Academic journal article The Economic and Labour Relations Review : ELRR

What Should We Expect of Microeconomic Reform?

Academic journal article The Economic and Labour Relations Review : ELRR

What Should We Expect of Microeconomic Reform?

Article excerpt

1. Introduction

Recent announcements of proposed divestiture of public ownership by the Australian government in the domestic airlines, in international air transport, in telecommunications and the Commonwealth Bank are among what many would include in the piecemeal process of microeconomic reform. Yet micro reform is much more than (and not always wholly dependent upon) privatisation. It spans a spectrum of government initiatives that seek to enhance economic welfare through measures designed to better exploit the allocative role of prices.

In Australia, these above mentioned proclamations are the latest in a series of government-inspired changes to individual markets' functioning that began with the Whitlam Government's 25 per cent tariff cut and span the floating of the exchange rate and deregulation of financial markets in the 1980s. All were, in a sense, "microeconomic reforms."

Microeconomics as a discipline studies the working of individual markets, but not necessarily in isolation. Some of its deepest insights are into the interaction of markets. The capacity of such interactions to deliver desirable material outcomes for a society provides the reason for microeconomic reform-to encourage efficient markets--not for their own sake, but for the gains they can supposedly bring. These gains come from the perceived ability of markets to:

* co-ordinate and reconcile divergent plans of individual producers and consumers,

* provide incentives and, consequently,

* allocate resources in an efficient fashion.

A policy oriented microeconomist would accordingly see the practical side of microeconomic reform as primarily concerned with:

(i) identifying markets where there is evidence of significant failure in some aspect of the above;

(ii) establishing what changes are both improving and feasible (open to government influence) in such markets;

(iii) assessing the form, magnitude, and distribution of any gains flowing from such changes and the period over which they are likely to be realized;

(iv) establishing the dependence of if any, (ii) and (iii) on the sequence of reform. This last task would help governments choose the agenda of reform;

(v) implementing the agenda.

It is fair to say that in Australia some progress has been made in (i) to (iii) above. It is difficult to see that (iv) has occurred and so the government - inspired micro reform "agenda" is ad hoc. Steps towards more competition in product markets through tariff reductions were taken in the early 1970s (although this process faltered somewhat after the 1974 recession-see Table 1) before any comparable progress in institutional changes to the markets for financial services, other services, or labour.

The significant changes to financial markets that accompanied the implementation of the Campbell report in the early 1980s had therefore been preceded by governmentally-devised increased openness in some product markets,while others, such as Textiles Qothing and Footwear and Motor Vehicles, remained heavily protected, with assistance levels increasing substantially over the levels that followed the tariff cuts of the early 1970s.

As a result, part of the import competing sector was being subjected to adjustment pressure in an environment where little was being done to lower cost structures through elements of microeconomic reform that are only now being given attention. (These elements include the various government non-tax charges and reforms to competition-and therefore pricing-in the non financial services sector.) The remainder, the least internationally competitive parts of manufacturing, far from being subjected to comparable pressure, was being increasingly sheltered. Furthermore, substantial components of protection were offered through quantitative restrictions such as quotas, whose protective effect increased substantially with the fall in the nominal value of the Australian dollar in the mid 1980s afterits float in 1983. …

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