Revision Lecture: Microeconomic Reform (MER)

1. Revision Lecture: Microeconomic Reform (MER) A guide to the implementation of MER policies in Australia.

2. Lecture Overview • Definition • Tools • Recent Case Studies • Strengths • Weaknesses

3. 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…”

4. 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

5. Tools • Deregulation • Privatisation • Corporatisation • Tariff Reform • Labour Market Reform • Competition Policy • Supervisory Bodies

6. 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.

7. 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.

8. 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%.

9. Deregulation - 3 • In mid 1989 the NSW government deregulated the market for eggs. • Almost immediately prices fell by 17%.

10. 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.

11. 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%

12. 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.

13. 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

14. 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.

15. 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.

16. 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%!

17. 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.

18. 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….

19. 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.)

20. 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.

21. 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.

22. 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.

23. 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?

24. 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.

25. 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….

26. 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.

27. 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.

28. 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.

29. 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.

30. Strengths of MER • Domestic strengths: • Cost 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

31. Strengths of MER • External strengths: • Labour 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

32. 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!)

33. Weaknesses of MER • Domestic weaknesses: • Long 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

34. Weaknesses of MER • External weaknesses: • Lower 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)