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Microeconomic policy and structural change

This tutorial was written by
Ken Edge
Head Teacher Social Science
Cardiff High School

Outcomes
Overview
Content
Review exercises
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Outcomes

HSC Topic Four: Economic polices and management is described in the Board of Studies NSW Stage 6 Economics Syllabus (1999) on pages 40 to 42. The specific outcomes from the syllabus for this tutorial are listed below.

A student:

H1	Demonstrates understanding of economic terms, concepts and relationships.
H2	Analyses the economic role of individuals, firms, institutions and governments.
H5	Discusses alternative policy options for dealing with problems and issues in contemporary and hypothetical contexts.
H6	Analyses the impact of economic policies in theoretical and contemporary Australian contexts.
H7	Evaluates the consequences of contemporary economic problems and issues on individuals, firms and governments.

Overview

Microeconomics is a branch of economics that focuses on the individual sectors of the economy, particularly consumers and producers. Micro is derived from a Greek word meaning small.

Microeconomic reform has been a major focus of the Federal government since the 1980s because of the ineffectiveness of short-term macroeconomic policy to improve international competitiveness, reduce the current account deficit and foreign debt and to increase domestic savings. The focus of microeconomic policy has been firstly to subject the private sector to increased domestic and international competition and secondly to improve the performance of government businesses. Microeconomic reforms have focused on two main areas, the:

reduction or removal of trade and competition restrictions in international and domestic markets
reallocation of resources to reflect market forces.

Microeconomic reforms have been successful in generating structural changes in the Australian economy. Structural change involves the long-term adjustments in the pattern of production and output. The direct benefits of these reforms have been to reduce inflationary expectations and increase productivity and employment opportunities. For example, the Productivity Commission has estimated that microeconomic reforms have increased GDP by 2.5%, productivity by 1.7% and average household income by approximately $7000 since 1998/99.

Content

What is microeconomic economics?

Figure 1

Microeconomics is broadly based on supply-side economics, where the focus is on aggregate supply, rather than on aggregate demand as in Keynesian economics. The principal determinant of economic growth is seen as the allocation and efficient use of the factors of production, especially labour and capital. Microeconomic reforms are designed to improve productivity and economic efficiency.

The effect of increases in efficiency can be best explained using the aggregate supply and demand curve analysis shown in Figure 1. If the economy is at point A (0P₁0Q₁), an increase in efficiency will shift the aggregate supply curve from Agg Supply ₁ to Agg Supply ₂ and a new equilibrium point B. Output has increased from 0Q₁ to 0Q₂ and the general level of prices in the economy falls from 0P₁ to 0P₂. In this situation, microeconomic reforms have reduced inflationary pressures and increased real GDP.

Sources of economic efficiency include:
- technical or productive efficiency. This occurs where individual firms combine resources to produce goods and services at the lowest possible prices for consumers. For example, labour market reforms and enterprise bargaining have reduced labour costs and increased productivity.
- allocative efficiency. Resources need to be allocated to industries that reflect demand by consumers. Competition increases allocative efficiency because firms who can use certain resources more efficiently can bid those resources away from firms that are less efficient. The reduction in tariffs, for example in the textile industry has seen a reallocation of resources to more efficient industries.
- dynamic efficiency. Is the ability of a firm or industry to adapt to changes in consumer demand and technology to maintain competitiveness. For example, the deregulation in the telecommunications industry has led to reduced costs and increased access to new technologies.
- inter-temporal efficiency. Thisensures that Australia’s resources are effectively allocated between current consumption and future investment.
Microeconomic reforms: an historical overview

Structural change

Structural change has been occurring since the industrial revolution when labour started to move from agriculture to manufacturing and service industries. Structural change involves the shift of resources from slower growing areas of the economy to faster growing areas.

The term structural adjustment refers to the long-term changes in the nature and pattern of production in the economy. Structural adjustments that occur because of the operation of the price mechanism are said to be market induced. These include changes in consumption patterns, technology, demographic factors, and international factors such as globalisation.

There are also government induced structural changes in the product and factor markets. For example, the introduction of the National Competitions Policy and the taxation reform with the introduction of the GST.

