Paul Bowles
E XPLAINING THE D IFFERENCES : “G EOGRAPHY ”
“Geography” has long been recognized as an important influence on the two countries’ political economies. Australia’s distinctive economic history was attributed in Geoffrey Blainey’s influential 1967 book to the “tyranny of distance”. Although in a globalized world “distance” has shrunk, it is still commonplace for Australians to regard their country as being “eight hours from anywhere” and surrounded by a “moat”. Australia remains isolated geographically from its historic imperial allies, first the U.K and since 1945 the US, and remains culturally isolated from its geographically closer (but still non-contiguous) Asian neighbors. Geography dictates that there is no obvious country with which Australia could form a monetary union except perhaps New Zealand, a union which is of only modest interest to Australia as I discuss further below.
7 See, for example, the set of papers in “The Falling Australian Dollar: A Forum”, Journal
of Australian Political Economy, no. 46, 2000.
8 Personal communication March 4, 2003.
9 However, The National Post subsequently reported that support for “seriously
considering” adopting the US dollar among Canada’s business leaders had fallen as the Canadian dollar appreciated during 2003. See The National Post, October 14, 2003. See also Ragan (2001: 41) who argues that “though non-economists seldom claim to understand most macroeconomic issues … there is a surprising level of agreement among them that, for Canada, a fixed exchange rate would be preferable to the status quo of a flexible, sometimes even volatile, exchange rate.”
Canada, in contrast, shares the world’s longest unprotected border and that with the world’s only superpower which is also the issuer of the world’s reserve currency. As Pierre Trudeau remarked, just two years after Blainey’s book on Australia’s tyranny of distance, Canada’s geographical position was akin to “sleeping with an elephant”. What might be called the “tyranny of proximity” ensures that the US looms large in any Canadian policy debate and offers an easy and obvious reference point for the discussion of monetary union in the Canadian setting.
While Blainey and Trudeau’s descriptions refer primarily to geography as distance, “geography” can be defined more broadly than this. This is perhaps best illustrated by gravity models which measure the pull of a common border, and of the similarity of language, culture/ethnicity and political institutions on international trade and investment flows.10 Use of a common currency is also typically found among the independent variables influencing trade and investment flows. However, common currencies are also argued more likely to be economically beneficial for countries with high levels of trade integration. Thus, the influence of “large neighbors” on the possibilities for monetary union can similarly be thought of as being influenced by this broader set of geographical factors.
Studies in this genre typically use large data sets and empirically measure the influence of “geography” on trade and/or the benefits of common currencies. One explanation for the differences in exchange rate debates between Canada and Australia might simply be, therefore, that in Canada there is a very obvious and culturally and politically similar “large neighbor” with whom Canada could possibly enter some form of monetary union whereas in Australia there is not. Canada is highly integrated with the US economy in terms of both trade and investment. The US accounts for 87 percent of Canada’s exports and a significant point in the debate over a fixed versus flexible exchange rate regime has been the extent to which North America consists of a series of regional economies which straddle the Canada-US border rather than two separate national economies. This issue is important for determining the strength of the argument that Canada is best served by a flexible exchange rate regime because it allows Canada to adjust differently to external shocks such as changes in world commodity prices.
Furthermore, a key to the argument linking low productivity with exchange rate misalignment is the “mobility of firms and highly skilled individuals across the Canada-US border”. (Courchene and Harris 1999: 9). Thus the presence of a large neighbor, a presence which has real economic effects, provides a clear
reason why monetary union with such a neighbor should be an obvious debating point.
Australia, in contrast, has a much more diversified export composition, in country terms, than does Canada. See Figures 4 and 5 below.
Figure 4: Canada's Export Destinations (2001)
87.0% 0.5% 2.2% 1.0% 0.5% 0.6% 3.7% 4.4% U.S. European Union ASEAN Japan China South Korea Mexico Other Countries
Source: Exports by Country (2002) Micro media Limited, 65-003-XPB, Vol.58 No.4 Statistics Canada,
Figure 5: Australia's Export Destinations (2000)
9.7% 11.7% 13.3% 19.6% 5.7% 7.7% 4.9% 3.3% 5.7% 18.4% United States European Union ASEAN Japan China South Korea Taiwan Hong Kong New Zealand Other Countries Source: http://www.abs.gov.au/Ausstats/[email protected]/0/be75d8ff866cba97ca256aaa007fe 175?OpenDocument, the June Quarter 2001 issue of International Merchandise Trade, Australia (Cat. no. 5422.0)
Furthermore, Australia has a long history of ambiguity in terms of its relations with neighboring countries. As Beeson (2001: 45) has written “Australia has always been a long way from “home” and often painfully conscious of its isolation and potential vulnerability. The sense of being strangers in a strange land, surrounded by peoples of whom they knew little other than that they were different, alien, and possibly hostile, shaped much of Australia’s early international relations. Indeed, it is still possible to trace the continuing influence of such insecurities and uncertainties in contemporary politics.”
