Essay on Microeconomic Reform in Australia

Write an essay on Microeconomic reform in Australia including discussion on:

* The meaning of the term ‘Microeconomic reform”.

* Examples of recent microeconomic reform

* Possible effects of microeconomic reform in the Australian economy.

Microeconomic reforms (MER) are the actions to reform particular product and factor markets with the aim of raising the economy”s long term growth rate and increasing its flexibility. It also refers to the set of policy initiatives aimed at prompting structural change in the Australian economy so that resources can flow freely from one use to another. Any barrier to the free flow of resources in response to price signals creates inefficiencies in the economy, adding to cost.

MER has many aims. Firstly it is used to improve resource allocation by maximising output of scarce resources. It is also to encourage efficient operations of markets (adoption of world”s best practice) and encourage efficiencies-allocative (limited resources allocated to the most uses for its output to be maximised), technical (aims to produce at the scale where costs per unit are the lowest) and dynamic ( how firms achieve and maintain efficiency over time). Micro reforms refer to individual sectors within the economy.

They work to improve inputs and outputs, and are tools of control in conjunction with macro policies (fiscal and monetary). MER works on supply side economics to improve productivity. This is done through govt. deregulation which improves efficiency, lowers tariffs, increases international competitiveness and through the reforms of the GBEs which lowers costs and increases competition (Hilmer report).

In recent years there have been many examples of developments in MER. The last fifteen years of MER has been the crucial factor in improvements of the status of the economy on Australia especially the return to low inflation. In the product markets, MER has been reducing protection, and improving the competition policy through the introduction of the Trade Practices act (1974) and the Hilmer report in 1993, as a decrease in regulations mean increased competition. This led to privatisation and corporatisation of GBEs and deregulation.

In Factor markets, such as the capital markets, deregulation occurred from the early 80s which included the deregulation of financial markets and float of the dollar (“83). Labour markets also went under some structural changes with the decentralisation of wage-fixing with the introduction of enterprise bargaining instead of arbitration and the end of National Wage cases in the early 90s as well as restructuring of awards. Under the Howard govt. the introduction of the WRA has brought on AWAs (individual contracts), simplification of awards and measures to reduce union power.

Some deregulation has occurred through some reduction of the role of the IRC in wage fixing and industrial relations. In the public sector, the most important MER of the decade are the corporatisation and privatisation of former GBEs such as the Commonwealth Bank of Australia, Qantas, Telstra (partial)(end of monopoly in 1991 and full competition in 1997) and corporatisation of Australia Post.

Taxation has gone under some changes with the introduction of capital gains tax, fringe benefits tax and the possible introduction of a GST and tax indexation (linking tax brackets to inflation rates so that individuals would not be under the influence of bracket creep due to inflation. Also income tax cuts-from 60% to 47%-provide incentives to work and increase output. Welfare has also been under the influence of MERs through tightening of old age pensions and benefits through the incomes and assets test as well as the introduction of the ‘Work for the Dole” scheme.

The main reason for MER is to improve the over all performance of economic activity. MER must help to achieve govt. objectives as the failure of macroeconomic policy means it cannot do the job alone. It attempts to override and supplement macro by improving dynamism of productivity, efficiency and raising national income. It aims to improve the ability to absorb displaced workers and make the economy less inflation prone. Another reason for MER is to ensure efficiency for sustainable economic growth and improved living standards.

The three main types of efficiency are allocative, technical and dynamic and are prerequisites for possible economic growth. Allocative efficiency is when prices reflect costs. It is the production of combination of goods and services which yields maximum efficiency. Technical efficiency involves the production of g+s at minimum average costs. This is done through the acquisition of capital and the right number of labour employed to produce at maximum efficiency without the Law of Diminishing returns kicking in, or excessive RULC.

Another reason for MER is to improve competition. It puts pressure on firms to increase technical efficiency and to pass on the benefits of the improved technical efficiency in the form of lower prices to consumers. In turn, competition will improve allocative efficiency, which means resources will be allocated only to the areas which reflect consumer demand and push price down to long run average costs.

The pattern is like a set of dominos, reduced allocation of resources will increase competition which puts pressure to lower prices and improve resource allocation, which in turn will increase national income and living standards. A proof of its success is the dramatic decrease of inflation in Australia from the 70s (10%) to the 80s (8%) to the 90s (<2.5%).

MER has many possible effects in the Australian economy, both beneficial and costing. The main advantages lie in the fact that MER increases national income by increasing national productivity and increases competition in product and factor markets. It allows easier macro management by increased competition means that less regulation make firms more flexible and dynamic and capable to respond to unfavorable shocks.

More competition is encouraged by deregulation, lowering of tariffs to expose local firms to competition and deregulation of the labour market so that it is free to move to where it is most productive. The promotion of competition will hold down prices, and excessive wage rises an therefore inflation (between the RBA target of 2%-3%- currently at 1.6%). In the long run the level of real GDP will rise, more wants are being satisfied and living standards will rise.

However, as always there are also costs. These include short term costs, as there is a time delay between the implementation of the short term costs for the long term (higher national income and full employment ) to kick in. Income distribution also is a victim of MER (labour market deregulation) as it favorises income distribution in favour of the rich.

The answer is to supplement the distribution with re-distributive measures in the budget. MER can also conflict with other policies such a macro policies, for example in cases where short term rises in unemployment add to the budget deficit. Many say that the aim of MER is to rise competition and therefore reduce the CAD but this cant happen. This is because the increase in national income unfortunately doesn”t increase the level of national savings but of spending because of higher wages and purchasing power. Therefore the Exchange rate will appreciate and the CAD will tend to worsen.