10. Microeconomic Reform

8/11/2019 10. Microeconomic Reform

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10. Microeconomic Reform

Supply Side EconomicsOur study of macroeconomics has shown that policies that control the

level of aggregate demand (monetary & fiscal policy) can be used toinfluence the level of economic activity. The main aim of these demandmanagement policies is to reduce fluctuations in the trade cycle. Such

policies in the 70 s and !0 s in "ustralia were not completely effective.The economy e#perienced periodic recessions and unemploymentremained 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 economiststo switch their attention from demand management policies to policiesthat improve supply. %ssentially their argument was that if we couldimprove the responsiveness of supply to demand changes we could avoidthe inflationary conse'uences of increases in aggregate demand. Supplyside economics sees aggregate supply as the dominant variable in theeconomy and focuses on policies to improve the efficiency and operationof the economy. %fficiency and productivity are seen as ey ob ectivesthat will solve many of "ustralia s problems. *n "ustralia these policieshave become nown as microeconomic reform.

"n inflationary gap occurs because aggregate demand e#ceeds aggregatesupply at the full employment level of income. This often results indemand inflation + too much money chasing too few goods. Thus far theonly solution to this has been to reduce the level of aggregate demand. "more permanent solution is to wor on the supply side to boost thecapacity 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 followingdiagram.

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Microeconomic ReformDefinition,icroeconomic reform includes all action ta en by government toimprove resource allocation ma#imise the output from scarce resourcesand improve the efficiency of "ustralian industry. ,icroeconomic reform

policies often aim to ma e mar ets more competitive by removingstructural 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 rowth / ,icroeconomic reform will allow "ustralia toimprove its rate of economic growth by increasing productivity &efficiency.

"llocative %fficiency / "llocative efficiency can be achieved byensuring 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 thatma#imises utility.

Structural %fficiency / "llocative efficiency also occurs wheninefficient 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 resourcesachieve technical efficiency. This will occur in a competitive mar etmade more efficient by microeconomic reform.

2ynamic %fficiency / 2ynamic efficiency occurs when firms introducenew innovations and product improvements. This is more li ely tooccur 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 competitionappropriate for the industry. 5erfect competition is not achievable inall industries and governments have to be realistic about the level ofcompetition that is possible. 4or able competition also means toremove unfair trading practices li e monopolisation collusion andmar et sharing.

%#ternal 6alance / ,icroeconomic reform will help solve problemswith e#ternal balance li e foreign debt and the $urrent "ccount

2eficit. 6asically "ustralia needs to increase e#port incomes andreduce its dependence on foreign capital. ,%3 policies have madeimprovements in this regard.

Microeconomic Reform in AustraliaThe ederal overnment has si# priorities for microeconomic reform/

-. abour mar et reform

1. 2eregulation8. 9ational competition policy:. *ndustry assistance;. 3eform of public enterprises


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,acroeconomic Stability / %conomic goals li e low unemploymentand inflation can only be achieved if wages growth is controlled. =ighwage growth will cause cost inflation via the wage price spiral andencourage firms to substitute capital for labour causing

unemployment. =igh real wages growth is though to be responsiblefor periods of stagflation in "ustralia.

5roductivity & *nternational $ompetitiveness / abour costs are si#ty percent of business costs and the most important determinant of thecost of production. "ustralia has long been regarded as a high wagecost country and this has placed "ustralian manufacturers ande#porters at a cost disadvantage to foreign producers.

*naccurate 5rice Signals / 4age fi#ing systems that changed wagerelativities 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 theeffectiveness of the price mechanism.

istory of !a"e Determination in Australia=istorically both State and ederal overnments in "ustralia have playedan important role in wage determination through independent industrialcourts and tribunals. Some of the ey components of this wagedetermination system which was called *ncomes 5olicy have included/

"wards / "wards are legal documents that set out the minimumwor ing conditions for each occupation. 4hen an industrial courtma es an award for wor ing conditions the decision was legally

binding on all employers who employed wor ers for that particularoccupation covered by the award. "wards became a safety net for allwor ers and ensured e'uity in wor ing conditions at variouswor places. %ach award contained a long list of award conditionswhich all employers had to provide.

$entralised 4age 2etermination / " central body called the "ustralian

*ndustrial 3elations $ommission ("*3$) used to determine wageoutcomes in all ederal awards. The $ommission was independenthowever it was re'uired to adhere to overnment guidelines whichwere called *ncomes 5olicy.

