maintaining export-oriented firms. Victoria's exports of goods in 2011-12 grew 10 per cent, faster than Western Australia or the nation.

To explore the options for Victoria's enterprises, The Age has joined with Victoria University and the Committee for Melbourne to present a conference later this week, Victoria at the Crossroads, with speakers including Prime Minister Julia Gillard and Victorian Treasurer Kim Wells, and experts from a wide range of areas.

The springboard was concern that global and Australian economic conditions are now working against Victoria. The state will have to find new sources of growth or remain stuck in the slow lane of a two-speed economy.

For example:

. In the year to March, demand (total spending) grew 10 per cent in the mining states (WA, Queensland and the Northern Territory) but just 2 per cent in the rest of Australia, including Victoria.

. The state's unemployment rate has risen in a year from 4.9 per cent to 5.5 per cent, with the official figures showing 27,000 full-time jobs lost and 41,000 part-time ones added.

Ominously, the June survey of the Victorian Employers' Chamber of Commerce and Industry found only 9 per cent of its member companies surveyed expect the Victorian economy to strengthen over the year ahead, while 61 per cent expect it to weaken.

The problem is that Victoria has lost its main drivers of growth. Spending by foreign students in the state fell by $1 billion in 2010-11 as the high dollar, tougher migration policies and anti-Indian violence sent students elsewhere. The heavy debts we took on in giddier times now restrain consumer spending. In Spring Street and Canberra, expansionary budgets have given way to contractionary ones.

Housing starts in the six months to March were down 16 per cent from their record high a year earlier, and housing is a big buyer of goods and services. House prices have fallen for a year and a half, provoking caution.

Manufacturers from Ford to the backyard sheds are doing it tough and shedding jobs under the crushing weight of the high dollar. And investment surveys suggest there is worse to come.

This is not just Victoria's story; it's the story of south-eastern Australia. The Reserve Bank's recent interest rate cuts will help at the margin, but the core message from policymakers is: it's your problem.

That means it's got to be our solution. We must be tough, resourceful, patient and creative: to find better ways to work, make new products and find new customers. Good luck.

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What does the manufacturers' task force want? Lots

THE Gillard government now faces a host of tough budgetary and policy choices after its manufacturing task force urged it to cut business taxes, reduce "the impacts of the carbon price", and lift spending on infrastructure, skills and a range of other areas.

The task force, mostly of business and union leaders, warned that since 2008, the high dollar has cost 110,000 manufacturing jobs, 10 per cent of its workforce and 85,000 more are at risk.

With the dollar likely to stay high, the report said, the challenge is to create an economic environment and workplace culture that will make manufacturing more internationally competitive.

"This requires a business environment that supports continual innovation in products, processes and management," they said. But their 41 recommendations show this will not be cheap.

With manufacturing output 8 per cent below 2008 levels, they urge the government to bring forward infrastructure investment, buy more local content, create a housing recovery, and step up spending on small business and skills training.

The report proposes:

. A government-led effort to win Australian companies a bigger share of supply contracts for the $470 billion of mining-related investment in the pipeline, rather than see most of it go to imports.

. Bringing research institutes and industry together in "smarter Australia precincts", like Melbourne's Parkville medical precinct, so more of Australia's research expertise is directed towards making new products or improving them.

. Building on Australia's strengths by processing raw materials before export, especially processed food for Asia's markets.

. Developing more global niches in knowledge-intensive manufacturing, as Futuris has done in automotive interiors and CSL in plasma.

. Monitoring the impact of the carbon tax on emission-intensive industries, and ensuring it is "refined as needed" to keep firms globally competitive.

Prime Minister Julia Gillard said the government supports most of the report in principle, but shied away from committing to its spending proposals, saying they would be considered in the budget process.

She said the government's manufacturing support arms will combine to help Australian manufacturers bid for contracts in infrastructure and resource projects. It will also set up a "manufacturing leaders group" bringing employers, unions and government together.

"I want to make sure that we still have a strong manufacturing sector beyond the resources boom," she said. "Manufacturing provides us with a skill base, with innovation, and it provides working people with jobs."

Australian Industry Group CEO Innes Willox said Australian manufacturing needs to build on its strengths, improve its partnership with public sector research, become part of global supply chains and build a culture in which small manufacturers can grow big.

Mr Willox said manufacturing's biggest problem was the high dollar, quipping: "The dollar is number one, and it's about four games clear on top of the ladder." But industry must lift its productivity to become globally competitive even with a high dollar.

