Western Australian Secession

Right for the wrong reasons?

I’ve started thinking recently about WA secession from the rest of Australia. Now, let me just say this – if I were to support secession, it wouldn’t be because of any nationalistic or patriotic reasons (or whatever is the state-equivalent of those words), or about WA’s identity and independence, yada yada yada. I’m not even particularly interested in the GST debate about how much to which WA should be entitled and how much WA should subsidise the rest of Australia with its GST revenue. As I understand it, GST revenue distributions are updated every year based on the needs of the specific state/ territory over the previous three years. So there is a three-year lag but after WA has been slumping for three years, GST should start flowing back to support its economy. Maybe WA can negotiate a better deal, maybe the methodology can be improved. All relevant debates to be had – not really what has peaked my interest recently.

No, what I’m more interested in is the notion of the optimal currency area. For an area to successfully share a currency, resources need to be able to flow around the area freely and rapidly, so that if there are imbalances in one area (e.g. recession in WA and boom in the East), these resources will leave WA for the East, thus correcting the imbalance. These resources include money AND people.

In the case of WA, money flows easily between the east and west, but people don’t – even with a common culture and language (things that the Euro didn’t have), most of WA’s labour shortfalls during the mining and resources boom were met with international labour, not labour from other states. Furthermore, over the last 25 years, Perth’s inflation rate has, on average, deviated from that of Melbourne and Sydney by more than any other capital city, except Darwin (maybe NT wants to secede too, with WA or on its own). In other words, it seems the West doesn’t boom/ slump at the same time or with the same magnitude as the East.

And yet, the whole country operates under a common currency and common Central Bank interest rate policy. A recent news report after the August 2016 interest rate cut said that if WA were its own country, its interest rate would be zero or negative right now! And NSW would be over 4%. As it is, all states have to make do with a national interest rate of 1.5% – not optimal. And it was exactly the reverse problem during the mining and resources boom – WA needed a higher interest rate to curb inflationary pressures, and the East needed a lower one to combat their slump.

WA secession could be good be everyone – WA would get its own currency and Central Bank interest rate policy that it could tailor to its own circumstances, and the East wouldn’t have to worry directly about WA’s circumstances when deciding upon their own interest rate policy. Nor would their currency be influenced by WA’s activity to the extent that it is now. Even if WA was no better off from a tax perspective (they probably would still want to pay for the use of Australia’s military), even if NOTHING else changed – wouldn’t these gains be enough to justify secession? Australia could still be a whole country for national and international sporting events. There need not be animosity between East and West. Couldn’t this be beneficial for all concerned?

And the finance activity needed to support a Central Bank in Perth could fill up the looming vacant offices around the City, maybe even include the Central Bank with the already-internationally-famous Perth Mint. Imagine the boom! I admit, I am a bit biased here – I dream of working for the Central Bank in Sydney, so a Central Bank in Perth would be a great start!

I have not made up my mind about WA secession yet. But is this not something to think about? It need not be about East vs. West and who gets what. It need not be about State identities and ‘sticking it to the bureaucrats’. It really could just be about the economic realities, which are beneficial to both sides – exchange rates and interest rate policy.

Alternatively, if GST shares are improved, maybe that will improve the fiscal policy aspect of economic management, thus helping to correct any interstate imbalances without the need for separate currencies and separate interest rate policies. But I’d be less tempted to trust politicians with effective fiscal policy than I am to trust effective monetary policy to Central Banks that are at least quasi-independent. Just look at all the heavy-lifting monetary policy has had to do around the world to compensate for governments’ ineptitude and irrational debt-fears (something about which I am planning to go into great detail in subsequent blogs).

One possible problem with WA secession I do foresee is volatility – WA has only two million people and a GDP (or GSP when it applies to individual States) of around $150b (about 10% of Australia on both counts). To be its own country with its own exchange rate would possibly imply a lot of volatility, especially given WA’s export/ international exposure. Mining and agriculture would have an even bigger impact on the state’s business cycle swings, which may offset the smoothing-benefits of having its own currency and interest rate policy. Furthermore, trade deals may need to be renegotiated, given that Australia’s trade partners would now be dealing with two Australia’s, not one. And there would be the inconvenience of changing currencies during East-West travels. But would this be a deal-breaker?

But again – something to think about. I’m sure there’s an abundance of research/ case studies that could be/ have been done that actually puts real numbers on these impacts.

Now, before anyone says that my flirtation with WA secession is inconsistent with my criticism of the Brexit decision, it’s not. It is actually consistent. What I’m suggesting is that WA become like a PRE-Brexit Britain – independent interest rates and currency, but still part of the larger market. In fact, WA could remain even closer to the rest of Australia than Britain USED TO BE to the EU. So while I’m suggesting WA move in a similar DIRECTION to Britain, it would still be far more consistent with globalisation and integration than the Brexit decision. So there!