Effectiveness of microeconomic policy essay PDF

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Assess the effectiveness of microeconomic policy on the Australian economy. Microeconomic policy refers to aimed at specific industries to increase aggregate supply in the economy through stimulating productivity and efficiency in the economy. It has been relatively effective in achieving government objectives. Background The main purpose of microeconomic policy is to promote structural change in the economy and National Competition policy Over the past 30 years, the National Competition policy introduced in 1995 have been a centrepiece of Australian competition policy and have an impact on price stability and economic growth. The policy prohibits anti-competitive behaviour in the market and reduce regulation which may reduce competition. In addition, they also aims to reduce competitive neutrality by government enterprise, this has seen corporates like Australia Post become corporatized and made to pay taxes. These polices are effective in stimulating competition, which is significant in stimulating technical productivity in the economy and therefore increase Aggregate Supply. In addition, it can also reduce cost-push employment in the economy and therefore help achieve price stability. A vital reform conducted is that ACCC increase their surveillance and implement reforms to industries that historically have less level of competition including telecommunication and energy by allowing more new businesses entering the market. This has effectively stimulate competition in these sector, and in 2005 it has seen electricity price down 19%, coal freight cost down 15% and telecommunication cost also dropped by 20% showing the effectiveness of this reform. Overall, according to the Productivity Commission, GDP in 2005 was boosted by 2.5% during the 90s. However, there have been concerns regarding the slow down of reforms due to ‘great complaency’. The Harper Review published in 2012 stated that there should be substantial changes made in order to improve competition in the globalised world. Specifically, so as to improve competition in retail sector, government should deregulate certain regulation on retail hours and zoning laws, as this can assist with retail stores to better compete with online stores. More deregulation in certain industries can further improve productivity in the economy which helps to stimulate both AS and economic growth since GDP rates has only averaged 2.4% since transition period. Although there have ben concern regarding its role in driving structural change in Australian economy, NCP is still a centrepiece in microeconomic reform while only having limited effect in generating a sustainable long-term growth in the Australian economy. Labour Labour market reform has been somewhat effective in achieving full employment and more sustainable economic growth in Australia. The microeconomic reform in labour market started in the 1980s when Australian government aims to put forward a decentralised wage determination system, which result in the introduction of enterprise bargaining in 1991. This allows wages to be determined at the enterprise level encouraging workers to work harder and therefore improve productivity and technical efficiency in the economy. This has been effective as between 1996 and 2014 labour productivity risen by 2.2% annually which is higher than OECD average. In addition, it can also stimulate allocative efficiency as labour

become more flexible and might move to industries that have better outlook which could result in higher pay like mining and financial service industries. However, Australia has been facing the issue of low wage growth for the past few year. Although corporate profit has risen by 9% in the past 3 years, it has not seen a sufficient wage increase which is only at 1.9% and real wage growth has been 0. This reflect the significant impact of loss of negotiating power in the labour market in Australia. There has also been an IMF report expressing the concern that real wage increase may only be at 0.3% in the next 6 years. Overall, It is still important to acknowledge that is has been somewhat effective in achieving full employment as Unemployment rate is only at 5% compared to 11% in the 80s, regardless of the concern of loss of negotiating power and low wage growth. In 2009, the Fair Work Act is also introduced as a part of microeconomic reform, providing a safety net in the labour market which includes a $18.93 minimum wage in 2019, risen by 3.5%. This can be effective in promoting equity and improving distribution of income in the economy. However, Financial Reform in financial market have had been somewhat effective in assisting Australian economy to achieve its government objectives. The aim of financial market reform is to promote competition and ensure efficient allocation of funds. The deregulation of financial market granting up to 16 foreign banks and lenders into Australian financial market allowing Australian to access foreign capital which result in a increase in accessibility of fund and therefore reduces cost of borrowing. This entice customer and businesses to borrow more funds in the economy. Deregulation also occurs as Federal Government encourages competition in home loan and mortgage finance. The benefit of the reform is that due to the historically low 2.4% saving rate in Australia under the 1.9% deposit rate, accessing of overseas funds can help us to make up the saving gap and allow Australia to make further investment in mining and manufacturing sector which consequently improve allocative efficiency and aggregate supply in the economy, thus, ensure a long-term sustainable economic growth in Australia. However, deregulation in mortgage finance and low cost of borrowing has led to significant household debt and foreign debt which has reached $2trillion dollars. In addition, according to Productivity Commission, there is still too little competition in the banking sector, where banks take advantage of this by exploiting loyal customer and adding up to $87 per month to their mortgage payments. THEREFORE, this limits the access of funds and reduce efficiency in the Australian economy which demonstrates that financial market reform has only been somewhat effective. Product Market (Trade) Product market reform focuses on the trade and industry policy which has been relatively effective in stimulating AS and maintain sustained growth. It is introduced via the 1988 and 1991 Industry Statement through removing quotas and tariffs which used to be 25% in 1970s. This has successfully promote competition in Australia therefore stimulate productivity of Australian firms. By 1986, quotas were removed and in 2010, total tariff was only at 1.3% in most industries. Since then, there have been a significant increase in level of imports as Australian signed free-trade agreement with 11 groups of countries which also shows the increase international competitiveness. This result in structural change in the economy requiring businesses to improve their allocative efficiency. This has been