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Going down. Non-mining investment plummets

BUSINESS investment in the non-mining economy has shrunk to its lowest share of gross domestic product for almost 40 years, as a result of the high dollar and appears set to fall lower still.

The Bureau of Statistics estimates that in the nine months to March, business investment in manufacturing and services such as finance, retailing and IT fell to 4.95 per cent of GDP, its lowest level since 1972-73.

The bureau's quarterly survey, taken in April and May, found companies plan to invest even less in 2012-13. Manufacturers' investment plans were 11 per cent lower than at the same stage last year, while service companies' plans were down 4 per cent.

Even if these plans are upgraded as usual over the year ahead, the survey implied that non-mining business investment would shrink, to about 4.5 per cent of GDP.

That would take it back to levels last seen 60 years ago, in the savage bust that followed the Korean War boom.

The bureau figures were published weeks ago, but escaped attention, as analysts focused on the mining industry's record investment plans. At face value, two-thirds of all business investment in Australia this financial year will be in mining, and just a third in all other industries combined.

The Reserve Bank reported last week that in 2011, more than half of Australia's growth in GDP came from mining investment. Since the entire economy grew just 2.1 per cent, that implies growth in the rest of the economy was barely 1 per cent.

The Reserve voiced concern that the high dollar is doing more damage to the economy than it anticipated. While mining is booming, the Reserve reported that activity in the rest of the economy is subdued.

"In liaison, many firms indicate that they are slowing their investment spending in line with weaker cash flows, and are becoming more selective about which projects to pursue," it said. "Many companies [are] prepared to spend on machinery and equipment investment [only] to the extent necessary to offset depreciation."

The bureau figures show investment by non-mining companies has now slid well below its worst levels in the 1990-01 recession.

Non-mining investment between 1987 and 2000 averaged 6.6 per cent of GDP, as companies built new offices, hotels, retail complexes, or re-equipped factories, truck and car fleets or equipment hire centres.

But since 2010 it has ebbed as mining investment has boomed. Manufacturing investment, which averaged 3.4 per cent of Australia's GDP in the 1960s, has now slumped to less than 1 per cent, with much of that invested to process minerals before export.

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Advice from Dow Chemical - manufacture success

DOW Chemical's global president and CEO Andrew Liveris has called on Australian governments to scrap their hands-off policy towards the embattled manufacturing sector and develop partnerships with industry to use Australia's skills and resources to make high-value products.

Mr Liveris, co-chairman of Barack Obama's Advanced Manufacturing Partnership and author of Make It In America, a blueprint for revitalising manufacturing in the US, has returned to his homeland with a similar plan to rebuild manufacturing in Australia.

Launching the plan yesterday at the University of Technology, Sydney, he said Australia should change policies to aim for "a balanced, sustainable economy that adds value to resources", rather than one dependent on minerals and energy.

"Australia's current growth trajectory is unsustainable," he said. "Internal disparities will become exacerbated, and its global competitiveness will decline because other countries are maximising their value-adding capabilities.

"Passivity is not a strategy for growth."

The plan, which Mr Liveris will present tomorrow to Treasurer Wayne Swan, calls on governments to:

Develop a plan to encourage "advanced manufacturing" here, creating the right environment for manufacturing that is export-competitive, dependent on innovation, and on partnerships with researchers, government and other firms.

Increase investment in innovation, by lifting incentives for venture capital, co-operative research centres, and the "D" end of R&D, to bridge the gap between Australia's world-class research effort and its low rate of commercialisation.

Require gas producers to reserve a big share of new gas fields for domestic use at well below world prices, making Australia's huge gas reserves a feedstock for value-added industries, which would have a global comparative advantage.

The plan, titled The Dow Chemical Company Advanced Manufacturing Plan for Australia, also urges new initiatives to increase the focus on science and mathematics in schools, and partnerships between business, universities and government to develop advanced manufacturing.

"Australia has all the building blocks of a global leader, including a vast quantity of natural resources [and] a highly skilled, talented workforce," he said. "Australia has the ingredients, but no recipe.

"We believe the government has a big role to play, not by protectionism, but through focused public policies. The current environment does little to address the challenges associated with commercialising new concepts here, and driving the creation of new markets."

Mr Liveris sharply criticised Australia's energy policies, warning that the carbon tax and renewable energy targets would damage competitiveness. He urged the government to focus instead on low-cost savings through greater energy efficiency, increased use of gas, and cleaner coal.

He urged state governments to reserve part of all new natural gasfields for domestic use, as Sir Henry Bolte did with Bass Strait, giving companies cheap gas to build globally competitive downstream industries.