The National Competition Policy

In 1992, the Federal Government initiated an independent inquiry into competition in Australia. The recommendations of the committee conducting the inquiry became the Hilmer Report. In 1995, all Australian governments agreed to a package of reforms based on these recommendations that then became the National Competition Policy (NCP). The key elements of the National Competition Policy are the:
- extension of the provisions of the Trade Practices Act 1974 prohibiting anti-competitive activities, such as the abuse of market power and market fixing by all businesses
- introduction of competitive neutrality, so privately owned businesses can compete with those owned by the Government on an equal footing
- the review and reform of all laws that restrict competition unless it can be demonstrated that the restrictions are in the public interest
- development of a national access regime to enable competing businesses to use nationally significant infrastructure, such as airports, electricity cables, gas pipelines and railway lines
- implementation of specific reforms to the gas, electricity, water and road transport industries.
In 1995, as part of the NCP the Australian Competition and Consumer Commission (ACCC) was formed with the merger of the Trade Practices Commission and the Prices Surveillance Authority. The ACCC is responsible for consumer protection and maintaining competition to ensure the efficient allocation of resources in the product market. This is similar to the role of the industrial relations reforms that occurred in the labour market in 1996 with the introduction of the Workplace Relations Act.

(Source: National Competition Council )
Key product market reforms

Tariff reform

(Click on Tariff reforms for more information on methods of protection and the effects of protectionist policies on the domestic and global economies.)

Between 1960 and 1992, Australia went from being the third richest OECD nation to the fifteenth. The high levels of protection of Australian industry from internal and external competition contributed to much of this decline. There was little incentive for producers to reduce costs and prices, to produce new, innovative products or to use resources as efficiently as possible.

Since the 1980s, the government has been reducing the level of protection on Australian industries to promote import competition, increase efficiency and the level of exports. The average tariff levels have now been reduced to around 5%, which is very low by world standards. However, the motor vehicle and textile industries have been given special considerations to save jobs and promote investment. For example:
- tariffs on passenger motor vehicles (PMV) are to be held at 15% between 2000 and 2004, then reducing to 10% in 2005.
- tariffs in the textiles, clothing and footwear industries (TCF) are to be held at current levels (i.e. between 5% and 25%) from 1 July 2000 to 1 January 2005, and then reduced to a maximum rate of 17.5% for clothing.
Industry reform and policies

Long-run economic growth requires investment in highly productive capital to produce goods that are cost competitive on export markets. In 1997, the Federal Government launched a $1.2 billion plan, based on the Mortimer Report, to stimulate industry investment and expansion in selected high growth areas of the economy.

In addition, the Federal Government’s Investing for Growth (2001) blueprint committed $4.5 billion to research and development. Direct assistance is also provided to businesses by AUSTRADE through initiatives such as the Export Market Development Grants Scheme. Other initiatives are directed to support Australia’s free trade polices including involvement in the WTO, APEC and trade agreements with New Zealand.

Taxation reforms

The New Taxation System was introduced on 1 July 2000. The reforms in taxation were designed to generate higher levels of productivity, saving and investment in the economy. The main features of the New Taxation System are:
- Goods and Service Tax (GST) to replace the Wholesale Sales Tax (WST) and a range of narrowly-based indirect state taxes
- cost reductions for businesses through the removal of the inefficient indirect taxes
- exports to be exempt from the GST
- States and Territories to receive the GST revenue
- company taxation rates reduced to 30% over 2000–2003 with full dividend imputation to be introduced.
Key factor market reforms

Financial Deregulation

Deregulation involves the removal of restrictions that affect the efficient allocation of resources and operation of markets. Based on the recommendations of the Campbell Report (1981) and the Martin Report (1983) the Labor Government in 1983 deregulated the financial market. The key measures included the:
- use of market operations by the Reserve Bank to conduct monetary policy
- floating of the Australian dollar in December 1983
- the entry of sixteen new foreign banks to increase competition.
In July 1998, the Howard Government introduced a new system of regulation and prudential supervision in the banking sector. These changes were based on the Wallis Report. The control of all deposit taking institutions such as banks, credit unions and building societies became the responsibility of Australian Prudential Regulation Authority (APRA). The Australian Securities and Investment Commission (ASIC) became responsible for integrity in the financial market.

