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Revision Lecture: Microeconomic Reform (MER). A guide to the implementation of MER policies in Australia. Lecture Overview. Definition Tools Recent Case Studies Strengths Weaknesses. Definition.

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Revision Lecture: Microeconomic Reform (MER)

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Revision Lecture: Microeconomic Reform (MER)

A guide to the implementation of MER policies in Australia.

Lecture Overview

  • Definition

  • Tools

  • Recent Case Studies

  • Strengths

  • Weaknesses


  • “…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…”


  • 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


  • Deregulation

  • Privatisation

  • Corporatisation

  • Tariff Reform

  • Labour Market Reform

  • Competition Policy

  • Supervisory Bodies


  • 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.

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.

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%.

Deregulation - 3

  • In mid 1989 the NSW government deregulated the market for eggs.

  • Almost immediately prices fell by 17%.


  • 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.

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%

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.

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


  • 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.

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.

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%!

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.

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….

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.)

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.

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.

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.

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?

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.

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….

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.

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.

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.

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.

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

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

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!)

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

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)

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