Saturday, May 01, 2010

Ah Oh. Richard Green asks whether we would we be better off without WA

From Troppo:

"Shane Wright 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."