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10.

Microeconomic Reform
Supply Side Economics
Our study of macroeconomics has shown that policies that control the
level of aggregate demand (monetary & fiscal policy) can be used to
influence the level of economic activity. The main aim of these demand
management policies is to reduce fluctuations in the trade cycle. Such
policies in the 70s and !0s in "ustralia were not completely effective.
The economy e#perienced periodic recessions and unemployment
remained high in boom times. Stagflation remained a serious problem and
periods of strong economic growth coincided with $urrent "ccount and
balance of payments problems.
This ineffectiveness of macroeconomic management led some economists
to switch their attention from demand management policies to policies
that improve supply. %ssentially their argument was that if we could
improve the responsiveness of supply to demand changes& we could avoid
the inflationary conse'uences of increases in aggregate demand. Supply
side economics sees aggregate supply as the dominant variable in the
economy and focuses on policies to improve the efficiency and operation
of the economy. %fficiency and productivity are seen as (ey ob)ectives
that will solve many of "ustralias problems. *n "ustralia these policies
have become (nown as microeconomic reform.
"n inflationary gap occurs because aggregate demand e#ceeds aggregate
supply at the full employment level of income. This often results in
demand inflation + too much money chasing too few goods. Thus far the
only solution to this has been to reduce the level of aggregate demand. "
more permanent solution is to wor( on the supply side to boost the
capacity of the economy and increase the level of aggregate supply.
,icroeconomic reform policies aim to increase efficiency and
productivity such that aggregate supply can increase. See the following
diagram.
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Microeconomic Reform
Definition
,icroeconomic reform includes all action ta(en by government to
improve resource allocation& ma#imise the output from scarce resources
and improve the efficiency of "ustralian industry. ,icroeconomic reform
policies often aim to ma(e mar(ets more competitive by removing
structural impediments and government imposed barriers to entry.
Aims of Microeconomic Reform
%fficiency & .le#ibility/ The overall aim of microeconomic reform is
to encourage the efficient operation of mar(ets& to increase
productivity and to improve fle#ibility of industry to change.
%conomic 0rowth/ ,icroeconomic reform will allow "ustralia to
improve its rate of economic growth by increasing productivity &
efficiency.
"llocative %fficiency/ "llocative efficiency can be achieved by
ensuring that resources flow to those industries that have the capacity
to pay as a result of offering the best value to consumers. This means
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that consumer needs are satisfied and resources are used in a way that
ma#imises utility.
Structural %fficiency/ "llocative efficiency also occurs when
inefficient producers are forced to leave the industry and resources are
allocated to efficient producers who are internationally competitive.
Technical %fficiency/ Technical efficiency occurs when firms use
resources efficiently. .irms that use the least amount of resources
achieve technical efficiency. This will occur in a competitive mar(et
made more efficient by microeconomic reform.
2ynamic %fficiency/ 2ynamic efficiency occurs when firms introduce
new innovations and product improvements. This is more li(ely to
occur in a more competitive environment. ,%3 policies aim to
promote competition in all industries.
4or(able $ompetition/ The government aims to achieve wor(able
competition which broadly means the right level of competition
appropriate for the industry. 5erfect competition is not achievable in
all industries and governments have to be realistic about the level of
competition that is possible. 4or(able competition also means to
remove unfair trading practices li(e monopolisation& collusion and
mar(et sharing.
%#ternal 6alance/ ,icroeconomic reform will help solve problems
with e#ternal balance li(e foreign debt and the $urrent "ccount
2eficit. 6asically "ustralia needs to increase e#port incomes and
reduce its dependence on foreign capital. ,%3 policies have made
improvements in this regard.
Microeconomic Reform in Australia
The .ederal 0overnment has si# priorities for microeconomic reform/
-. 7abour mar(et reform
1. 2eregulation
8. 9ational competition policy
:. *ndustry assistance
;. 3eform of public enterprises
<. Ta#ation reform
1. Labour Market Reform
Reasons for Labour Market Intervention
The .ederal 0overnment has decided to intervene in the "ustralian labour
mar(et for several reasons/
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,acroeconomic Stability/ %conomic goals li(e low unemployment
and inflation can only be achieved if wages growth is controlled. =igh
wage growth will cause cost inflation via the wage price spiral and
encourage firms to substitute capital for labour causing
unemployment. =igh real wages growth is though to be responsible
for periods of stagflation in "ustralia.