$ollective 6argaining / Trade >nions were able to negotiate withemployers on behalf of union employee members and representmembers in "*3$ procedures. This gave Trade >nions the power toinfluence wor ing conditions in an industry.

5roductivity *ncreases / 4age increases recommended by the ederal

overnment in their *ncomes 5olicy were based on increases in labour productivity. *t was generally thought that wage increases would be

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non inflationary if employers had increased output to balance againstincreased costs.

Recent Reforms to Incomes #olicy*t was generally agreed that centralised wage fi#ing was creatingnumerous problems for the "ustralian economy. 4ages and wor ingconditions were not fle#ible and higher wages granted by the "*3$reduced the international competitiveness of many firms. *t was arguedthat wage outcomes needed to match the capacity of industry to pay andthis varied across various firms industries and sectors. "ustralia has sinceadopted a more fle#ible decentralised or enterprise based system of wagedetermination. The main features of this system include/

%nterprise "greements / These are fle#ible wor place agreementscalled %nterprise "greements which allow employers to negotiatedirectly with the employees of one wor place. Such agreements can

be registered or certified with the relevant authority. 4here suchagreements are negotiated with a group of employees they are called?$ollective "greements@. 6y allowing wages to be determined atenterprise level it is assumed that wage outcomes will not e#ceed thecapacity of industry to pay and will not ma e firms unprofitable.

abour 5roductivity / 6y allowing wages to be determined by

negotiations between employers and employees it is e#pected thatemployers will want productivity improvements before they pay wageincreases above inflation. *n this way the lin between wages andlabour productivity will be maintained.

"ustralian 4or place "greements / These are individual contractsthat are negotiated between an employee and an employer. Thisenables greater fle#ibility and the possibility of productivity tradeoffsand allows employers to ad ust pay and conditions to thecircumstances of the wor place.

"ward Simplification / "wards have been greatly simplified whichreduces cost to business. The number of award conditions has beenreduced to a basic minimum. "wards still e#ist in "ustralia but underthe 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 personalAcarer s leave. ;1 wee s of unpaid parental leave.

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$%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 $ommission is the main governmentorganisation that settles industrial disputes over wages and wor ingconditions. The "*3$ acts li e an industrial court and hears evidencefrom trade unions and employers and their associations before it ma esdecisions on industrial disputes. State governments also have similarorganisations. *n 9S4 we have the 9S4 *ndustrial $ommission. Therecent 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 bindingcontract. *f conciliation fails the dispute goes to arbitration. "rbitration isa court li e proceeding in which the parties give their evidence and a

panel of industrial udges ma es a decision.

+. 'air #ay &ommissionThe $ommission has the responsibility of setting minimum wages in"ustralia. The commission will hold Bpublic consultation sessionsB rather than the courtCli e hearings of the "*3$ as well as commissioningresearch to inform its decisions. The air 5ay $ommission must promotenational economic prosperity while ta ing into account the needs of theunemployed 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 withthe relevant award. That re'uirement has now gone and the "4" orcollective 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 suchillegal content.

. -ffice of !orkplace ServicesT=% O4S gets the compliance powers formerly the domain of the Officeof the %mployment "dvocate. *t will enforce compliance with the newlaws the terms and conditions of industrial agreements including "4"sand the freedom of association principles and investigate complaints. *twill employ 100 inspectors to both inspect wor places enforce the lawand also advise employees and employers on their rights and obligations.

/. Australian uildin" &onstruction &ommissionThe commission investigates enforces and prosecutes any wor place

breaches in the building and construction industry. *t also educatesindustry participants on their rights and obligations and has particularemphasis on trying to stop illegal industrial action to prevent noCtic etnoCstart being enforced to stamp out pattern bargaining and to protectemployers who refuse to the deal with the construction union. 2eputycommissioner 9igel =adg iss recently conceded it e#ists to policeindustrial behaviour on building sites not criminal behaviour.

Evaluatin" Incomes #olicies

The following criteria can be used to evaluate the effectiveness ofincomes policy in "ustralia. 4ages rowth / 3apid increases in real wages will create costCpush

inflation and increase costs to "ustralian business. 4ages growthhas been contained and this has allowed "ustralia to e#periencehistorically low rates of inflation over the last several years.

