Would we be better off without WA? Secession and currency areas

Shane Wright (reproduced by Peter Martin) weighs up pros and cons (mainly cons) of WA secession from the perspective of WA. Lets ask a natural counter question: What if the rest of Australia would be better off without WA?

Specifically, should Australia still have a single currency? If we keep worrying about the “two track economy” hypothesis maybe we should consider the idea that Australia is not a optimal currency area. The monetary policy and exchange rates we get from straddling divergent economies are optimal for neither East nor West.

My wife works in inbound tourism, catering for tour groups and corporate junkets. International tourism is experiencing difficulties and for all the rubbish that is published about Australia’s brand and bickering over successive marketing campaigns, these difficulties come down almost entirely to a simple fact : the exchange rate, pumped up by internationally high interest rates and commodity exports,  is making it expensive to visit here. Likewise this bears on manufacturing, education and other exports. Meanwhile even non exporting firms are constrained by tighter monetary policy designed to keep a lid on an economy a continent away.

Dutch Disease strikes again. But whereas the Dutch could not rid themselves of the North Sea, WA may eagerly leave. The gains from a  more optimal monetary regime would more than make up for the comparatively modest fiscal transfers that stir up resentment in the West. A separate currency hardly damages trade with New Zealand, so why should it with a nation nearly as similar and just as distant? Likewise we’d not have to consider bribes and withholding welfare to make up for the lack of the kind of labour mobility that is meant to be a hallmark of OCAs.

If we end this marriage, it’s less a case of kicking out a bludging partner than an amicable separation where everyone is better off.

About Richard Tsukamasa Green

Richard Tsukamasa Green is an economist. Public employment means he can't post on policy much anymore. Also found at @RHTGreen on twitter.
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8 Responses to Would we be better off without WA? Secession and currency areas

  1. munroe says:

    I can’t see the benefits of WA seceding, as this is a long term, mutually beneficial arrangement. The only reason they’re talking about secession is that they’re worried about getting screwed. The alternative is to treat them with respect and stop taking federation for granted, which is what’s happening right now. Kevin Rudd is a fool and his short-sighted money grab is what ignited this issue.
    Besides, it would be far better to get rid of Tasmania first. A bunch of loafers, living off mainland wealth.

  2. derrida derider says:

    Never mind all that, would they really go for the flag in that picure – a black swan surrounded by the butcher’s apron?

  3. Ken Parish says:

    Queensland and NT are also have heavily resource-based economies (although NT’s is tiny by comparison). Should they be hived off as well?

    More importantly, I would have thought that having a diverse national economy with substantial mining, manufacturing and services sectors is a positive thing not something to be dismembered by drastic constitutional surgery. It might involve tricky fiscal management when one of these sectors is dramatically more buoyant than the others (as at present), but again surely the fact that we’re being kept more prosperous than almost every other country by the demand for Australian minerals is a positive not a negative. Maybe this post is just an economists’ joke that I didn’t understand?

  4. Ken;

    It’s not a joke. Floating currency exchange is of the classic mechanisms for allowing economies to adjust their internal structure of production in relation to other economies.

    Of course, there’s a tradeoff. In introducing a monopoly currency by fiat you take away the ability for some sectors to adjust by floating their own currency. Hence the Reserve Bank and the European Central Bank face similar problems: a single currency region with multiple conflicting monetary policy indications.

  5. Richard Green says:

    Ken – I deliberately made a logical fallacy by overlooking the benefits of national government – which I think are substantial for both parties and enough to offset the currency issues – to focus on the problems of currency.
    Nonetheless, diversity within a currency zone may be disirable for a number of reasons, but it falls into problems when the variety is between regions rather than within them. Where resources (notably labour) have problems moving from one industry to another because those industries are in distinct regions.
    That requires the fiscal redistribution as a partial remedy if you are to preserve the area, but it’s these redistributions that cause the seccessionist noises in the first place.

  6. Nabakov says:

    “I would have thought that having a diverse national economy with substantial mining, manufacturing and services sectors is a positive thing not something to be dismembered by drastic constitutional surgery.”

    Yup. Especially as resource based economies are very cyclical. Also Australia’s strongest state economy, Victoria, draws that strength from being very diversified.

  7. Tel says:

    I saw this article quoting President Vaclav Klaus,

    http://www.larouchepac.com/node/14314

    Greece needs a devaluation by 40%, but it no longer has the drachma. The alternative were a lowering of wages and salaries by 40%, but that is not too easy in a democratic society. The real cause of the tragedy is not the rational or irrational economic policy in Greece, it is the euro that has caused this tragedy. Without the euro, the Greek politicians could solve this crisis with the instruments that have been in use for centuries.

    I’ll just relate this to traditional economic thinking: money is fluid and any money can be converted easily to any other money; so as a fundamental theoretical principle it does not matter how you denominate some particular utility, money is money is money — universal and all purpose. You draw curves for supply and demand, the curves cross at an equilibrium point and that’s where it settles regardless of the system of units in effect.

    However, clearly Vaclav Klaus does not believe this is the case, nor does Richard Green believe it, and I’ll speak frankly I don’t believe it either. Translating the article above, the theme is that the East Coast of Australia needs a devaluation (just like Greece) but regular people will not accept any devaluation when they can see it in numerical terms, so a sly devaluation is the only way forward. This is also the underlying theme that President Klaus delivers w.r.t. the Euro.

    What bothers me though, is how Economics (viewed as a “science”) can advocate any resolution that depends on stealth. It would seem that a science built upon stealth is doomed by the very nature of science itself depending on transparency and repeatability.

  8. Kim Hillier says:

    If We secede the problem of Robin Hood fund distribution would not change. All mining income would be spent in Perth.
    The answer is not to secede but to change the distribution and responsibility setup of Australia, with Tax income spent where it is generated, thus having a true reflection of where infrastructure, finance and population is needed.
    Local government should receive, spend and be responsible for the Lions Share. State and Federal Government with income and responsibilities more in line with
    their respective Jobs.
    Many other countries have this system, most centralist countries fail (ie Soviet Union). We have to remember that Australia was administered, not governed and when the UK left, we continued basically with centralised administration (originally state and then Federal).

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