A big theme in Australian history has beenhome.swiftdsl.com.au/~daveclark/gs05lec3merprivw.pdf ·...

GENC2001 An Introduction to the Australian

Economy: Lecture 3: Microeconomic reform

Copyright: David Clark 2004 1

A big theme in Australian history has been:

“The government shouldinterfere to stop the laws of economics from working.” (Student essay)

However, such laws usually defeat the best efforts of governments

What is microeconomic reform?

The generic term for 'government policies designed to deregulate or re-regulate product, service and factor markets in such a way as to promote competition and efficiency in relation to both domestic and international markets.

Basic objectives?

To allow the allocation of resources to better reflect market (as opposed to non-market) outcomes.

Removal of reducing restrictions on trade - not just international trade but also trade among individuals and firms within a country

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Dave Clark

Note

Not all of these will be put up in lecture. See pages 14-16 in particular - good case study of MER results. Included to widen your knowledge of topic and to save you time.




Three types of regulation

Economic regulations

Tariffs & subsidies

Tax concessions

Social regulations

Minimum wage laws

Consumer protection

Administrative regulations

Government controls over business

Other forms of "red tape"

But microeconomic reform does not equal deregulation

Not just a matter of reducing regulation or smaller government.

For example, where there are clear examples of market failure - e.g.monopoly power or "externalities" - then microeconomic reform may involve redesigning and improving regulations rather than deregulation or smaller government.

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Microeconomic reform aims to maximise four types of efficiency

Productive efficiency: efficiency with which resources within a firm are utilised by changing managerial and employee practices

Dynamic efficiency: the extent of innovation and the speed at which new developments are adopted by firms.

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Microeconomic reform aims to maximise four types of efficiency

Intertemporal efficiency - improve the allocation of resources between current consumption and investment and encourage more investment in technology and skill enhancement

Allocative efficiency: the extent to which prices reflect costs and funds are allocated to their best uses across the economy

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Main ways in which microeconomic reform helps productivity

Through the exposure of Australian firms to increased competition:

Australian firms will have the incentive and the ability to exploit 'catch-up' opportunities - adopt world's best practice.

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- internationally via the reduction of protection and

- domestically via competition policy

Barriers to Australian microeconomic reform were great

Resistance from all sorts of industry and interest groups - including regulatory bodies and their employees - to reforms which threaten their privileges or powers - even though such reforms may clearly be in the national interest.

Consumers of public sector provided services are often the last to be given a hearing in public debates. Debates usually dominated by the suppliers of the service, who have most to lose from any cut-backs or changes

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Barriers to microeconomic reform were great

Difficult trade-offs between short-term macroeconomic costs and the long-term microeconomic benefits. For example, changes in taxes may reduce tax revenue and hence government spending but in the long-run encourage more investment, jobs, growth and dynamism in the economy.

Should reform be piece-meal, step-by-step, or is a bold, boots-and-all strategy superior in overcoming resistance from vested interests? Studies show that even the sequence of reforms can be very important.

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Why microeconomic reform unavoidable

Parochial lobby groups form & then gain and defend benefits obtained for their

members from governments

Resources increasingly flow to lawyers, bureaucrats, academics and lobbyists

who work the system

Result: economies stagnate and then decline

Subsidies, trade protection and government handouts grow & interest groups argue

"national interest" to hide their own self-interest

Why are these interest groups so powerful?

Narrow, self-serving interest groups easier to form and maintain

For example, easier for five manufacturers to form a cartel or lobbying group to push for high tariff protection.

But organising 5 million car users much more difficult. Each driver hopes to "free-ride" on the others and any gains from their actions would be highly dispersed, rather than just go to five members

And once these groups have special benefits they fight to the death to defend them

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Productivity growth poor in 1970s & 1980s

Real GDP

Labour Productivity

Total factor productivity

0 1 2 3 4 5 6% annual average growth, 1970-89

AUSTRALIACanadaGermanyJapanUKUS OECD average

Data source: OECD

The ten main microeconomic reform steps taken in Australia

In the early 1980s, financial markets were deregulated, interest rate and exchange controls abolished, the $A floated, and banking opened to new entrants.

Phased reductions in protection were announced in 1988 and 1991. Result: general level of tariffs fell to only 5 per cent by mid 1996. But motor vehicles and textiles, clothing & footwear tariffs remain high.

Major infrastructure reforms, including the setting up of a national electricity market, abolition of the two-airline policy, competition in telecommunications and job cuts in coastal shipping and on the waterfront.

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Main microeconomic steps cont...Improvements in accountability & efficiency of government business enterprises through corporatisations & privatisations.

Company tax reduced from 39 cents in the $ to 36 cents and full dividend imputation and fringe benefits tax introduced.

Business regulation rationalised by the introduction of "mutual recognition" of Federal and State laws on products and occupations.

Progress made in promoting co-operation and reducing overlap between levels of government through the deliberations of the Council of Australian Governments (COAG).

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Main microeconomic steps cont...

