Transcript Microeconomic Reforms

Revision Lecture:
Microeconomic Reform (MER)
A guide to the implementation of
MER policies in Australia.
Lecture Overview
 Definition
 Tools
 Recent
Case Studies
 Strengths
 Weaknesses
Definition
 “…any
government policy action
encouraging a firm or industry to
participate in structural reform….”
 “Reforms act on specific parts or
aspects of our economy.”
 “…a wide range of supply-side
efficiency measures designed to
improve…particular industries…”
Definition
 The
main points of all of the definitions
lead to the same key facts:
 Our
aim is on the supply side
 We focus on one particular part of the
economy
 Many tools are available to assist
Tools

Deregulation
 Privatisation
 Corporatisation
 Tariff Reform
 Labour Market
Reform
 Competition Policy
 Supervisory Bodies
Deregulation
 This
is the process of removing
government “red tape”.
 That is, bureaucratic barriers to entry in
a particular market.
 Industries are deregulated to encourage
participation, increase competition and
force efficiency.
Deregulation - 1
 In
October 1990 the airline industry was
deregulated.
 The main change was to relax barriers
to entry in the domestic passenger
carrying market.
 By September 1994 prices had fallen by
just over 23% in real terms.
Deregulation - 2
 In
1993 the long distance telephone
market was deregulated in Australia.
 In under a year, the results included just
one new carrier (Optus), however
already prices had fallen by 20%.
Deregulation - 3

In mid 1989 the
NSW government
deregulated the
market for eggs.
 Almost immediately
prices fell by 17%.
Privatisation
 This
is the sale of assets which are
publicly owned into the hands of private
investors.
 Once again, the goal is to improve the
efficiency of the firms by forcing them to
be answerable to shareholders.
Privatisation - 1
In the early 1990’s shares in all 400 of
Poland’s GBEs were placed in the hands of a
giant firm.
 Ownership of this firm was given to the entire
adult population.
 The results were immediate:




Inflation fell from 600% in 1993 to 30% the next
year
Real GDP fell in 1989 and 1990 (over 20%!), by
1992 it was growing again
Unemployment, however, climbed to 17%
Privatisation - 2
 The
CBA was sold off in two stages, in
1991 and 1996.
 Since then the share price has
multiplied ten-fold, and the dividends
have continued to rise.
Privatisation - 3
 Telstra
was privatised in 1996 and 1997.
 Since then they have gone from 76,990
employees to only 44,977
 Their market share has dropped from
90% to 70%
 However, the profit per employee has
increase from $21,041 to $81,375
Corporatisation
 This
is the process of forcing GBEs to
face the same market as other
businesses.
 That is, they must aim to make a profit
just as if they were owned by
shareholders.
 Also, they do not receive special loans
or other government benefits.
Corporatisation - 1
 The
best example of this process is
Australia Post.
 Up until November 1993, regulations
prohibited anyone from carrying a letter
for less than $4.50.
 At that time the price was dropped to
$1.80, and letters over 250g could be
carried by anyone at any price.
Corporatisation - 1



The results? In August
1994 Australia Post
announced that the
price of a standard
letter would be fixed at
45c.
It remained there until
2002 – a fall in price of
around 30% in real
terms.
At the same time profits
paid to the Govt have
increased by 120%!
Tariff Reform
 Tariff
reform was on the agenda as early
as 1973, but by 1988 it was a major
government focus.
 Although the goals are repeatedly put
back, the main focus is to eventually
eliminate tariffs by 2010 as per our
APEC agreement.
Tariff Reform
 The
major exceptions to these reforms
have been the motor vehicle industry
and the TCF industry.
 These areas maintain high protection,
although they will not be able to rely on
this forever….
Tariff Reform
 In
1998/9 industry assistance was
estimated to be costing Australian
consumers $9 billion per year.
 By 2010 these costs should be gone.
 The real question is, at what cost…?
 (See earlier PowerPoint for more
detailed discussion of this area.)
Labour Market Reform
 In
the early 1990’s Australia’s labour
market moved towards enterprise
bargaining.
 By 1996 this was enshrined in the
Workplace Relations Act.
 The main attempt was to make wage
negotiations decentralised, to lower the
influence of the unions.
Labour Market Reform

At this stage it is
difficult to judge the
impact of this policy
with official
statistics.
 There are still many
critics of the
process.
Labour Market Reform - Pros

Decentralised negotiations are more flexible.
 Working towards agreement leads to
cooperation, and therefore fewer strikes.
 Efficiency is vital for achieving
macroeconomic goals.
 Overseas markets have all gone in a similar
direction.
 Workers and managers are held accountable
for their actions.
Labour Market Reform - Cons

Our trading partners have even more flexible
arrangements – do our reforms go far
enough?
 Only 35% of people have taken up the
chance to negotiate.
 Minimum wages are still used.
 Better negotiators get better pay, which leads
to inequality.
 How can the average worker measure their
own productivity objectively?
Competition Policy
 The
Hilmer Report in 1993 suggested
that the Australian economy would
benefit from a higher degree of
competition.
 Accordingly in 1995 National
Competition Policy was adopted by all
Australian states.
Competition Policy
 At
the time, it was estimated that this
one change would add 5% to Australia’s
GDP.
 The federal government agreed to
reward the state governments with $16
billion in grants for successful
implementation of the legislation.
 The goals of the new laws were….
Competition Policy
 1.
Review anti-competitive legislation
(eg licensing arrangements, shop hours
etc).
 2. Allow private firms to compete with
GBEs.
 3. Allow for access to GBE
infrastructure.
 4. Reform all providers of infrastructure
and utilities.
Supervisory Bodies


With ongoing
deregulation, certain
industries were seen to
need supervision.
This is because if an
important utility or
infrastructure provider
“goes under” it affects
all parts of the
economy.
Supervisory Bodies
 The
most obvious examples are APRA
and ASIC.
 These two groups oversee the health of
our financial sector.
 With the phasing out of PAR
requirements, it became important that
these institutions understood their
importance.
Strengths of MER

When examining the
strengths and
weaknesses of any
policy, it is important
to be able to relate
the policy to the
goals of the
government.
Strengths of MER
 Domestic
 Cost
strengths:
inflation has been minimised (demand
inflation has been held in check by macro
policies)
 Economic growth has been maintained,
despite uncertain global conditions
 Unemployment, overall, has continued to
fall DESPITE the use of MERs
Strengths of MER
 External
 Labour
strengths:
market reforms have allowed for
our wages to grow at a slower rate than
those of our trading partners
 Structural changes in the transport industry
have allowed for more efficient exporting
 Telecommunication reforms have cut costs
 Financial deregulation has allowed for
cheaper borrowing
Strengths of MER
 And
more…
 National
savings have been encouraged,
lowering our reliance on overseas
borrowing
 Tariff cuts and new programs have lowered
costs of production for domestic firms
(particularly exporting firms!)
Weaknesses of MER
 Domestic
 Long
weaknesses:
term unemployment has increased,
due in part to structural unemployment (eg
the public sector lost 135,000 staff
members between 1995 and 1998)
 Like all policies, the “ideal goals” or MER
are hampered by political constraints, time
lags and conflict with other goals
Weaknesses of MER
 External
 Lower
weaknesses:
tariffs can lead to a worsening of the
CAD (ie local production is discouraged,
importing is encouraged)
 Improved productivity can be undone by
overseas policies (eg the assistance given
to farmers in the USA)