Should Western Australia Secede?

 Westralia’s law. Westralia’s will; Our loyalty, ‘England and Empire’ still.”

Some West Australians or Western Australians as the rest of Australia calls them have always been a bit reluctant about being a part of the Commonwealth of Australia. WA was so late into the Commonwealth that the preamble to the Constitution doesn't actually mention it:

WHEREAS the people of New South Wales, Victoria, South Australia, Queensland, and Tasmania, humbly relying on the blessing of Almighty God, have agreed to unite in one indissoluble Federal Commonwealth under the Crown of the United Kingdom of Great Britain and Ireland, and under the Constitution hereby established:

Western Australians approved the draft constitution in a referendum held on 31 July 1900. As Thomas Musgrave notes:

A special provision - section 95 - had been inserted into the Constitution in order to address Western Australia’s concern over the abolition of the inter-colonial tariff. Section 95 permitted Western Australia, on condition that it entered the Federation as ‘an original State’, to maintain its inter-colonial tariff within the Federation for a period of five years, in a formula which decreased the tariff by twenty percent each successive year. A further economic inducement came in the promise of a transcontinental railway linking Western Australia to the eastern States.

Another major factor, however, was the threat of an internal secessionist movement based in the gold fields. This secessionist movement was not hostile to the other Eastern colonies, but to the isolationist views of established Western Australians. The WA gold rush led to a massive increase in the colony's population from 47,000 in 1890 to 179,000 in 1900. Depressed economic conditions in the rest of the country increased the attraction of going to WA. A phenomenon that is not being matched during the current boom, mainly because, despite the doomsayers, the rest of Australia is still doing relatively well as we will see below. The new settlers changed the political outlook of the state, challenging the isolationist views of the WA establishment. As Musgrave argues:

The Western Australian delegates who attended the constitutional conventions of 1891 and 1897-98 were drawn for the most part from the traditional elements of Western Australian society. Their approach to the notion of federation reflected the isolationist sentiments of their constituency. But these were not the sentiments of the goldrush settlers. When it became apparent that Western Australia might not join the proposed federation, the settlers formed the Eastern Goldfields Reform League. The Reform League began to agitate vigorously for the secession of the goldfields region from Western Australia and its integration into the Australian Federation. At this point the British Colonial Secretary, Joseph Chamberlain, intervened to pressure Western Australia into joining the Federation. On 27 April 1900, Chamberlain sent the acting Governor of Western Australia a telegram alluding to the secessionist movement in the goldfields and advising the Governor that in these circumstances it would be in the best interests of the colony to join the Federation. The loss of the goldfields would have been disastrous to Western Australia, both from an economic and a political viewpoint. Therefore, a Bill was hastily introduced into the Parliament of Western Australia providing for a referendum on the draft constitution.

So in the beginning, it was the miners who wanted to be a part of the Commonwealth and the 1900 equivalent of WA's cafe latte set that didn't want it (perhaps we could call them the sherry sipping set).

West Australians again tried to secede in 1933, when two-thirds of the electorate voted yes to the question:

Are you in favour of the State of Western Australia withdrawing from the Federal Commonwealth established under the Commonwealth of Australia Constitution Act (Imperial)?

 At the same referendum a majority voted no to the second question:

Are you in favour of a Convention of Representatives of equal number from each of the Australian states being summoned for the purpose of proposing such alterations in the Constitution of the Commonwealth as may appear to such Convention to be necessary?

Ironically, the party pushing for secession - the Nationalists - lost the election to the party opposing it - the Labor Party. Nevertheless, the Labor government sent a delegation to London in 1935, but the mission failed because a Select Committee of the British House of Commons argued that only the Commonwealth as a whole could decide on the issue of secession. According to Musgrave the Committee concluded, that

the petition was not receivable because Western Australia, as a State, was ‘not concerned with the subject-matter of the proposed legislation’ and because the Imperial Parliament did not have jurisdiction to enact the request ‘except upon the definite request of the Commonwealth of Australia conveying the clearly expressed wishes of the Australian people as a whole’.

In other words, by joining the Commonwealth, Western Australians had given up the right to make that decision unilaterally.

As Australia entered WWII the issue of secession faded into the background, but it has periodically returned as key West Australian players have periodically railed against Federation.

Mining magnate, Lang Hancock, the father of the world's richest woman Gina Rinehart founded the Westralian Secession Movement, but like many wealthy people in recent years perhaps thought his wealth would lead necessarily to popularity. (Australia has a proud history of wealthy people thinking that success in business should lead them to success in politics or the ownership of sporting clubs).