5roductivity & *nternational $ompetitiveness/ 7abour costs are si#ty
percent of business costs and the most important determinant of the
cost of production. "ustralia has long been regarded as a high wage
cost country and this has placed "ustralian manufacturers and
e#porters at a cost disadvantage to foreign producers.
*naccurate 5rice Signals/ 4age fi#ing systems that changed wage
relativities in favor of industries with strong Trade >nions were
distorting price signals in the labour mar(et and preventing the flow of
labour to industries of high consumer demand. This was reducing the
effectiveness of the price mechanism.
istory of !a"e Determination in Australia
=istorically both State and .ederal 0overnments in "ustralia have played
an important role in wage determination through independent industrial
courts and tribunals. Some of the (ey components of this wage
determination system which was called *ncomes 5olicy have included/
"wards/ "wards are legal documents that set out the minimum
wor(ing conditions for each occupation. 4hen an industrial court
ma(es an award for wor(ing conditions the decision was legally
binding on all employers who employed wor(ers for that particular
occupation covered by the award. "wards became a safety net for all
wor(ers and ensured e'uity in wor(ing conditions at various
wor(places. %ach award contained a long list of award conditions
which all employers had to provide.
$entralised 4age 2etermination/ " central body called the "ustralian
*ndustrial 3elations $ommission ("*3$) used to determine wage
outcomes in all .ederal awards. The $ommission was independent
however it was re'uired to adhere to 0overnment guidelines which
were called *ncomes 5olicy.
$ollective 6argaining/ Trade >nions were able to negotiate with
employers on behalf of union employee members and represent
members in "*3$ procedures. This gave Trade >nions the power to
influence wor(ing conditions in an industry.
5roductivity *ncreases/ 4age increases recommended by the .ederal
0overnment in their *ncomes 5olicy were based on increases in labour
productivity. *t was generally thought that wage increases would be
:
non inflationary if employers had increased output to balance against
increased costs.
Recent Reforms to Incomes #olicy
*t was generally agreed that centralised wage fi#ing was creating
numerous problems for the "ustralian economy. 4ages and wor(ing
conditions were not fle#ible and higher wages granted by the "*3$
reduced the international competitiveness of many firms. *t was argued
that wage outcomes needed to match the capacity of industry to pay and
this varied across various firms& industries and sectors. "ustralia has since
adopted a more fle#ible decentralised or enterprise based system of wage
determination. The main features of this system include/
%nterprise "greements/ These are fle#ible wor(place agreements
called %nterprise "greements& which allow employers to negotiate
directly with the employees of one wor(place. Such agreements can
be registered or certified with the relevant authority. 4here such
agreements are negotiated with a group of employees they are called
?$ollective "greements@. 6y allowing wages to be determined at
enterprise level it is assumed that wage outcomes will not e#ceed the
capacity of industry to pay and will not ma(e firms unprofitable.
7abour 5roductivity/ 6y allowing wages to be determined by
negotiations between employers and employees it is e#pected that
employers will want productivity improvements before they pay wage
increases above inflation. *n this way the lin( between wages and
labour productivity will be maintained.
"ustralian 4or(place "greements/ These are individual contracts
that are negotiated between an employee and an employer. This
enables greater fle#ibility and the possibility of productivity tradeoffs
and allows employers to ad)ust pay and conditions to the
circumstances of the wor(place.
"ward Simplification/ "wards have been greatly simplified which
reduces cost to business. The number of award conditions has been
reduced to a basic minimum. "wards still e#ist in "ustralia but under
the recent changes they contain only five conditions/
,inimum wage.
" ma#imum of 8! ordinary hours of wor( each wee(.
.our wee(s of paid annual leave.
-0 days of paid personalAcarers leave.
;1 wee(s of unpaid parental leave.
;
$%e &urrent Industrial Relations 'rame(ork
The institutions that currently ma(e up the "ustralian *ndustrial 3elations
System include/
1. Australian Industrial Relations &ommission )AIR&*
The "ustralian *ndustrial 3elations $ommission is the main government
organisation that settles industrial disputes over wages and wor(ing
conditions. The "*3$ acts li(e an industrial court and hears evidence
from trade unions and employers and their associations before it ma(es
decisions on industrial disputes. State governments also have similar
organisations. *n 9S4 we have the 9S4 *ndustrial $ommission. The
recent changes to industrial relations allow disputing parties to attend
private mediation services.
