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1 Introductory concepts 2  Market mechanism  3 Elasticities  4 Market structures 5  Market failures  6  Macro economic activity/eco growth  7 Inflation 8  Employment & unemployment  9  External Stability  10  Income distribution 11.Factors affecting economy  12  Fiscal/Budgetary policy  13  Monetary Policy   14 Aggregate Supply Policies  15 The Policy Mix

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Microeconomic reform policies

Microeconomic reform policies (MRPs) are specific AS policies that aim to improve the structure, operation and efficiency of 'markets' (or industries) in Australia such that productivity and competitiveness of Australian goods and services is improved.  They typically involve the removal of impediments to achieving greater productivity or efficiency of the Australian economy such that we are better utilising our resources and creating an environment that is more conducive to productive investment.

The importance of microeconomic reform policies was highlighted in the Trade Policy Statement released by the government (April 2011).

Australia will not wait for other governments to reform their economies before reforming ours. Australian economic reform is good for jobs, good for prosperity…..Productivity growth has accounted for 80 per cent of the increase in Australia's national income over the past 40 years. In an ageing population and a patchwork economy, productivity growth will need to do most of the heavy lifting over the coming 40 years too…….Reviving productivity growth through a new economic reform program is core business for the Gillard government.  Economic reform at home and securing better market access abroad work hand-in-glove in creating jobs and prosperity.'            


The difference between microeconomic reform policy and macroeconomic policy

MRPs are policy initiatives aimed at improving the performance of particular sectors, industries or enterprises in the economy (or more generally improving the operation of 'markets' in the economy).  Accordingly, microeconomic reforms operate on the supply side of the economy by manipulating the productive potential of each enterprise, which in turn determines the productive capacity (or supply potential) of the economy more generally.

Ultimately, MRPs are aimed at improving the structure of the economy such that trade in goods and services is conducted in the most efficient way possible.  Macroeconomic policy, on the other hand, concerns policies that seek to influence the economy at a broad (macro) or aggregate level, such as a tightening of monetary policy that seeks to reduce growth in AD and decrease inflationary pressure, or the delivery of an expansionary budget deficit to stimulate the economy.

Whilst MRPs are designed to achieve structural changes in the economy, structural change can and does occur even without MRPs.  Normal competitive pressures in markets cause businesses and industries to review their operations in an effort to improve performance. Accordingly, changes in technology, or changes in market trends, can cause businesses to restructure in an effort to improve efficiency.  For example, the 2013 decision by ANZ Bank to restructure operations and transfer some production facilities offshore is an example of structural change or structural reform, but it is not an example of a microeconomic reform policy.  

Over 2013 there has been much publicity given to the structural changes taking place in the economy as a result of the higher dollar. In particular, the mining sector grew at the expense of the manufacturing sector that has been forced to undergo changes to the structure of their organisations in order to remain competitive.   Notable examples include the planned closure of Ford and Holden production facilities, with management citing concerns such as the high dollar and high Australian labour costs.  Many of the structural changes taking place are once again not examples of MRPs per se, but instead examples of structural change caused by changes in market conditions.  In some cases, however, the longer term effects of MRPs (such as tariff cuts over time) have been contributing factors to the decision by motor vehicle manufacturers in Australia to discontinue operations into the future.

How microeconomic reforms improve the structure of the economy and boost productive capacity

With the MRPs you might examine as part of your studies, it is important that you are able demonstrate an understanding two things.

  1. How the particular reform is able to improve efficiency/productivity and/or competitiveness in the economy; and
  2. How the resulting improvement in efficiency/productivity is likely to assist in the achievement of the government's goals.

The means by which the MRPs improve efficiency/productivity will typically be different for each policy.  In other words, while all MRPs aim to improve efficiency, the way each policy achieves this goal will usually be unique.  However, once it can be shown how a MRP has increased efficiency/productivity or competitiveness, the explanation for how the policy assists in the achievement of each of the government's goals will be very similar.  

To illustrate, tariff reductions (as a feature of trade liberalisation) are an example of one microeconomic reform that works to improve efficiency by forcing protected industries to find ways of restructuring their operations in order to reduce costs and become more price competitive against the cheaper imports.  Firms in these industries will often raise productivity (e.g. via the employment of the latest technology), which then reduces average costs of production and simultaneously raises the supply capacity of that enterprise.  These factors allow firms to reduce prices (facilitating downward pressure on inflation) and increase their competitiveness, which boosts sales and production levels over time and stimulates economic and employment growth for the economy.  In this respect, lower tariffs have helped to achieve internal stability in Australia, with favourable impacts on growth, inflation and unemployment (in the longer term).

It is important that you develop an understanding of how a MRP can cause the structure of Australian industries to change so that there is an increase efficiency/productivity and international competitiveness.  Examples of MRPs will be provided over the next few pages in terms of how they improve the structure of the economy and then how the resulting improvements in efficiency or productivity work to assist (or hinder) the achievement of the government's economic goals.  

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