Thursday, June 05, 2008

Mr Rudd, New England and an Asian EU

Now this title will seem an odd combination, but I thought that I would record in short form a personal historical fact, while making a short comment on a current event.

In Self-government for New England - why I remain a supporter I provided a link to some of the posts I had written spelling out why I still supported self government for New England. Then, in a response to a comment from Neil, I made several points: one was that any change involved a pattern of winners and losers; a second that the arguments against New England self-government tended to repeat over time, a bit like a bad meal.

Driving to work this morning, I found that Kevin Rudd was espousing an Asian economic union along the lines of the EU. Now this cast my mind back.

In the early part of 1983 I returned to the Department of Industry and Commerce from a period of leave without pay as a postgraduate student at the University of New England. Not quite sure what to do with me, the Department put me onto a study of the virtues of an Asian Free Trade Area. This assignment was due to Doug Anthony, who had asked that work be done on the topic.

I am not sure that the study did Doug much good, the Hawke Government came to power a little later, although it must be one of the first ever official studies into the case for economic integration within Asia. However, it had a major influence on me.

The Bureau of Industry Economics loaned me Noel Benjamin to support the work. Noel and I dug into the statistics as well as the crazy patchwork quilt of tariff and licensing restrictions across Asia. We concluded that a free trade area would be a good thing, although we doubted that it could be done.

One side-effect of all this was that I had to dig into the economic theory of customs unions and free trade areas, an area that I had not visited for many years. Central to the theoretical discussion was trade creation versus trade diversion.

Trade creation was a good thing. This involved an aggregate increase in trade, allowing for greater gains. Trade diversion was a bad thing because it simply diverted trade from a lower cost external source to a higher cost one within the customs union.

One of the issues that I had been wrestling with in my historical studies was the real cause of structural changes that had disadvantaged New England and, more broadly, country Australia. In simple terms, the price of Australian Federation was a customs union that diverted industrial trade, benefiting the capital cities and especially Sydney and Melbourne while costing country areas and the smaller states.

There was nothing profound about this conclusion. However, I concluded that the scale of income transfer was far greater than people realised. This led me into a study of the history of the Australian tariff system.

All this had a decided impact on my policy advice. While I did not support some of the neo-classical economic positions of some of my former Treasury colleagues, I thought that they underplayed dynamic effects, I certainly wanted industry protection wound back.

Today when I look at Mr Rudd's suggestion that there should be an Asian EU, I support the idea as a basis for debate. However, I also think that the underlying economics do not make a great deal of sense at this point in time.

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