The "*3$ and its State e'uivalents solve industrial disputes in two ways.
$onciliation occurs when an independent person facilitates an agreement
between the disputing parties. The conciliator is usually a )udge in the
"*3$ or an e#perienced mediator. The parties are advised of their legal
positions and as(ed to sign an agreement which has the force of a binding
contract. *f conciliation fails the dispute goes to arbitration. "rbitration is
a court li(e proceeding in which the parties give their evidence and a
panel of industrial )udges ma(es a decision.
+. 'air #ay &ommission
The $ommission has the responsibility of setting minimum wages in
"ustralia. The commission will hold Bpublic consultation sessionsB rather
than the courtCli(e hearings of the "*3$& as well as commissioning
research to inform its decisions. The .air 5ay $ommission must promote
national economic prosperity while ta(ing into account the needs of the
unemployed and low paid.
,. -ffice of t%e Employment Advocate )-EA*
Since the 4or(place 3elations "ct -DD< introduced "ustralian 4or(place
"greements& this body has overseen them as well as promoted their use.
9ow it will also oversee new collective agreements. *n the past& the O%"
has made sure that "4"s do not disadvantage a wor(er compared with
the relevant award. That re'uirement has now gone& and the "4" or
collective agreement must simply comply with five minimum conditions.
The O%" will also police Bprohibited contentB of agreements (e.g. union
pay deductions& right of entry& union preference clauses and so on)& and
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can recommend employers and unions be prosecuted for including such
illegal content.
.. -ffice of !orkplace Services
T=% O4S gets the compliance powers formerly the domain of the Office
of the %mployment "dvocate. *t will enforce compliance with the new
laws& the terms and conditions of industrial agreements& including "4"s
and the freedom of association principles and investigate complaints. *t
will employ 100 inspectors to both inspect wor(places& enforce the law
and also advise employees and employers on their rights and obligations.
/. Australian 0uildin" &onstruction &ommission
The commission investigates& enforces and prosecutes any wor(place
breaches in the building and construction industry. *t also educates
industry participants on their rights and obligations& and has particular
emphasis on trying to stop illegal industrial action& to prevent noCtic(et
noCstart being enforced& to stamp out pattern bargaining& and to protect
employers who refuse to the deal with the construction union. 2eputy
commissioner 9igel =adg(iss recently conceded it e#ists to police
industrial behaviour on building sites& not criminal behaviour.
Evaluatin" Incomes #olicies
The following criteria can be used to evaluate the effectiveness of
incomes policy in "ustralia.
4ages 0rowth/ 3apid increases in real wages will create costCpush
inflation and increase costs to "ustralian business. 4ages growth
has been contained and this has allowed "ustralia to e#perience
historically low rates of inflation over the last several years.
4or( 5ractices/ *nefficient wor( practices also increase costs and
reduce efficiency. *mprovements in wor( practices are a ma)or
ob)ective of labour mar(et reform. Significant improvements in
wor( practices have been negotiated in enterprise agreements.
*ndustrial 2isputes/ " high level of industrial disputes would result
in lost production. This would increase business costs and reduce
efficiency. *ndustrial disputes in "ustralia are at historically low
levels.
5roductivity/ *ncreases in labour productivity will increase
business profits and improve international competitiveness. 0ood
wor( practices and improvements in industrial relations should
achieve this goal. 7abour productivity has improved significantly
over the last decade.
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>nemployment 3ates/ *mprovements in the labour mar(et should
motivate local business to increase employment and encourage
foreign direct investment in "ustralia which will also increase
employment. "ustralia has en)oyed historically low unemployment
rates in the last few years.
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#roductivity
"n important ob)ective of microeconomic reform is an improvement in
productivity performance& which is the main source of continued rises in
living standards. The e#tent of reforms introduced and the indications of
improvements evident at a sectoral level give rise to an e#pectation that
an improved productivity performance should also be apparent at an
economyCwide level. The following graph shows that there has been a
steady improvement in total factor productivity since -DD-. 7abour
mar(et deregulation has undoubtedly contributed to this trend. See chart
-.