Ironically, given the current WA Premier's recent comments about his states closer relationship with Asia than with the rest of the country, Hancock was opposed to developing closer resource ties to China. In "A Condensed Case for Secession", Hancock 'wrote':

On May 28, 1973, a report appeared in one of our national mining journals regarding Dr Cairn’s visit to Red China. This indicated that the good doctor was giving some thought to inviting Chinese geologists to the Pilbara for prospecting expeditions. 

By what divine right has either of these two members of our Government the authority to hand out Australian lands, or to permit them access to our minerals? 

Such high handed acts by the Federal Government should not be tolerated by the people of WA. Who is going to protect them from such wild, irrational policies? 

Their first step should be to support and join the Westralian Secessionists, who intend “fielding” contestants for the Senate in 1977. This movement has no loyalty to any political party and has its State as the first and only consideration. 

How things change, while Hancock could accuse the Whitlam Labor government of betraying Australia by providing for Chinese investment in Australia, current WA politicians rail against 'racist' Easterners for not allowing Chinese state-owned enterprises freer reign to invest in WA mining infrastructure and development.

Currently some West Australians are feeling that the rest of Australia - "the East" - is dining out on their hard graft in producing Australia's export wealth. See here and here and here.And as we will see below there is some truth to this assertion.

It's not the first time that West Australia has come to Australia's rescue. As I wrote in The Vulnerable Country:

In the period from 1900 to 1914, increasing demand for Australia’s exports underpinned economic growth, the repayment of foreign debt and rising living standards. The recovery was not dependent on foreign investment and immigration, rather it was bolstered by gold discoveries in Coolgardie and Kalgoorlie, and Western Australian development generally

I imagine that some in WA would be a little uncomfortable with the current secessionist rhetoric, but others would support it wholeheartedly. (I can't find a properly conducted recent opinion poll on the issue and Newspoll assures me that they haven't done one, although they did offer to do one for me for a couple of grand.)

Supporters, however, should bear in mind that whilst their state is currently making sizeable contributions to the Commonwealth, over the longer-term this may not be the case. Western Australia might actually need the rest of Australia in the future to cover its shortcomings if the mining sector falters. Whilst a boom in mining is undoubtedly a good thing in a state where mining makes up 33 per cent of Gross State Product, it also means that a slump in mining would disproportionately affect the West.

It wasn't long ago, i.e. the 1980s and 1990s, that most policy-makers and economic commentators thought that Australia's future as a resource exporter was a recipe for becoming a third world economy. While that was obviously wrong for now, it may not be the case in 10, 20 or 30 years time. It's possible that as China's and India's resource intensive period of growth changes into the traditional pattern of intensive services growth that Western Australia will be more reliant on the Eastern states and the wonders of horizontal fiscal equity.

It's also possible that over the shorter term that growth stumbles in China and India will bring resource prices crashing or that the vast number of gas discoveries will actually lead to a gas glut and eventually lower prices. Note that it's possible not a certainty. We could still have a Boom Mark 3 as well! Indeed Japan's demands for gas will increase, but they are actively seeking alternative sources of supply, most importantly an end to the ban of gas exports from the United States. The difference between the US price and the world price for gas is enormous and a lifting of the ban would encourage even more fracking in the United States.

If one studies the history of capitalism, then even commodity super cycles like the current one come to an end. Major exports that many people believe will always be most important generally do not continue to be most important forever. Remember the fate wool, for so long Australia's major exporter and only Australia's 20th largest export in 2010-11.  Still there's some money to be made in the meantime.

Our analysis of the WA case for secession will be improved by not only speculating on the future, but by considering the recent past performance of  the Australian states.

An excellent article from the March Reserve Bank Bulletin analyses the recent economic performance of the states. Kathryn Davis, Kevin Lane and David Orsmond argue:

Spending has grown strongly in the resource-rich states in recent years, primarily reflecting very high levels of investment in the mining industry. However, the pace of growth in state production and developments in other economic indicators have been more uniform across the states. This reflects the high import content of mining investment as well as the flow-through of spending and income from the resource-rich states to the other states.

One of the ways to measure state economic performance is to analyse state final demand, which measures "the growth in consumption and investment spending by the household, business and government sectors combined"

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Western Australia and Queensland have clearly outperformed the rest of Australia, but note that they also did considerably worse during the downturn as demand from China temporarily collapsed. While this might not worry West Australians (or Queenslanders) at the moment, it might in the future if the terms of trade collapses as it has done after all booms in Australian history (see here for explanation of the terms of trade)

Remember that this boom is different from many other booms in Australian history because it's both an investment and terms of trade (price) boom. This means that large amounts of capital have been invested in the mining sector at the same time as there have been massive increases in the prices of our major resource exports. 