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Strong dollar a local nightmare

FOR 20 years from 1985 to 2005, the Aussie dollar averaged US70c. Now it is hovering around $US1.05. At that level, the question is: does it make sense for any firm to export manufactured goods from Australia?

It's not just Alcoa, Toyota or Holden. It's any firm that exports from Australia, or competes with imports. In the currency of global trade, producing in Australia is now 50 per cent more expensive than in the past. That applies to cars, computer games, university courses or tourism.

Between 1985 and 2005, the Aussie floated between US50c and US90c. If it got too high, firms would tighten their belts, grit their teeth and wait for it to fall. This time it's different.

The dollar is now far above its old levels. Some say it could go higher. Many, most, believe it is now up there to stay. This is not just a cyclical high, it's a structural shift. And it has wrecked good business plans that had assumed a dollar in the range it used to live in.

The destruction is going on all around us. Since the global financial crisis began, Bureau of Statistics figures show, a net 127,000 manufacturing jobs have been wiped out across Australia. One in every eight manufacturing jobs has gone already. Far more than that are under threat.

Treasury, the markets and the Reserve Bank tell us the Aussie is set to remain high far into the future, maybe for decades. It may not stay at today's level, but it will stay well above the zone it lived in before the minerals boom began. This is an epochal change, which will change Australia.

Why does the level of the dollar matter? Suppose you're a manufacturer in Clayton making plastic thingos. There's a big global market, but you're competing with manufacturers in China, Korea, everywhere.

Suppose it costs you $A10 to produce a kilo of thingos. With the dollar at US70c, that makes your costs $US7 a kilo. Suppose the world price is $US9 a kilo, then you're making a decent profit from exporting.

But with the dollar at $US1.05, suddenly your costs have jumped to $10.50 a kilo, yet the global price is only $9. To export thingos now costs you money, serious money. If you think the dollar is going to stay that high, you either somehow cut costs dramatically, or give up the game.

And that's not all. Suppose your Chinese rival can produce thingos for $US5 a kilo. When the $A was US70c, his costs in $A were marginally higher than yours; you could hold him off at home. But with the Aussie at $US1.05, his costs are now less than $A5 a kilo. He can undercut you and take away your local contracts. If you think the $A will stay up here, you don't just give up exporting - you give up manufacturing.

This is a crisis that will bring many well-run firms to their knees: not because they are inefficient, but because costs beyond their control have made them uncompetitive. It is a crisis that, if the dollar remains high as forecast, will cost hundreds of thousands of manufacturing jobs.

But seeing our politicians arguing is like watching two bald men fighting over a comb.

Julia Gillard and Wayne Swan always trot out the line that Labor understands that there are people and firms who are doing it tough. OK, but what are you are going to do about it?

Tony Abbott says he wouldn't have a carbon tax. Wow. A carbon tax might add about 1 per cent to the cost of manufacturing in Australia. The higher dollar has added about 50 per cent. What are you going to do about that?

One option is to do what others do: get the central bank to drive the dollar down. That's possible. They can do that by printing money - but that's the recipe for inflation.

There's two other ways, both unpalatable: invest overseas, as China does, or stop wage growth, as Germany once did.

Our best chance was the mining tax. A 40 per cent tax on superprofits in all mineral sectors, as originally intended, would have sharply slowed mining industry growth, reducing the upwards force on the $A and allowing other industries more room to grow. But Tony Abbott said no, Labor backed off, and even its emasculated tax is yet to pass Parliament.

In the crisis, our politicians and policy advisers have failed the test - unless you think ''do nothing'' is the correct answer. This change will leave many victims in its wake.

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Car exports slump

AUSTRALIA'S car exports have crashed to their lowest level since 1998, as the high dollar and the loss of foreign export contracts has left car-makers battling to keep a toehold in the global market.
The Bureau of Statistics said exports of built-up cars earned $1.35 billion in 2011, a shuddering 63 per cent fall from the $3.69 billion three years earlier.

Holden has been the biggest victim, after General Motors ended exports of Commodores to the United States to protect jobs at its US plants. From 56,140 cars exported in 2008, Commodore exports shrank to 7811 in 2010.

But last year's victim was Toyota, now the only significant exporter of Australian-made cars. In 2008 it produced record exports of 101,668 Camrys and Aurions, but that dropped to 82,630 in 2010 and then to just under 60,000 last year.