CHART 1: TOTAL FACTOR PRODUCTIVITY GROWTH - NON-FARM
MARKET SECTOR
Improved #roductivity compared to -E&D
9evertheless& what is most stri(ing is that "ustralian e#perience contrasts
sharply with the deceleration evident for the O%$2 as a whole in the
-DD0s relative to its earlier e#perience& highlighting the importance of
microeconomic reforms in "ustralia in enabling these broader trends to
be avoided. 7abour productivity in "ustralia is clearly improving in the
late -D!0s which is in sharp contrast to the deterioration in labour
productivity for other O%$2 countries. See chart 1.
D
CHART 2: LABOUR PRODUCTIVITY GROWTH: AUSTRALIA AND THE
OECD
Labour 'orce #articipation
2emographic factors and changes in social preferences have resulted in
changes in the composition of the wor( force& particularly in relation to
participation and hours wor(ed. *ncreasing participation by married
women in the labour force has underpinned an increase in the past 80
years in the proportion of the population either employed or loo(ing for
wor( ($hart 8). Over the same period& average wee(ly hours wor(ed have
declined from around 8D hours in the second half of the -D<0s to around
8< hours in the first half of the -DD0s. 9otwithstanding that aggregate
decline& the proportion of males wor(ing more than :D hours rose from
10 per cent in -D!- to 1D per cent in -DD<& while the proportion of
employed females wor(ing such hours rose from < per cent to D per cent
E8F.
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CHART 3: LABOUR FORCE PARTICIPATION
Source: ABS Cat. Nos. 6203.0 and 6204.0.
These changes have coincided with increased availability of partCtime and
casual wor(. The reasons lie both in increased supply and demand for
such forms of wor(& including the increasing importance of the services
sector. .or e#ample& many people see( fle#ibility in wor(ing hours to
manage family or study commitments and deregulation of shopping hours
has increased demand for wor(ers outside traditional wor(ing hours.
0reater fle#ibility in the terms and conditions of partCtime and casual
wor( has also meant employers have been more willing to ta(e on such
wor(ers. The combined effect of longer wor(ing hours for some and
increased partCtime and casual wor( for others is that a smaller proportion
of wor(ers is now wor(ing a conventional wor(ing wee( compared to
twenty years ago.
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+. Dere"ulation
This involves the removal of regulations that are preventing structural
change and competition. 3egulations re'uire business to provide
information or monitor activities. This costs money and increases the cost
of production and prices. 3emoving these re'uirements and controls
reduces costs and ma(es firms more efficient. 3ecent e#amples of
deregulation include/
'inancial Sector
*nterest 3ate $ontrols/ 6an(s were told what interest rates to charge
for various loans. This policy tended to distort the allocation of
financial resources. The 36" now influences interest rates by setting a
target for the cash rate. "ll financial institutions are affected e'ually
by these measures and any distortions in favor of 96.*s have been
removed.
6an(ing 7icenses/ ,ore ban(ing licenses were issued and foreign
ban(s entered "ustralia. This increased competition in the ban(ing
industry and resulted in improved service and the introduction of
better technology. 4e now have a broader range of credit cards&
"T,s and %.T5OS. "ll these improvements have reduced costs for
consumers and business.
.oreign %#change 7icenses/ ,ore foreign e#change licenses were
issued which help reduce the cost of foreign e#change transaction to
firms and consumers. This made it easier and cheaper for firms to deal
with international transactions and opened the "ustralian economy up
to foreign capital and investment.
.le#ible %#change 3ate/ .loating of the "ustralian 2ollar gave
"ustralian firms a more competitive e#change rate which stimulated
e#ports and local manufacturing. 5rior to this change the ">2 was
overvalued and this made e#ports e#pensive in foreign currency. *t
also made monetary policy more effective by eliminating the affect of
changes in foreign reserves on the domestic money supply.
Tender System/ The tender system made it easier for the 36" to fine
tune the settings for monetary policy. >nder a tender system the 36"
sets the amount of securities to be sold and allows the mar(et to set
interest rates rather than setting interest rates and see(ing buyers at
that price.
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Depreciation of t%e E1c%an"e Rate
The impact of such changes cannot be viewed in isolation from
movements in the real e#change rate C ie movements in the nominal
e#change rate ad)usted for relative rates of inflation at home and abroad.
"s indicated in $hart :& the real e#change rate has fallen considerably
since the early -D!0sG despite some more recent increases& the real
e#change rate is currently about 1; per cent lower than it was in the early
-D!0s.