4or 5ractices / *nefficient wor practices also increase costs andreduce efficiency. *mprovements in wor practices are a ma orob 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 reduceefficiency. *ndustrial disputes in "ustralia are at historically lowlevels.

5roductivity / *ncreases in labour productivity will increase business profits and improve international competitiveness. oodwor practices and improvements in industrial relations shouldachieve this goal. abour productivity has improved significantly

over the last decade.

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>nemployment 3ates / *mprovements in the labour mar et shouldmotivate local business to increase employment and encourageforeign direct investment in "ustralia which will also increaseemployment. "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 ofimprovements evident at a sectoral level give rise to an e#pectation thatan improved productivity performance should also be apparent at aneconomyCwide level. The following graph shows that there has been asteady improvement in total factor productivity since -DD-. abourmar et deregulation has undoubtedly contributed to this trend. See chart-.

CHART 1: TOTAL FACTOR PRODUCTIVITY GROWTH - NON-FARMMARKET SECTOR

Improved #roductivity compared to -E&D

9evertheless what is most stri ing is that "ustralian e#perience contrastssharply with the deceleration evident for the O%$2 as a whole in the-DD0s relative to its earlier e#perience highlighting the importance ofmicroeconomic reforms in "ustralia in enabling these broader trends to

be avoided. abour productivity in "ustralia is clearly improving in thelate -D!0 s which is in sharp contrast to the deterioration in labour

productivity for other O%$2 countries. See chart 1.

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CHART 2: LABOUR PRODUCTIVITY GROWTH: AUSTRALIA AND THEOECD

Labour 'orce #articipation

2emographic factors and changes in social preferences have resulted inchanges in the composition of the wor force particularly in relation to

participation and hours wor ed. *ncreasing participation by marriedwomen in the labour force has underpinned an increase in the past 80years in the proportion of the population either employed or loo ing forwor ( $hart 8 ). Over the same period average wee ly hours wor ed havedeclined from around 8D hours in the second half of the -D


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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 andcasual wor . The reasons lie both in increased supply and demand forsuch forms of wor including the increasing importance of the servicessector. or e#ample many people see fle#ibility in wor ing hours to

manage family or study commitments and deregulation of shopping hourshas increased demand for wor ers outside traditional wor ing hours.reater fle#ibility in the terms and conditions of partCtime and casualwor has also meant employers have been more willing to ta e on suchwor ers. The combined effect of longer wor ing hours for some andincreased partCtime and casual wor for others is that a smaller proportionof wor ers is now wor ing a conventional wor ing wee compared totwenty years ago.

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+. Dere"ulationThis involves the removal of regulations that are preventing structuralchange and competition. 3egulations re'uire business to provide

information or monitor activities. This costs money and increases the costof production and prices. 3emoving these re'uirements and controlsreduces costs and ma es firms more efficient. 3ecent e#amples ofderegulation 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 offinancial 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 beenremoved.

6an ing icenses / ,ore ban ing licenses were issued and foreign ban s entered "ustralia. This increased competition in the ban ingindustry 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 forconsumers and business.

oreign %#change icenses / ,ore foreign e#change licenses wereissued which help reduce the cost of foreign e#change transaction tofirms and consumers. This made it easier and cheaper for firms to dealwith international transactions and opened the "ustralian economy upto foreign capital and investment.

le#ible %#change 3ate / loating of the "ustralian 2ollar gave"ustralian firms a more competitive e#change rate which stimulatede#ports and local manufacturing. 5rior to this change the ">2 wasovervalued and this made e#ports e#pensive in foreign currency. *t

also made monetary policy more effective by eliminating the affect ofchanges 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 setinterest rates rather than setting interest rates and see ing buyers atthat price.

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Depreciation of t%e E c%an"e Rate

The impact of such changes cannot be viewed in isolation frommovements in the real e#change rate C ie movements in the nominale#change rate ad usted for relative rates of inflation at home and abroad."s indicated in $hart : the real e#change rate has fallen considerablysince the early -D!0sG despite some more recent increases the reale#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 reductionsin protection on import competing industry and provide a relativestimulus for e#port industry. *n "ustralia while manufacturingHs share ofoverall production has continued to decline as in many other industrialcountries the share of some manufacturing activities has e#panded C andsome 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 increasecompetition 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 usingthese agricultural inputs. The "ustralian dairy wool and wheatindustries have all e#perienced some deregulation.

arm SiIe / The total number of farms in "ustralia has fallen whilstfarm output has been increasing. This means that farm siIes areincreasing 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 -DD0 s.