considered effective as according to Productivity Commission in 2005, GDP increased by 10.8% while wages also risen by $4,200 in average which reflects its effectiveness in stimulating As and achieving economic growth. However, it could lead to structural unemployment in the short run due to the structural change. This is evidenced as 90% of workers that were above 40 years old and loss their job in manufacturing industries are unable to work again due to the mismatch in skills. This limits the ability to achieve full employment and economic growth, consequently, this result in the economic downturn in 1990s which was described as ‘the recession we had to have’. In response to this, in the 2015/16 budget, government allocate $300 to retrain staff and help them gain skills useful in the modern workplace. Overall, the reform in trades have been somewhat effective in increasing AS in the economy and stimulating eco growth after 1990s as Australia never experienced an recession since then. The other microeconomic reform government implemented is the corporation, privatisation as well as deregulation in certain industries. A range of government enterprise were privatised in the 90s in order to improve the level of competition in the markets, this includes businesses like Telstra and Quantas. It also follows with deregulations in industries such as telecommunications and financial service. These has been effective to not only increase productivity in these industries and therefore

Structure 2 Introduction Definition & State effectiveness & State the criterial that is assess against (e.g. government objectives which include eco growth, full employment, price stability) Background The emphasis of Microeconomic policies is to improve productivity in factor, product and labour market. Major microeconomic reform took place in the 90s in Australia and over this period it has relatively contributed to the 2.5%. annual GDP growth. This create structural change in the economy and allows economy to allocate funds into industry with higher demand and competitive advantage, consequently stimulate technical, allocative and dynamic efficiency in the economy. This will therefore increase productivity and aggregate supply which refers to the total amount of goods and services supply in the economy. (GRAPH) An increase in level of aggregate supply can help achieve government objectives and more sustainable growth in the long run.

Price stability (LABOR paragraph) Microeconomic policies including product and financial market reforms has been effective in achieving price stability in Australia. Microeconomic reform of the product market includes deregulation and privatisation of government enterprise like Telstra. The privatisation aims to eliminate competitive neutrality and force them to pay taxes like businesses in the private sector. This creates competition in Australia, stimulating firms to improve productivity and therefore improve technical efficiency in Australia and reduce costs. This is effective industries such as telecommunication where productivity risen by 8% since 1996 and costs of phone calls reduced by 25%. Therefore, as prices dropped, it reduces cost-push inflation, and this is demonstrated as average inflation rate since 1990 has been only around 2.6% which is between the target rate. In addition, the national competition Policy established in 1995 has been a centrepiece to the Australian microeconomic reform and also help Australian economy achieve price stability in the long run. It has limit anti-competitive business conduct such as predatory pricing in certain industries. The ACCC implement surveillance to industry with natural monopolies and allow third party access in industries like natural energy and telecommunications to promote competition. These specific initiatives allow the market to become more productive and costs of output will decrease accordingly as in the energy