" lower real e#change rate will tend to moderate the effects of reductions
in protection on import competing industry and provide a relative
stimulus for e#port industry. *n "ustralia& while manufacturingHs share of
overall production has continued to decline as in many other industrial
countries& the share of some manufacturing activities has e#panded C and
some manufactured e#ports have increased considerably.
CHART 4: REAL EXCHANGE RATE
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A"riculture
%mbargoes 3emoved/ %mbargoes on the importation of sugar& dried
fruit& tobacco and citrus fruit have been removed. This will increase
competition in these industries and help reduce input prices to
manufacturers.
,ar(eting 6oards/ ,onopoly mar(eting boards have been privitised
and competition has been introduced. This has reduced agricultural
prices in these industries and reduced costs for manufacturers using
these agricultural inputs. The "ustralian dairy& wool and wheat
industries have all e#perienced some deregulation.
.arm SiIe/ The total number of farms in "ustralia has fallen whilst
farm output has been increasing. This means that farm siIes are
increasing and these larger farms are becoming more efficient as a
result of economies of scale.
$ransport
"viation/ The twoCairline agreement was abolished in the early -DD0s.
Since this time there have been many firms attempting to enter the
domestic industry. 3ecently Tiger "irlines bac(ed by Singapore
"irlines has undercut fairs in the domestic mar(et and spar(ed a price
war. $onsumers and firms have benefited from much lower travel
costs both within "ustralia and internationally as a result of increased
competition.
3ail/ 9ational 3ail $orporation was established and privatised in
100-. This aims to reduce interstate rail freight costs which would be a
ma)or benefit to many businesses.
$elecommunications
9ew $ompetition/ Optus and Jodafone were allowed to enter in
the early -DD0s. The industry was opened to full competition in -DD7.
5rior to this the industry was dominated by a monopoly that was
considered to be inefficient and charging monopoly prices. "s a result
of the reforms telecommunication prices have fallen and this has
reduced costs and increased efficiency in many industries.
9etwor( "ccess/ 9ew carriers have been given access to the
Telstra networ(. The "$$$ is partly responsible for the regulation of
Telstra and ensures monitors anti competitive conduct. The "$$$ has
recommended much lower prices for networ( access and Telstra is
currently in dispute in regard to these access prices.
*nternet & 6roadband/ The .ederal 0overnment is attempting to
reduce broadband prices generally and especially for rural
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communities. *t recently granted licenses for rival firms to provide
broadband in rural communities and at affordable prices. This should
reduce costs for a range of businesses and may well stimulate e#port
income.
,. 2ational &ompetition #olicy Reforms
The =ilmer 3eport in -DD8 made numerous recommendations for
national competition policy. These included/
"$$$/ %stablishment of the "ustralian $ompetition & $onsumer
$ommission "$$$. This organisation regulates business to ensure
that unfair trading practices are eliminated. >nfair trading practices
could potentially increase prices and input costs for firms and
regulation of this behavior is vital for improving efficiency and
international competitiveness.
5ublic Sector 2eregulation/ State 0overnment *nstrumentalities
have been deregulated and allowed to compete with each other.
%lectricity& gas& and water are e#amples of industries deregulated. The
aim is to increase competition to increase efficiency and decrease
prices.
>niform 9ational $ompetition 3ules/ " national competition code
was agreed between the State and .ederal 0overnments where it was
agreed that government owned monopolies would be opened up to
competition.
"ccess 3ights for %ssential *nfrastructure/ 6usiness is guarantee
fair prices for essential services li(e water& electricity& gas even if these
facilities are owned by rival companies.
0overnment 6usiness %nterprise 3eforms/ " competitive neutrality
principle was established that ensures that 06%s compete e'ually
with the private sector. 0overnments agreed to remove special
provisions that gave public enterprises an advantage over private
sector firms.
3eform of the 5rofessions/ >nder these reforms the professions are
re'uired to remove restrictive wor( practices and improve
competition. 5rofessions li(e law and accounting are costly inputs for
all businesses and reform of these professions is essential for
improved efficiency.
.. Industry Assistance
5rotection/ =istorically protection of local industry in "ustralia has
been used to establish and grow manufacturing industries. This policy
re'uires tariffs on imported goods to increase their cost such that they
are comparable in price to high cost local import substitute goods.
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7ocal goods were usually high cost because firms were small and
lac(ed economies of scale that overseas producers had achieved.