Toyota spokeswoman Vesna Benns said the loss of $A earnings was even bigger, since export contracts are written in $US, and the $US has fallen sharply against the $A in the past year. Toyota's total export earnings, including sales of accessories, slumped from roughly $1.5 billion in 2010 to $1 billion in 2011, she said.

Total exports of Australian-made cars have fallen from a record 162,000 in 2008 to about 70,000 last year.

But total Australian exports grew 10 per cent in 2011 to a record $313 billion, with most of that growth coming from minerals, and the rest from farm exports. Imports grew 9 per cent to $294 billion, and the trade surplus rose from $15 billion to $19 billion.

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Do we need industry when we have a mining boom?

THE drastic cuts at BlueScope Steel raise two key questions. Does it matter to Australia if we have a steel industry or not? And if it does, is it worth trying to keep it?

We could ask the same questions about whether Australia should keep making cars. We could ask the same questions about whether we should keep manufacturing anything.

The record dollar is slowly driving Australian manufacturers out of business. With each cent the dollar rises, their import competitors become cheaper and their exports more expensive.

From 1985 to 2005, the Australian dollar averaged US75¢. It has now risen 40 per cent above that to around $US1.05.

That shift has made imported goods 30 per cent cheaper - and our exports 40 per cent more expensive. Australian manufacturing is slowly being crushed. Why has the Australian dollar risen so much? Firstly, because our mineral export prices have risen to record levels and the Australian dollar tends to rise and fall with them.

Secondly, our interest rates are now far higher than in other AAA-rated countries, offering investors juicy returns. Also, the Reserve Bank keeps hinting that it will raise rates higher still.

Thirdly, while most Asian countries (such as China) keep their currencies low to boost local output, ours floats freely. The Reserve at times has intervened to stop the dollar falling, but never to stop it rising.

Nor would it. The Reserve is obsessed with the mining boom and thinks the big threat to Australia is inflation. To contain prices, it is reining back the other 90 per cent of the economy. Its hints of more interest rate rises keep pushing the dollar higher.
Does it matter if Australia becomes, in Kevin Rudd's words, ''a country where we don't make things any more''?

Treasury and the Reserve say it doesn't. They think mineral prices will stay high for decades, keeping the dollar too high for manufacturing to survive. They say we will ship out so many minerals, we won't need it.

Others see that as reckless. Mineral prices could fall sharply. But when factories close, they don't reopen.

To avert that would require big policy shifts, not Band-Aids. The risk is that we will lose manufacturing permanently for a mining boom that turns out to be only temporary.

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Resources boom presents real challenge for government

THE OECD's question for Australia is simple: how do you manage a resources boom to maximise the gains and minimise its negative impacts on inflation, the budget, and other industries?

Its own answers are mostly good ones, even if they seem to have been written by Treasury, like a ventriloquist using the OECD as its dummy.

First, ensure taxpayers get the benefit of the boom by putting a comprehensive tax on mining profits, and not the three-legged dog Julia Gillard gave us. The mining tax should be redrawn to cover all minerals, all mining firms, and raised higher rate so taxpayers do not end up paying the miners.

Second, the government should not spend the money on routine services, but save it, or spend it only on infrastructure.

Third, keep open the doors to skilled migrants, to avoid labour shortages pushing wage rises out of control, and forcing the Reserve Bank to drive up interest rates.

Fourth, lift spending on infrastructure and regulate it better. Invest more in public transport, and make trucks pay the full cost of the wear and tear they impose on our roads. Slow the rollout of the NBN, to encourage competition between internet technologies.

Fifth, start a new wave of reform, mainly through comprehensive tax reform, but also by removing government support for the car industry. (Like Treasury, the OECD simply ignores the real-world impact of closing down our biggest manufacturing industry).

And last, set up a serious anti-poverty program, to bring more people into the workforce by tackling the underlying causes of their disadvantage: poor health, poor education, homelessness, welfare traps and dole benefits below the poverty line.

This is a real challenge for a government that has messed up the few bold decisions it has taken, and for an opposition that likes reforms only if they're popular. But if Treasury is right, this is the environment we are facing, so challenges can't be avoided.

It's a pity the OECD relied so heavily on Treasury's advice, and hence proposes to shut down the car industry. That would intensify the damage the resources boom will do to the south-east, where most Australians live. Learn to think outside the square, guys.

But the rest of its report raises many ideas our politicians should be thinking and talking about. Not that they will. Treasurer Wayne Swan yesterday ignored the 98 per cent of the report focused on reforms to highlight the few bits that let him pat himself on the back. How ungainly. How out of touch.

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