Since this time there have been many firms attempting to enter thedomestic industry. 3ecently Tiger "irlines bac ed by Singapore"irlines has undercut fairs in the domestic mar et and spar ed a pricewar. $onsumers and firms have benefited from much lower travelcosts 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 ama or benefit to many businesses.

$elecommunications 9ew $ompetition / Optus and Jodafone were allowed to enter in

the early -DD0 s. The industry was opened to full competition in -DD7.

5rior to this the industry was dominated by a monopoly that wasconsidered to be inefficient and charging monopoly prices. "s a resultof the reforms telecommunication prices have fallen and this hasreduced costs and increased efficiency in many industries.

9etwor "ccess / 9ew carriers have been given access to theTelstra networ . The "$$$ is partly responsible for the regulation ofTelstra and ensures monitors anti competitive conduct. The "$$$ hasrecommended much lower prices for networ access and Telstra iscurrently in dispute in regard to these access prices.

*nternet & 6roadband / The ederal overnment is attempting toreduce 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 shouldreduce costs for a range of businesses and may well stimulate e#portincome.

,. 2ational &ompetition #olicy ReformsThe =ilmer 3eport in -DD8 made numerous recommendations fornational competition policy. These included/ "$$$ / %stablishment of the "ustralian $ompetition & $onsumer

$ommission "$$$. This organisation regulates business to ensurethat unfair trading practices are eliminated. >nfair trading practicescould potentially increase prices and input costs for firms andregulation of this behavior is vital for improving efficiency and

international competitiveness. 5ublic Sector 2eregulation / State overnment *nstrumentalitieshave been deregulated and allowed to compete with each other.%lectricity gas and water are e#amples of industries deregulated. Theaim is to increase competition to increase efficiency and decrease

prices. >niform 9ational $ompetition 3ules / " national competition code

was agreed between the State and ederal overnments where it wasagreed 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 thesefacilities are owned by rival companies.

overnment 6usiness %nterprise 3eforms / " competitive neutrality principle was established that ensures that 6% s compete e'uallywith the private sector. overnments agreed to remove special

provisions that gave public enterprises an advantage over privatesector firms.

3eform of the 5rofessions / >nder these reforms the professions arere'uired to remove restrictive wor practices and improvecompetition. 5rofessions li e law and accounting are costly inputs forall businesses and reform of these professions is essential forimproved 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 theyare comparable in price to high cost local import substitute goods.

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ocal goods were usually high cost because firms were small andlac ed economies of scale that overseas producers had achieved.=owever these tariffs also had the effect of increasing business inputcosts. or e#ample a tariff on steel increased the costs for all

businesses using steel as an input. This reduced the internationalcompetitiveness of these businesses and reduced "ustralia smanufacturing e#ports. "ustralia s tariff policy has now been reviewedand 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 reviewingassistance to agricultural industries and also undertoo ad hocin'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 toan average of around ;K. Some industries have higher protection rates

but these will be gradually reduced by 10-;. ower protection levelshave increased competition which has resulted in greater efficiencyand productivity in the traded goods sector.

*ndustry 5lans / Special assistance pac ages have been developed forseveral ey industries that will be adversely affected by tariffreductions. %#amples include the "utomotive $ompetitiveness &

*nvestment Scheme and the Strategic *nvestment 5rogram for the T$industry. These programs provide incentive for firms to continueinvestment levels and maintain efficiency whilst the industryrestructures as a result of the tariff changes and increased competition.

"ccess to oreign ,ar ets & ree Trade "greements / 5olicies thatincrease the international competitiveness are worthless if firms areunable to gain access to world mar ets. *f countries are usingrestrictive practices and protectionist policies then "ustralian firmsmay be denied access to trade with a particular country. The "ustralian

government has free trade agreements with several countries includingthe >S" and is negotiating bilateral agreements with numerouscountries 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 5acificregion but many ob ections have been raised in this forum in regard tomultilateral 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 promotereforms 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 achievesincreased mar et access through trade promotions underta en by"ustrade.