The deregulation of the financial markets has resulted in a more efficient allocation of capital resources and facilitated the integration of Australia into world capital markets. However, some people would argue that bank deregulation has had little benefit and has resulted in higher fees and a reduction in services.

Other examples of deregulation
- The scrapping of the Two Airline Agreement in 1991, which allowed Qantas to access domestic routes in 1994. Increased competition from other carriers such as Virgin Blue has led to lower airfares and increased services. However, the Ansett collapse, September 11, SARS and the War in Iraq have caused major financial problems in the industry.
- Deregulation of the telecommunications industry and the entry of Optus (1992), Vodafone (1993), AAPT (1997) and a number of smaller providers, which has led to rapid decreases in prices and expansion of mobile phone and Internet markets.
Labour market reforms

Labour market reforms have been taking place since the 1980s, when a series of Prices and Incomes Accords between the Federal Government and the Australian Council of Trade Unions (ACTU) was introduced to reduce industrial disputation and determine wage and non-wage outcomes.

By the 1990s, the State and Commonwealth Governments had moved away from a centralised wage fixing system towards an enterprise based bargaining system, in which wages reflected the circumstances of individual businesses and their employees. The process was accelerated by the introduction of The Workplace Relations Act (1996) .

Two major initiatives were the introduction of Australian Work Place Agreements (AWAs) and Certified Agreements (CAs), both of which encouraged labour market flexibility and promoted workplace level wage bargaining. A safety net or industrial award system was developed for those workers unable to negotiate an enterprise agreement.

These reforms were designed to reduce unemployment and increase labour market responsiveness to structural and cyclical shifts in the product market. Labour productivity has been increased in many industries through the removal of inefficient work practices.

Government Business Enterprises (GBEs)

Other changes to achieve greater economic efficiency in the public sector have included the:
- introduction of competitive neutrality (refer to NCP), requiring GBEs to pay taxes, charges and interest on loans. This allows privately-owned businesses to compete on an equal footing with GBEs in the market place.
- full or partial sale or privatisation of public enterprises by the State and Federal governments. Such as, Telstra in 1997 and 1998, Qantas, the Commonwealth Bank, several city airports, the Australian Wheat Board and Wool Corporation, GIO, the State Bank of NSW, Queensland Insurance and the NSW Egg Marketing Board.
- commercialisation of many government businesses such as Integral Energy. These businesses now have to develop efficient management practices and pay dividends to the government.
- requirements for other GBEs, such as Australia Post were to have efficient management structures and develop performance objectives similar to private enterprises. This process is referred to as corporatisation.

Review exercises

Exercise 1 Flash version HTML version

Exercise 2

What is the aim of microeconomic policy?
Answer
Define Competition Policy.
Answer
Outline the key elements of the National Competition Policy (NCP).
Answer
Competition policy is one element of microeconomic policy. List the other elements.
Answer

Exercise 3

Outline TWO microeconomic polices that have increased efficiency and productivity in domestic and international markets.
Answer

Exercise 4

The answers to these questions can be found by selecting the appropriate web pages.

What is the role of the Productivity Commission ?
Discuss TWO factors that have contributed to the productivity gains on the Australian Waterfront since 1997.

Exercise 5

The following diagram represents the market for electricity in New South Wales.

Diagram representing the market for electricity in New South Wales

Briefly, explain how competition policy has helped increase efficiency in the electricity industry.
Answer

Research tasks

The National Competition Council was established by all Australian governments in November 1995 to act as a policy advisory body to oversee their implementation of National Competition Policy (NCP).
1. What is the aim of the National Competition Council?
2. Review one of the media releases or matters that the council is currently reviewing.
In August 2002, the Federal government announced an assessment of the progress on implementing the National Competition Policy. Develop a summary of the main issues relating to the Structural Reform of Public Monopolies.
Outline the role of the ACCC .