market cost of electricity has dropped by 19%. Thus, it also helps to reduce inflation in the economy and maintain the inflation rate between 2-3% target band showing the effectiveness of it. However, there has been concern as inflation rate are too low at only 1.9% in 2019. Overall, microeconomic policies has been effective in maintaining long term price stability in Australia since 1996 ( 2.5% inflation rate between 1991 to 2018), but it is important to note that microeconomic policies emphasis on competition to maintain low inflation in the long term, while monetary policies acts as a counter-cyclical instrument and is the main polices utilise maintain inflation between 2-3% target rate. Full employment Microeconomic reform can also have be effective in assisting the Australian economy achieving full employment at NAIRU. Labour market reform has been the main contributor to this. Federal Government has sought to decentralize wage determination in the 1980s and introduced Enterprise bargaining in 1991. This allows employees and employers to negotiate their wages at an enterprise level and consequently as it recognise individual effort, the decentralisation of wage determination will result in higher level of productivity. Therefore, it might incentivise owners to employ more people rather than purchasing capitals which can create employment in the economy and therefore help Australian to achieve full employment. This has seen effective as 1million jobs has been created since 2013. In addition, deregulation in the financial market can also contribute to Australian archiving full employment. As financial market reform aims to improve competition through financial sector by granting license to over 40 foreign banks. This allows Australian consumer and businesses to access overseas capital to cover the lack of domestic savings, therefore, This will stimulate consumption and investment in the economy. As labour is a derived demand, this could lead to strong growth in job creation and consequently reduce unemployment. This is evidenced as unemployment has dropped from 11% in 1991 to only 5%, demonstrating a downward trend since labour market reform. However, it is important to note that this has create short-term unemployment in the economy due to the structural change in manufacturing and mining sector which can be seen as 80,000 people worked in Passenger Motor Vehicle industries are made redundant. Additionally, it has also result in the trend of casualization due to the flexibility decentralisation of wage determination system brings, and it is shown as underemployment rate has been rising significantly since GFC and it is currently at 8.1%. Overall, microeconomic policy has been effective in achieving full employment as it also

incorporates macroeconomic policy which uses government expenditure to create employment in the economy. Economic growth Microeconomic policy is relatively effective in achieving long term economic growth in Australia allowing us to achieve consecutive economic growth for 27 years. This is mainly due to the structural change generated from microeconomic reforms which stimulate allocative and dynamic efficiency in the economy. Specifically, financial reforms which includes deregulation from the Campbell Report in 1981 granted foreign banks to operate in Australia which allows Australian access capital. Therefore, this can help cover the saving gap as Australian household saving ratio only averaged at around 4% since 1991 and the figure has also dropped significantly at the start of 2000s. Access to oversea capita allows businesses in Australia ot fund investment in industries like mining or service industries where Australia has comparative advantage in or having high demand both domestically and globally and also increase productive capacity in the economy. This will improve technical efficiency in the long term while also result in structural change and therefore improve allocative efficiency in the economy. The other microeconomic reform aims to achieve this is tariff reform, where government aims to remove tariffs and quotas since the 1980s. By 2006, tariffs in Australia only averaged at 1.3%, which can create significant competition in Australian market. This can also stimulate technical and allocative efficiency while improve international competitive of Australian products. This is most evidenced in agriculture as farms have merged due to competition, and overall level of output has increased as productivity improved by 36%, allowing agriculture export increase by 22%. Overall, these reforms allows the Australian economy gain higher level of productivity which was effective as multifactor productivity risen by 1.8% annually on average over the 1990s in Australia. Therefore, it stimulates aggregate supply and allows Australian economy to achieve a more sustainable after reform is introduced. The effectiveness is evidenced as Australian has not suffered form a recession for 27 years and annual growth rate from 1991 to 2006 has been at 3.5%. ` However, there has been stagnation in economic growth since the transition period as GDP growth only average at 2.4% since 2012, this is mainly due to the short-term effect of structural change and the slow down in micro reform. The other negative implication is that it has result in a 2 trillion foreign debt which may limit Australian’s ability to further stimulate economic growth in the long term and also effectiveness of macroeconomic policy. Overall, microeconomic growth has been relative effective in improving AS and generating long-term sustainable economic growth in Australian while incorporating the help from macroeconomic policy which can stimulate growth in the short run.

Although microeconomic policies has been relatively effective in achieving a long-term growth at 3.7% and also many other government objectives, it has some significant limitations. For instances, it has long implication and impact time lag which may not be able to solve instant issues within the economy. It also creates the limitation where microeconomic policies and reforms become vulnerable to political constraints as party does

not have majority in the Senate making it harder for its initiatives and reforms to be implemented. Moreover, it is the global influence where the slowdown of Chinese economic growth and trade tension in the world may limits the effectiveness of micro polices in AUSTRALIA....