=owever these tariffs also had the effect of increasing business input
costs. .or e#ample a tariff on steel increased the costs for all
businesses using steel as an input. This reduced the international
competitiveness of these businesses and reduced "ustralias
manufacturing e#ports. "ustralias tariff policy has now been reviewed
and tariff reductions across many industries have been applied.
*ndustry "ssistance $ommission/ *ndustries "ssistance $ommission
(*"$) created by the 4hitlam government in -D78 to replace the Tariff
6oard. *n addition to tariffs& the *"$ was responsible for reviewing
assistance to agricultural industries and also undertoo( ad hoc
in'uiries into a wide range of policy. The *"$ was essentially a
publicly funded advocate of free trade and efficiency.
Tariff 3eforms/ The level of assistance for manufacturing has fallen to
an average of around ;K. Some industries have higher protection rates
but these will be gradually reduced by 10-;. 7ower protection levels
have increased competition& which has resulted in greater efficiency
and productivity in the traded goods sector.
*ndustry 5lans/ Special assistance pac(ages have been developed for
several (ey industries that will be adversely affected by tariff
reductions. %#amples include the "utomotive $ompetitiveness &
*nvestment Scheme and the Strategic *nvestment 5rogram for the T$.
industry. These programs provide incentive for firms to continue
investment levels and maintain efficiency whilst the industry
restructures as a result of the tariff changes and increased competition.
"ccess to .oreign ,ar(ets & .ree Trade "greements/ 5olicies that
increase the international competitiveness are worthless if firms are
unable to gain access to world mar(ets. *f countries are using
restrictive practices and protectionist policies then "ustralian firms
may be denied access to trade with a particular country. The "ustralian
government has free trade agreements with several countries including
the >S" and is negotiating bilateral agreements with numerous
countries including $hina & Lapan.
"5%$ C "sia 5acific %conomic $ooperation/ "ustralia is a member of
"5%$ which advocates trade liberaliIation in the 5acific basin. "5%$
holds regular meetings where trade ,inisters can discuss reforms.
"ustralia has long argued for multilateral free trade in the 5acific
region but many ob)ections have been raised in this forum in regard to
multilateral free trade. "ustralia has decided that it is easier to pursue
bilateral free trade agreements with ma)or trading partners.
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4TO C 4orld Trade Organisation/ The aim of the 4TO is to promote
reforms to world trade. The 4TO process should also deliver reduced
protection levels and the benefits from increased trade.
Trade 5romotion/ Trade promotion and e#port assistance can also help
trade performance and increase e#port penetration. "ustralia achieves
increased mar(et access through trade promotions underta(en by
"ustrade.
$ariff Reductions
*n ,ay -D!!& the process of industryCbyCindustry tariff reform& based on
an in'uiry process& was replaced by a commitment to acrossCtheCboard
tariff cuts. 2espite high unemployment& this policy was e#tended in the
*ndustry Statement of ,ay -DD- with a general commitment to reduce all
tariffs to ; per cent by 1000. The ; per cent target was achieved& with the
e#ception of the motor vehicle and te#tile industries& The =oward 7iberal
government subse'uently re)ected proposals to reduce the general tariff
rate to Iero. See chart ;
CHART 5: EFFECTIVE RATES OF ASSISTANCE IN MANUFACTURING
-7
Source/
*ndustry $ommission& Assistance to Agriculture and Manufacturing Industries.
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/. Reforms to public tradin" enterprises )#$E3s*
Two main approaches are used/
$orporatisation/ $orporatisation means to ma(e a 06% run li(e a
corporation. "ll political and bureaucratic intervention is removed.
0overnment managers also become more accountable for the
performance of the organisation. This should ma(e these government
businesses more efficient which should reduce the cost of essential
infrastructure to business. ie electricity generation and water supply.
5rivitisation/ 5rivitisation means to sell off 06%s to the private
sector or have a public float for shares. This is ta(ing $orporatisation a
step further and actually ma(ing the organisation a privately owned
enterprise. " private sector business should run more efficiently than a
06% and should provide more effective competition in their respective
industries. Telstra has been privitised with the T8 float.
The effect of these changes has been to reduce the average real prices
charged by public trading enterprises. This has an important cost cutting
impact on the economy because many of these organisations provide
essential services li(e water& electricity gas and transport. .alls in the
prices of these commodities will result in cost reductions in industry
generally.
