THE BENEFITS OF MICROECONOMIC REFORMThe preceding section illustrates the widespread and continuous process of structural change occurring domestically and internationally. In broad terms, the spectrum of choice facing governments in relation to structural change ranges from resistance to facilitation. Australia has been actively pursuing microeconomic reform across a number of areas to make the economy more responsive to change.
Consistent with the experience of a number of other industrial economies, the overall benefits from the reforms undertaken are becoming evident - particularly in the industries directly affected but also at the economy-wide level.
Benefits of Competition and CommercialisationA prime focus of reform has been to subject the private sector in Australia to more competition from both domestic and international sources and to improve the performance of public utilities. The direct benefits of these reforms are lower prices and increased productivity which, in turn, reduce input costs for other industries and increase aggregate employment opportunities. Aside from lowering the cost structure of downstream businesses, such price falls also exert downward pressure on overall inflation and inflation expectations.
Domestic aviation provides a good example of the benefits of increased competition. Prices fell with the end of the 'two airline policy' in October 1990 (Chart 10) and, with lower prices, passenger numbers have increased by around 75 per cent. Employment in August 1996 was 19 per cent above the August 1990 level and also in excess of the temporary peak reached in the late 1980s (Chart 11).
CHART 10: AVERAGE AIRFARES (1989-90 DOLLARS)
- Source: Australian Competition and Consumer Commission, Movement in Average Airfares Quarterly Update, March 1996.
- Source: ABS Cat. No. 6204.0.
In the communication services industry, measures to improve the commercial focus of Telstra and Australia Post include the introduction of managed competition in the telecommunications sector from 1992 and the reduction in 1994 in Australia Post's monopoly over some previously reserved postal services. A fall in Telstra's employment over the 1990s has been offset by increased employment elsewhere within the industry, including the new carriers (Optus and Vodafone) and the service providers that have emerged since the removal of Telstra's monopoly over many activities. Similarly, a reduction in employment in Australia Post over the 1990s has been offset by increased employment amongst private couriers and mail handlers. Overall employment in the communication industry (postal, courier and telecommunication services) has increased from around 150,000 at the end of 1989 to around 170,000 at the end of 1996. The improved efficiencies stemming from these reforms are illustrated by the marked reductions in the price of Telstra's services during the 1990s accompanied by significant rises in profitability (reflected in higher dividends and corporate tax payments) and by improved quality and responsiveness of service. Similarly, Australia Post's profitability has risen significantly since 1992 even though the price of standard stamps has remained unchanged, and therefore fallen in real terms, over this period.
Corporatisation and privatisation of electricity businesses have also fostered a more commercial focus and helped to deliver substantial improvements in productivity in recent years, although productivity remains below international best practice (Chart 12). Some losses in employment in the industry itself have been partly offset by an increase in contracted labour supplying services to the electricity industry. Average prices have fallen by six per cent (in constant dollar terms) between 1989-90 and 1994-95.
CHART 12: TOTAL FACTOR PRODUCTIVITY LEVELS IN ELECTRICITY(a)
- (a) Total factor productivity accounts for output increases beyond those explained by increases in inputs of capital, labour, fuel and other materials and services (eg contract maintenance).
Source: Bureau of Industry Economics, Electricity 1996: International Benchmarking, September 1996.
Significant economy-wide benefits - in the form of increased output and employment - can flow from price reductions of significant inputs supplied to other business activities. Electricity is an area of considerable importance to downstream industries, and the Industry Commission (1996) calculated that implementation of a range of reforms in this industry could deliver an eventual gain in GDP of up to 1.3 per cent. The commencement of inter-State competition on the National Grid should help to realise those benefits and lift productivity performance towards international best practice. Benefits of increased competition in electricity have already been seen in Victoria where 78 per cent of firms surveyed by the Australian Chamber of Manufactures consider that they have been able to negotiate better prices as a result of recent reforms and only 10 per cent consider that they are worse off. 
Overall, reforms to government business enterprises have resulted in lower costs for services provided, with surveyed prices for 58 major Commonwealth, State and Territory enterprises falling by around 10 per cent in the first half of the 1990s (Chart 13).
CHART 13: GOVERNMENT TRADING ENTERPRISES - AVERAGE REAL PRICES(a)
- (a) Index (1989-90 = 100). Prices of examined enterprises are deflated by consumer price index changes. The decline in the index indicates that average government trading enterprise prices have risen at a slower rate than general inflation.
Source: Steering Committee on National Performance Monitoring of Government Trading Enterprises, Government Trading Enterprises Performance Indicators, various editions.
Potential benefits from wide-ranging microeconomic reform have been further emphasised in a number of studies (Chart 14). For example, the Industry Commission estimates that a range of reforms associated with the implementation of the National Competition Policy could boost GDP by around 5.5 per cent.