The figures for iron ore are truly astounding, especially given the fact that they had been flat for a long period of time before 2003. The increase in demand for iron ore during the rise of Japan from the 1960s was not matched by the massive increases in prices that have occurred since 2003. Coal prices were also flat for a long period before 2004.

 Iron Ore Prices 1982-2012 USD

Source: Index Mundi

Source: ABARES

What has happened in recent years is a massive expansion of supply to match the increased demand for all kinds of resources. Simple supply and demand analysis would suggest to us that if supply increases at a faster rate than demand then prices will fall. And if supply increases significantly and demand falls significantly as well, then prices will fall, well, significantly. But we can hope that supply increases will be matched by increasing demand as China's Communist Party successfully manages to keep investing in infrastructure and as demand for Chinese exports continues to increase from revitalised US and European economies or that the CCP engineers a successful transition to a more domestically oriented economy or that India keeps growing rapidly or ... You get the picture. Lots could go wrong. As ABARES predicts (in the graph above) prices for steel making raw materials (Australia's two biggest exports) are likely to decrease over coming years.

Getting back to our assessment of the states, Davis, Lane and Orsmond point out that investment spending has been a large source of growth in the resource states: "In 2011, business investment in the resource-rich states was exceptionally strong, increasing by 28 per cent in Western Australia and 58 per cent in Queensland."

This accounted for a large percentage of demand growth. Much of this investment spending, however, was used to purchase imports and "part of the mining investment (and operational) spending undertaken in Western Australia and Queensland is met by production in other states, not just for inputs such as parts but also for a range of professional services, such as accounting and consulting services. As a consequence, up until now at least, the differences in the growth of production across states has been narrower than the differences in the growth of total spending."

Resource investment, particularly gas investment is particularly import intensive as the chart below shows.

Consumption growth has been strongest in WA, partly because of increased investment, partly because of increased incomes and partly because of increases in WA's population. The overseas migration rate could be about to get even larger with new projects demanding foreign labour to compensate for the relatively small amounts of interstate migration to WA. It is worth noting the massive interstate migration to Queensland in the 2000s has also slowed considerably over the last few years. I'm also intrigued by the considerable increase in interstate migration to Tasmania in the first half of the 2000s.

The authors note that the differences in state production have been less than many would imagine.

Gross state product (GSP) measures the level of state production by adjusting spending for both interstate and overseas trade. However, GSP is published only annually; the most recent data are for 2010/11, which is before the surge in mining investment in the second half of 2011. Nevertheless, the GSP data indicate that while production in Western Australia and Queensland has grown faster than in the other states since the onset of the resources boom in the mid 2000s, the differences have narrowed markedly in recent years. 

The authors also provide some excellent tables at the end of the article on the relative size of the states, growth rates and industry shares. 

In terms of state growth rates WA and QLD are the clear leaders with SA and Tasmania the clear laggards, although the differences in GSP per capita are less significant. 

The big anomaly in terms of industry shares is of course the 33 per cent of WA production accounted for by mining, compared to 9 per cent for Australia. Construction has also been more important for WA than the other states and Australia as a whole. Financial and business services dominate in NSW and Victoria.

In terms of exports, WA clearly dominates. According to DFAT, WA accounted for 40 per cent of exports in 2010-11, followed by QLD and NSW with 19.5 and 19.1 per cent respectively.

NSW dominated imports in 2010-11 accounting for 38 per cent, followed by Victoria with 26 per cent. WA ran a clear trade surplus accounting for only 12.8 per cent of imports.

While WA has been increasing its dominance since 2005-06,  it only took over as the largest state exporter in 2002-03. (See here on p. 4) Its lead has increased markedly, however, during Booms Mark 1 and 2, but its possible that with a slowing or end to the boom that it will be drawn back to the pack in coming years.

So WA has some significant evidence to back its case that it carries the rest of the country, with the exception perhaps of Queensland, but the rest of the East is also not doing as badly as some in WA seem to think (see here also). Remember that exports only accounted  for 21.2 per cent of GDP in 2011, down from 22.7 in 2009.

So in sum do I think WA should secede from the rest of Australia? The answer is no, but I would say that wouldn't I, given that I am after all from 'the East' - a South Australian living in Queensland (although as a Queenslander I am a contributor to national wealth and as an academic I am involved in Australia's third biggest export.)

All the discussion is probably moot anyway because a change to the Constitution requires a majority of Australian voters and a majority of voters in a majority of states. The East is unlikely to let the West go, but the Commonwealth might have to do a better job of maintaining good relations with the WA government and avoid cutting by too much the amount of WA's own GST revenue that it gives back to West Australians. It might also have to re-consider the issue of state mining royalties.