CHART : GOVERNMENT TRADING ENTERPRISES - AVERAGE REAL
PRICES
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4. $a1ation Reform
The .ederal 0overnment has implemented some important changes to
ta#ation. The aim of these reforms was to remove distortions to the
allocation of resources as well as reducing costs to "ustralian business.
$oncern had been e#pressed that the ta# system was very comple#&
discriminated unfairly against certain sectors and substantially reduced
the international competitiveness of "ustralian industry.
0ST/ The introduction of the 0oods & Services Ta# in Luly 1000
improved efficiency and removed distortions in the ta# system. "
uniform rate of -0K applied to all industries (with a few e#ceptions).
Sales Ta#/ Sales ta# was abolished with the introduction of the
0ST. Sales ta# created many distortions in the allocation of resources
because it was only imposed on goods and applied several different
rates to various industries or sectors without )ustification.
6usiness Ta#ation/ Simplification of he 5rovisional Ta# system
such that ta#ation is paid after income has been calculated for the year
has promoted small business and reduced compliance costs for the self
employed.
$ompany Ta#/ " reduction in $ompany Ta# to ma(e our rates
international competitive so as to attract more foreign investment.
"ustralian $ompany Ta# rates were higher than overseas rates and
"ustralian companies were increasingly moving their operations
overseas to low ta# countries. The high $ompany Ta# rates were
having the dual effect of reducing investment and employment in
"ustralia.
$apital 0ains Ta#/ 3eforms included reductions in $apital 0ains
Ta# to encourage investment in business assets. =igh ta# rates on
capital gains for business assets was discouraging investment and
capital formation which was reducing the efficiency of "ustralian
business.
*ncome Ta#/ 9umerous *ncome Ta# cuts have been given to reduce
ta# avoidance and disincentives. *t was thought that high marginal ta#
rates were promoting ta# avoidance schemes and accelerating the
?brain drain@ to low ta# countries. 7oss of s(illed wor(ers was having
a significant impact on staff training and recruitment costs.
State 0rants/ "bolition of State grants which are replaced by
States share of 0ST. This increased public sector efficiency by
reducing the needs for comple# and time consuming .ederal State
negotiations. *ncreased public sector efficiently would ultimately
result in lower ta#ation for households and firms.
$omputer *ntegration/ 3eforms included improved integration of
the ta#ation and social security systems. This measure reduced social
10
security fraud and ta# evasion and improved the e'uity of the ta#ation
system.
Impact of Microeconomic Reform
&ompetition 5 Structural &%an"e
,ore $ompetition/ ,%3 has increased the level of competition in the
economy. *t is generally thought that more competition will drive
down business costs and improve efficiency and international
competitiveness.
Structural $hange/ $ompetition will increase the pace of structural
change in many (ey industries. ,icroeconomic reform is often
referred to as economic rationalism. %conomic rationalism aims to
clear away obstacles and allow mar(et forces to induce structural
change. Structural change can occur as a result of changes in
technology& incomes& consumption patterns or government reform
policies. ,icroeconomic reform aims to create structural change such
that output patterns are more responsive to consumer demand.
Efficiency
"llocative %fficiency/ 5rices will increasingly reflect costs and
allocative efficiency will be achieved. The price signals in the mar(et
will better reflect the desires of consumers. ,ore efficient mar(ets
will better meet the needs of consumers.
Technical %fficiency/ %fficient production technology will be used.
*nformation technology has also been a factor in boosting productivity
and efficiency as well as enabling the "ustralian economy to achieve
average growth rates of :K.
2ynamic %fficiency/ *nnovation and product improvements will result
from increased competition. .irms will become more innovative by
introducing new production techni'ues and developing products that
better meet the needs of consumers.
7ower $ost of 5roduction/ .irms will (eep costs to a minimum and
use the least cost method of production. They will be more focused on
cost reductions and will ma(e better use of resources and inputs.
7ower 5ublic Sector $osts/ 06%s were often sheltered from
competition by laws and regulations. The end result was high prices
for basic goods and services which were inputs for other firms and
industries. This created inefficiency and higher costs. The solution was
to e#tend the mar(et economy by privitising many government
business enterprises. This has reduced the cost of goods and services
provided by the government sector and made "ustralian firms more
internationally competitive.