CHART 14: PROJECTED BENEFITS OF MICROECONOMIC REFORM(a)
- (a) Benefits measured in terms of aggregate GDP and sectoral output.
Source: Results reported in Bureau of Industry Economics, Setting the Scene: Micro Reform - Impact on Firms, 1996. The results are derived from different studies, each involving wide-ranging, but different, reforms: Bureau of Industry Economics, Microeconomic Reform and the Structure of Industry, 1990; Economic Planning and Advisory Council (authors R. Filmer and D. Dao), Economic Effects of Microeconomic Reform, 1994; and Industry Commission, The Growth and Revenue Implications of Hilmer and Related Reforms, 1995.
Industry AssistanceIndustry assistance in the form of tariffs and quotas imposes economic costs by distorting the patterns of production and consumption and results in lower aggregate output. The effects of such assistance include higher consumer prices for some goods and higher input and production costs for other producers.
The removal or reduction of such assistance is a spur to reduced costs, improved productivity and a pattern of production that reflects commercial realities. Chart 15 shows that effective rates of assistance  for manufacturing industries as a whole have been reduced significantly in recent decades, particularly during the 1980s and 1990s. While considerable variation in rates of assistance remains across industries, there is much greater uniformity than was the case 20, or even 10, years ago.
CHART 15: EFFECTIVE RATES OF ASSISTANCE IN MANUFACTURING
- Source: Industry Commission, Assistance to Agriculture and Manufacturing Industries, Information Paper, March 1995 and Industry Commission, Annual Report 1995-96, September 1996.
The impact of such changes cannot be viewed in isolation from movements in the real exchange rate - ie movements in the nominal exchange rate adjusted for relative rates of inflation at home and abroad. As indicated in Chart 16, the real exchange rate has fallen considerably since the early 1980s; despite some more recent increases, the real exchange rate is currently about 25 per cent lower than it was in the early 1980s.
A lower real exchange rate will tend to moderate the effects of reductions in protection on import competing industry and provide a relative stimulus for export industry. In Australia, while manufacturing's share of overall production has continued to decline as in many other industrial countries, the share of some manufacturing activities has expanded - and some manufactured exports have increased considerably.
CHART 16: REAL EXCHANGE RATE(a)
- (a) The real exchange rate is calculated as the trade weighted index of the Australian dollar exchange rate multiplied by the domestic output deflator divided by a trade weighted foreign output price deflator.
Sources: ABS Cat. No. 1364.0.
Labour Market ReformsIn recent years, Australia has moved away from a centralised wage fixing system towards an enterprise-based bargaining system in which wages should increasingly reflect the circumstances of individual businesses and their employees. The process was accelerated by the Workplace Relations Act 1996. These reforms have the objective of reducing unemployment and increasing labour market responsiveness to structural and cyclical shifts in product markets. Increases in productivity should also be bolstered, including by removal of inappropriate workplace restrictions.
Overseas experience indicates that a greater focus on enterprise bargaining and increased wage flexibility across sectors and occupations helps to deliver better employment outcomes. The European Union, with relatively inflexible product and labour markets, had unemployment levels of around 10 per cent during the 1980s, and unemployment rates in Germany, France and Italy have risen to around 12 per cent over the past year. In contrast, in the United Kingdom - a European country that has instituted significant structural labour market reform - unemployment has fallen from around 10 per cent in the mid 1980s to around 6� per cent today. The United States, with generally more flexible markets, averaged around 6� per cent unemployment in the 1980s, much lower than in Europe, and unemployment has since fallen below 5� per cent. In New Zealand, after a decade of major structural reforms, including reforms to the labour market, unemployment has fallen rapidly to just under six per cent from a peak of almost 11 per cent in 1991 (although New Zealand's GDP growth over that period has been less than Australia's).
Effect on Aggregate ProductivityAn important objective of structural reform is an improvement in productivity performance, which is the main source of continued rises in living standards. At an individual industry level, such improvements are readily discernible; indications of significant gains in productivity have, for example, been mentioned above for the aviation and electricity sectors. The extent of reforms introduced and the indications of improvements evident at a sectoral level give rise to an expectation that an improved productivity performance should also be apparent at an economy-wide level.
A number of factors, however, complicate analysis of trends in aggregate productivity performance. Cyclical factors obscure recognition of structural improvements; for example, in the early stages of economic recovery, factor inputs may be used more intensively, resulting in increases in output and productivity. Moreover, productivity improvements are generally only incremental and so may only become apparent in aggregate data after a considerable period has elapsed.
Productivity measurement, too, is difficult, particularly in the increasingly important service industries. For example, deregulation of trading hours may have increased efficiency in wholesale and retail trade, one of the largest sectors in the economy. Yet extended shopping hours have actually decreased measured productivity on an hours worked basis as, in the absence of other indicators, measured output is indexed to sales (in effect there is no measurement at all of the improvement in service). Similarly, output in the financial sector is measured in terms of labour inputs and hence labour productivity is by definition unchanged, despite industry reports of large increases in output per worker in this sector partly as a result of deregulation.  These considerations suggest that the aggregate data may underestimate the true benefits of reform.
