A late addition to the Dollarization thread. There have been a number of suggestions recently that New Zealand should adopt Australia's or the US dollar. The government is apparently looking at it seriously. There is a Treasury working paper on it, called "Economic Integration and Monetary Union", available at http://www.treasury.govt.nz/workingpapers As well as containing some references that might be of use (not being an economist I'm not sure), it gives a fascinating insight into the dehumanised view of a New Zealand Treasury official. I give a couple of quotes below, but here is how he deals with the likelihood of depopulation of New Zealand as it loses higher paid jobs to Sydney and Melbourne: (Footnote) 28 The distinction between residents and citizens is important. Even if people remaining in New Zealand were worse off after closer integration, it would not necessarily be a disadvantage to all New Zealanders, as some will migrate to take advantage of the higher wages in the benefiting regions. The author also fails to analyse New Zealand previous experience of a fixed currency: until about 1932, New Zealand's currency was fixed to the Pound Sterling. Bill Rosenberg From: TREASURY WORKING PAPER 99/6 Economic Integration and Monetary Union Andrew Coleman p.14-15 In the last decade, a large literature has emerged analysing the effects of increased economic integration on the spatial distribution of employment and output. This literature has demonstrated that even if a country promotes greater international integration to reduce home bias, increase trade, and increase specialisation, the benefits of integration will not necessarily flow to residents remaining in the country. Rather, a region can decline following increased integration with another region either because of a migration of resources from one region to another, or because of the detrimental effect of increased competition on local firms.26 For this reason, while policy makers have generally viewed measures taken to enhance integration as a "good thing", some caveats should be noted. Most of the literature examining this issue has been based upon models of industries with increasing returns to scale operating under conditions of imperfect competition. These models suggest that such industries will limit production to a few locations, because of economies of scale, and that these locations will be in regions with the best market access such as large cities. Wages in these regions will be high, and these regions will become net exporters of goods subject to increasing returns. When transaction costs fall, new and existing firms may choose a new location. There are two countervailing forces affecting where firms choose to locate. As transactions costs fall from high levels to intermediate levels, the benefits of increasing returns to scale dominate, leading to a shift to regions with better market access (the core). As they fall further, these costs cease to matter as much and the disadvantages of high wages in the centre offset the returns to scale and some firms relocate back to the periphery. Consequently, at some stages of a decline in transaction costs it is possible that the periphery region will lose high paying jobs to the core region. The evidence on these theories is mixed. Krugman (1993) argues that the lower transaction costs and higher labour mobility in the USA compared to Europe is reflected in the greater regional concentration and specialisation of manufacturing industries. Other authors analysing the manufacturing and agriculture sectors have supported this observation, but it does not appear to be true for all industries. Labour market mobility appears to be a crucial factor, because if people are mobile they are more likely to migrate out of a region with low employment than companies and jobs are likely to migrate in, speeding up forces favouring large agglomerations. The New Zealand economy is more integrated with the Australian economy than any other, and it is reasonable to consider cities such as Sydney or Melbourne as the local "core", and smaller cities such as Brisbane, Auckland or New Plymouth as the periphery, particularly as international evidence suggests that large cities tend to be more productive than small cities (Ciccone and Hall, 1996). 27 Decreases in transactions costs already cause a relocation of economic activity around New Zealand, and between New Zealand and the rest of the world, and there is no reason to believe that increasing economic integration further would be any different. Some New Zealand industries would move overseas, and some overseas industries would move to New Zealand. In general, policy makers in New Zealand have proceeded as if falling transaction costs and lower barriers to trade will be good for New Zealand residents, not bad.28 29 In the absence of research demonstrating that closer integration will be detrimental to New Zealand, the assumption that closer integration is beneficial to New Zealand has been maintained in this paper. Footnote 28 states: 28 The distinction between residents and citizens is important. Even if people remaining in New Zealand were worse off after closer integration, it would not necessarily be a disadvantage to all New Zealanders, as some will migrate to take advantage of the higher wages in the benefiting regions. ---- The following paragraph from the final "discussion and summary" (p.30) seems to me to be an unusually frank admission that current policies have been a failure. New Zealand is the smallest OECD country to have a fully independent monetary policy. To continue to justify this stance on an economic basis, there should be evidence that monetary independence has been beneficial -- or, at least, of little cost. Over the last eight years, New Zealand has enjoyed very low rates of inflation, although its record is not dissimilar to that of most other OECD countries. Despite this low inflation, however, real short term interest rates have been higher than in our main trading partners; the New Zealand economy has not been noticeably more stable than other OECD economies; and trade volumes have grown only slowly despite having a trade share substantially below that of almost all other small OECD economies. While the counterfactual is not available, there should be no presumption from these outcomes that monetary independence should be the natural option for the New Zealand economy.