1-
*ncreased 5roductivity/ The 5roductivity $ommission claims that
microeconomic reform has increased productivity for three reasons/
*ncreased competition creates incentives to improve productivity.
Opening the economy to trade& investment and new technologies
has increased productivity.
0reater fle#ibility to ad)ust production procedures enables firms to
eliminate unproductive operations.
7abour 5roductivity/ ,icroeconomic reform was credited with
achieving higher levels of labour productivity (the ratio of output
produced per unit of labour used) which rose to an annual rate of 8K.
,ultifactor 5roductivity/ ,ultifactor productivity (the ratio of
output produced per combined unit of input of labour and capital) has
risen to -.7K in the D0s.
*nternational $ompetitiveness/ " lower cost of production will
ma(e "ustralian firms more competitive in (ey e#port and import
substitute industries. *mproved productivity and efficiency will assist
the international competitiveness of "ustralian firms.
Macroeconomic #erformance
Stagflation/ ,icroeconomic reform was also credited with
eliminating stagflation. *nefficiency was thought to create both
inflation and unemployment simultaneously.
*nternal 6alance/ ,icroeconomic reform ma(es the economy as a
whole more resistant to inflation and less li(ely to need contractionary
economic policy which can create unemployment.
%conomic 0rowth/ *ncreased productivity and improved efficiency
will mean that more can be produced with "ustralias resources and
this is called economic growth. *ncreases in output will mean higher
standards of living for "ustralian consumers.
>nemployment/ ,icroeconomic reform should create new
industries in "ustralia which could mean increased employment
opportunities and a lower 9"*3>.
%#ternal 6alance/ *mprovements to international competitiveness
will increase e#port incomes and reduce import levels which should
improve "ustralias balance on 9et 0oods. =owever more
competitive firms and higher incomes will increase investment in
"ustralia which will cause a drain on 9et *ncomes. ,ost economic
studies have predicted little to no improvement in the $"2 as a result
of microeconomic reform.
11
Increased 6D#
5otential benefits from wideCranging microeconomic reform have been
further emphasised in a number of studies ($hart 7). .or e#ample& the
*ndustry $ommission estimates that a range of reforms associated with
the implementation of the 9ational $ompetition 5olicy could boost 025
by around ;.; per cent. $hart 7 shows the increases to output predicted by
each study in the various sectors of the economy.
CHART !: PRO"ECTED BENEFITS OF MICROECONOMIC REFORM
18
%#am Muestions
,ultiple $hoice Muestions
-. The main cause of stagflation is/
a) %#cess demand.
b) =igher capital costs.
c) =igher wage costs.
d) "ll of the above.
1. *ndividual contracts are also called/
a) $ollective agreements.
b) "ustralian 4or(place "greements.
c) *ndividual contracts.
d) %nterprise agreements.
8. The main benefit of a good incomes policy includes/
a) 7ower levels of industrial disputes.
b) 7ower unemployment rates.
c) *ncreased labour productivity.
d) "ll of the above.
Short "nswer Muestions
-. %#plain the benefits of deregulation to "ustralian firmsN
OOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO
OOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO
OOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO
OOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO
OOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO
OOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO
OOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO
1. =ow has labour mar(et reform in "ustralia improved macroeconomic
performanceN
OOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO
OOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO
OOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO
OOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO
OOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO
1:
8. Outline "ustralias industry policy in recent years.
OOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO
OOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO
OOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO
OOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO
OOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO
OOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO
:. 4hy has "ustralia underta(en e#tensive ta#ation reformN
OOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO
OOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO
OOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO
OOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO
OOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO
OOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO
%#tended 3esponse
-utline t%e ma7or microeconomic reforms t%at %ave been undertaken
in Australia in recent years8 o( %as t%e economy benefited from
t%ese reforms8
3ule -/ 2efine the terms in the 'uestion/ microeconomic reform
3ule 1/ *dentify & define related concepts/ labour mar(et reform&
collective agreements& individual contracts& deregulation& ta#ation reform&
free trade agreements& and wor(able competition.
3ule 8/ 7in( introduced terms to the 'uestion/ %nterprise bargaining has
enabled employers to negotiate productivity improvements with wor(ers
and this has improved the international competitiveness of the "ustralian
economy.
3ule :/ 2raw logical conclusions/ "ustralia has much lower rates of
unemployment and inflation.
1;