$ariff Reductions

*n ,ay -D!! the process of industryCbyCindustry tariff reform based onan in'uiry process was replaced by a commitment to acrossCtheCboardtariff cuts. 2espite high unemployment this policy was e#tended in the*ndustry Statement of ,ay -DD- with a general commitment to reduce alltariffs to ; per cent by 1000. The ; per cent target was achieved with thee#ception of the motor vehicle and te#tile industries The =oward iberalgovernment subse'uently re ected proposals to reduce the general tariffrate to Iero. See chart ;

CHART 5: EFFECTIVE RATES OF ASSISTANCE IN MANUFACTURING

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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 6% run li e a

corporation. "ll political and bureaucratic intervention is removed.

overnment 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 essentialinfrastructure to business. ie electricity generation and water supply.

5rivitisation / 5rivitisation means to sell off 6% s to the privatesector or have a public float for shares. This is ta ing $orporatisation astep further and actually ma ing the organisation a privately ownedenterprise. " private sector business should run more efficiently than a6% 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 pricescharged by public trading enterprises. This has an important cost cuttingimpact on the economy because many of these organisations provideessential services li e water electricity gas and transport. alls in the

prices of these commodities will result in cost reductions in industrygenerally.

CHART : GOVERNMENT TRADING ENTERPRISES - AVERAGE REALPRICES

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4. $a ation ReformThe ederal overnment has implemented some important changes tota#ation. The aim of these reforms was to remove distortions to theallocation 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 reducedthe international competitiveness of "ustralian industry. ST / The introduction of the oods & 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 theST. 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 yearhas promoted small business and reduced compliance costs for the self employed.

$ompany Ta# / " reduction in $ompany Ta# to ma e our ratesinternational 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 werehaving the dual effect of reducing investment and employment in"ustralia.

$apital ains Ta# / 3eforms included reductions in $apital ainsTa# to encourage investment in business assets. =igh ta# rates oncapital gains for business assets was discouraging investment andcapital 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. oss of s illed wor ers was havinga significant impact on staff training and recruitment costs.

State rants / "bolition of State grants which are replaced byState s share of ST. This increased public sector efficiency byreducing the needs for comple# and time consuming ederal Statenegotiations. *ncreased public sector efficiently would ultimatelyresult in lower ta#ation for households and firms.

$omputer *ntegration / 3eforms included improved integration ofthe ta#ation and social security systems. This measure reduced social

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security fraud and ta# evasion and improved the e'uity of the ta#ationsystem.

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 drivedown business costs and improve efficiency and internationalcompetitiveness.

Structural $hange / $ompetition will increase the pace of structuralchange in many ey industries. ,icroeconomic reform is oftenreferred to as economic rationalism. %conomic rationalism aims toclear away obstacles and allow mar et forces to induce structural

change. Structural change can occur as a result of changes intechnology incomes consumption patterns or government reform

policies. ,icroeconomic reform aims to create structural change suchthat 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 etwill 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 productivityand efficiency as well as enabling the "ustralian economy to achieveaverage growth rates of :K.

2ynamic %fficiency / *nnovation and product improvements will resultfrom increased competition. irms will become more innovative byintroducing new production techni'ues and developing products that

better meet the needs of consumers. ower $ost of 5roduction / irms will eep costs to a minimum and

use the least cost method of production. They will be more focused oncost reductions and will ma e better use of resources and inputs.

ower 5ublic Sector $osts / 6% s were often sheltered fromcompetition by laws and regulations. The end result was high pricesfor basic goods and services which were inputs for other firms andindustries. This created inefficiency and higher costs. The solution wasto 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 moreinternationally competitive.

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Increased 6D#

5otential benefits from wideCranging microeconomic reform have beenfurther emphasised in a number of studies ($hart 7). or e#ample the*ndustry $ommission estimates that a range of reforms associated withthe implementation of the 9ational $ompetition 5olicy could boost 25

by around ;.; per cent. $hart 7 shows the increases to output predicted byeach study in the various sectors of the economy.

CHART !: PRO"ECTED BENEFITS OF MICROECONOMIC REFORM

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%#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) ower levels of industrial disputes.

b) ower unemployment rates.c) *ncreased labour productivity.d) "ll of the above.

Short "nswer Muestions-. %#plain the benefits of deregulation to "ustralian firmsN

1. =ow has labour mar et reform in "ustralia improved macroeconomic performanceN

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Documents

10. Microeconomic Reform