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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

Revision Lecture: Microeconomic Reform (MER)

A guide to the implementation of MER policies in Australia.

Lecture overview
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
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
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
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
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
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
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
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 11
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

  • 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 reform1
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 reform2
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
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 reform1
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
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
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
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 policy1
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 policy2
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
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 bodies1
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
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 mer1
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 mer2
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 mer3
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
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 mer1
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)