Despite the above difficulties, there are some indications that the improved productivity performance observed for particular industries is also becoming apparent at more aggregated levels. Movements in total factor productivity for the non-farm market sector since the early 1970s are shown in Chart 17. As expected, cyclical influences are apparent, even though the data have been expressed in terms of rolling averages. Nevertheless, even allowing for such influences in the first half of the 1990s, recent outcomes give support to the likelihood of a structural improvement in aggregate productivity performance over the 1990s. In particular, outcomes during the 1990s contrast with the general downward trend in productivity growth evident to the end of the 1980s, even though average productivity growth in the 1990s is not significantly above the 1980s experience. A very significant contributor to the improvement in aggregate outcomes over the 1990s appears to have been developments in the public enterprise sector, related to the substantial reforms of government business enterprises mentioned above. Since 1990, labour productivity levels in the public enterprise sector, which accounts for about 11 per cent of total output, have risen by around two-thirds.
CHART 17: TOTAL FACTOR PRODUCTIVITY GROWTH - NON-FARM MARKET SECTOR
- (a) Rolling average growth rates - six years to the year shown.
(b) The cyclically-adjusted trend has been derived by regressing annual total factor productivity growth for the period shown against a cyclical indicator and a time trend.
Source: ABS Cat. Nos. 5206.0, 5234.0 and Treasury estimates.
- (a) Rolling average growth rates - six years to the year shown.
International comparisons also suggest positive productivity developments in Australia. Differences in national accounting conventions create problems in compiling and comparing capital stock estimates, making comparisons of total factor productivity particularly difficult. Concentrating on labour productivity growth, therefore, data from the latest OECD Economic Outlook (including forecasts through 1998) indicate that recent and expected performance in Australia compares favourably with the rest of the OECD. As indicated in Chart 18, average labour productivity growth in Australia in the 1990s is expected to be marginally above that in the 1970s and 1980s, an outcome broadly consistent with the outcomes for total factor productivity noted above. Nevertheless, what is most striking is that Australian experience contrasts sharply with the deceleration evident for the OECD as a whole in the 1990s relative to its earlier experience, highlighting the importance of microeconomic reforms in Australia in enabling these broader trends to be avoided.
CHART 18: LABOUR PRODUCTIVITY GROWTH: AUSTRALIA AND THE OECD
- Source: Treasury estimates based on data from OECD, Economic Outlook, December 1996, including OECD forecasts to 1998.
Despite Australia's better recent productivity growth performance (compared with the OECD as a whole), Australia's productivity level remains relatively low. An international comparison undertaken by the OECD  indicates that Australia's labour productivity level in manufacturing in the mid-1990s was the lowest of the 11 OECD countries analysed. For a limited range of service industries analysed, the same study concluded that Australia's productivity levels were high only in construction and air transport. Similarly, the BIE has estimated that Australian industry lags significantly behind world best practice levels of labour and capital productivity in industries such as electricity, telecommunications, rail freight, waterfront container movement, aviation, gas supply, coastal shipping and road freight . These international comparisons of Australian productivity performance highlight the need for continued pursuit of reforms to enable ongoing efficiencies to be introduced, both to bridge the existing gap and to match further advances in world best practice.
What role do governments have in modern mixed economies such as Australia? Using appropriate indicators (macro economic aggregates) outline the present state of the economy. In what ways is the Commonwealth government using fiscal and monetary policies to influence the Australian economy? What are the main features of the government's micro economic policy? Why is the government concerned about microeconomic reform?
The role of government in Australia today has less influence on the market than they did a decade ago. It function now is to provide a stable internal and external balance under which the market can function. This is achieved through the use of fiscal, monetary and microeconomic reform.
Australia currently operates under a mixed economic system. This means that the government has partial control over the economy and has the ability to influence the markets. Recent moves by the government that shows the government's role in the economy to be shrinking includes the privatisation of government business enterprises (GBE) and deregulation of the financial market.
The main roles that the Australian government plays today are to ensure:
1) The efficient and even distribution of income (though CSSB, tax)
2) Provide a limited range of goods and services (Aust post)
3) General economic management through macro and micro economic policies.
In 96/97 the CAD fell to $20.9bn from the $27bn blowout during 95/96. This was largely due to a fall in domestic spending which lead to a slight rise in national savings. Inflation remained low and fell between the RBA's 2-3% target. This gave way to the RBA's 3 consecutive drops in interest rates to stimulate the economy. Economic growth has stabilised between 3-4%. Although this is a reasonable figure, a higher growth rate is required if unemployment is to fall from the 8.6% is...