Of course, Australia did embark in the 1990s under Prime Minister Paul Keating to seek an “engagement” with Asia and to more closely integrate itself with the rest of the “region”, a policy which is reflected in the country composition of exports illustrated above. Nevertheless, Australia’s “position in Asia” was problematic even before the current Howard government’s tempering of the explicit “engagement” policy. For example, as Asian Pacific Economic Cooperation (APEC) withered as a regional force, Australia’s attempts at greater integration with Southeast Asia through a linking of the Closer Economic Partenership (CEP) and ASEAN Free Trade Area (AFTA) were rebuffed by ASEAN.11 Australia was excluded from the Asia-Europe Meeting (ASEM) meetings and suggestions to expand the current ASEAN+3 to include Australia and New Zealand into an ASEAN+5 formula have come to nought.
While this points to the problematic path of economic integration in the “region” in general, more telling from the point of view of the topic of this paper is the fact that there is no obvious currency in Asia with which Australia might wish to join. An “Asian Currency Unit” is no more than a twinkle in the eye of the Japanese Ministry of Finance.12 Furthermore, the experience in the Asian financial crisis showed that linking with any currencies in the region would be a dangerous proposition. Indeed, it has been argued by two Australian economists that “the international financial markets appeared to make a clear distinction between the Asian currencies that were tumbling in value and the Australian dollar so that “contagion” was largely avoided.” (Meredith and Dyster 1999: 320). The Australian dollar did continue to fall against the US dollar as indicated in Figure 2 above although its decline on a trade-weighted measure was far less dramatic. While the Australian dollar was certainly not unaffected by the Asian crises, it did
11 At the ASEAN meeting held in Thailand in October 2000, a recommendation to move
forward on an AFTA-CER agreement was rejected. See Chong (2001).
12 There have been a number of suggestions by Japanese officials, usually connected with
the Ministry of Finance, about the long-term possibility of an Asian currency unit. See, for example, “Japanese Official Says Common Asia Currency Possible”, Reuters, May 26, 2002.
avoid some of the worst problems. There would be little point in inviting contagion through some form of currency arrangement.
Where Australia has been involved, albeit mainly passively, in monetary union issues has been with respect to New Zealand. Here it is Australia which is the “large neighbor” and the debate over an ANZAC dollar (a new “would-be” common currency of Australi and New Zealand) has resembled that over a NAMU in several important respects. It was New Zealand Prime Minister Helen Clark who ventured in 2000 that a monetary union was “inevitable” given continuing economic integration with Australia (see Dore 2000). It was neoliberal academics in New Zealand who argued that there would be benefits for New Zealand of a common currency (see Grimes and Holmes 2000). It was New Zealand businesses which were polled to gauge their level of support for such a proposition; it turned out to be relatively high (see Grimes and Holmes 2000). And it was in Australia that Finance Minister Peter Costello replied that there would be no common currency but that if New Zealand wished to propose to adopt the Australian dollar then this would be considered (see Henderson 2000). The (limited) ANZAC debate therefore reinforces the importance of taking geography into account in examining monetary union debates and this debate, in important ways, mirrors the Canada–US debate with relative country size again being a key variable.
Differences in political geography, therefore, are important in explaining the very different debates over monetary union which have taken place in Australia and Canada. In Canada, the debate has been whether to forge closer monetary links with its large neighbor, the US There has been no attention paid to this possibility by the US authorities. In Australia, it is New Zealand that is the small neighbor and Australia the large; it is New Zealand that has had the debate over the “inevitable” demise of its currency and Australia which has played the role of aloof regional power. Differences between the debates in Canada and Australia are at least partly explained by the fact that Canada has a large neighbor but Australia a small one.
Added to this are the economic consequences of this political geography. Canada is heavily dependent on the US market and experiences a relatively high level of capital and labor mobility across its borders. Australia has more diversified export destinations and was able to avoid the worst of the financial crises which engulfed many of its Asian neighbors in 1997.
The tyranny of distance in Australia’s case and the tyranny of proximity in Canada’s may therefore provide an important part of the explanation of the differences between them in terms of debates over monetary unions.
This argument has implications for how to view the British case. It is useful, not so much for asking whether Britain will or should join the euro, but for analyzing why Britain has proved more reluctant than many of her European neighbors to embrace monetary union. Howarth (2003) provides a useful starting point in this respect. He identifies a number of different approaches which have been taken to explain what he terms “British reluctance” (2003: 3) to join the euro. The analysis presented here lends credence to some of those approaches. Firstly, the importance of geography adds weight to those analyses of the British case which stress the role of the “politics of semi-detachment” or of being “‘semi- detached” from the continent” (Bulmer 1992 cited in Howarth 2003: 3). This politics is influenced by the broad array of “geographical” factors discussed here and provides a degree of “distance” to the monetary union debate not present in some of the other EU countries. This “distance” is reflected, for example, in strong cultural affinities across the Atlantic as well as across the English Channel and in a lower level of intra-EU trade in services in Britain than in other continental EU members. The EU may constitute a large economic unit but the question of how “close” a neighbor it represents for Britain remains open for debate and finds expression in the “politics of semi-detachment”.
Secondly, the argument of this paper would also lend credence to the importance of considering further the importance of a “geo-strategic” approach to understanding the British case, an approach which Howarth argues “few analyses examine closely” (2003: 10) despite its potential to serve as an “initial analytical tool” (ibid).