Labour market reform - including the restructuring of awards, some moves towards enterprise bargaining and measures to improve the flexibility and skills of the workforce.

Better social security targetting of genuine needy, through changes to means tests tightening of social security and clamp downs on fraud.

Reforms to education, including introduction of Austudy and the Higher Education Contribution Scheme and greater centralisation of universities. (Many academics believe latter has been disastrous.)

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Privatisation is the full or partial transfer of ownership of public assets to the private sector.

This process refers to the sale of enterprises which are a ‘going concern’ rather than the sale of land or buildings.

NB: Privatisation does not cover activities such as contracting out, leasing and private financing of infrastructure projects.

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What is privatisation?

Arguments for privatisation: a summary

MACROECONOMIC:- reduce public borrowing and debt.

MICROECONOMIC: - improve efficiency, innovation and choice

CAPITAL MARKETS: - widen share ownership and private opportunities

INSTITUTIONAL: - more rational pricing of goods and services

MAIN DANGER - PRIVATISATION MERELY REPLACES PUBLIC SECTOR MONOPOLY WITH PRIVATE SECTOR ONE

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Why we had so many government business enterprises (GBE's)

Tyranny of distance and geography - in early days many activities were simply unprofitable.

Belief in the "Nanny State".

Seen by Left as a challenge to capitalism by worker controlled enterprises.

Desire to assist private sector with infrastructure and cheap materials.

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Reasons for privatisations in Western economies: I

Academic studies which had tended to conclude that it was the lack of competition and the sectoral concentration of government business enterprises (GBEs), and not so much the ownership structure, which explained the differences in efficiency between private and public owned enterprises, were increasingly discredited.

Reason? Most of these studies were based on a comparison of cost between different enterprises in public and private ownership. Studies done outside universities, which have looked at the same enterprise before and after privatisation, have demonstrated the emergence of significant efficiency gains from privatisations.

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Reasons for privatisations in Western economies: II

Increasing, internationalisation and economic integration of economies made cross-border mergers and acquisitions and strategic alliances all the more important. This encouraged privatisations for two main reasons.

First, relieved from the restraints of government budget financing, privatised GBEs were now more free to target new business areas and to make new investments by tapping directly into the capital market.

Second, private companies were now more willing to undertake joint ventures with enterprises that were not state owned.

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Reasons for privatisations in Western economies: III

An aim to widen share ownership and to create a "share holder" culture in the population at large - a kind of "peoples' capitalism".

This aim part of a bigger goal: the development of further expansion of capital markets.

It was argued that large scale privatisation should lead to increased capitalisation, to more liquid markets, and to closer scrutiny of companies by the capital market.

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Reasons for privatisations in Western economies: IV

In the 1990s, governments came under increasing budgetary strain. This made the privatisation of GBEs attractive by removing the need to transfer resources to GBEs running deficits and/or by generating revenues from their sale.

However, by selling off GBEs, the government gives up the future dividend stream from these assets, leaving the net effect on government wealth difficult to assess.

Also, it is crucial that the proceeds from privatisation are not utilised to simple relieve pressure for taking measures against structural budget deficits.

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Privatisation: three main areasFinancial services - e.g.

Commonwealth Bank, State Banks of Victoria, SA, NSW

and WA

Electricity & gas - Victoria the most radical but other states likely to follow suit.

Telecommunications and transport - e.g. Telstra &

Qantas. But state railways unlikely to find buyers.




Australia's major privatisationsTelstra (66%)

Telstra (33 %)Vic Electric

CBA (2nd float)United Energy

Qantas (75 % float)CBA (1st float)

NSW GIOSolaris Power

Bank SATabcorp

Qantas (25 % to BA)

0 10 20 30 40 50Proceeds, billions of dollars

Nov 95Sept 93

Aug 93July 95July 91June 92

Oct 95June 95June 94Dec 93

Nov 97Estimated

Government ownership in 1990

Source: The Economist0%-25%25%-75%75%-100%

West Germany

Britain

United States

Japan

AustraliaPost AirlinesTelecom.

Railways Electricity

GBEs had more capital, less product

16.0%

10.0%

74.0%

15.0%

19.0%

66.0%Gross product Net capital stock

GBEs Other Public Sector Private Sector

1989 estimates for EPAC




State GBEs were the big losers

1983-84 1985-86 1987-88 1989-90

0

1

2

-1

-2

Losses, $s billions

Commonwealth States/Territories

Largely railway losses

Easier for Commonwealth - couldpush up phone & post prices

Australian privatisations big by world standards

RBA Bulletin, December 1997

0.12 0.120.35 0.4

0.75

1.75 1.8

JapanGermany

SwedenFrance

UKAustralia

NZ0

0.5

1

1.5

2

Annual average proceeds, 1990-97, as a % of GDP

According to the OECD, global privatisations totalled about US$30 billion in 1990 and nearly US$100 billion in 1997.




Both Commonwealth & State governments privatised

RBA Bulletin, December 19971991-92 1993-94 1995-96 1997-98

0

5

10

15

20

25

30

$s, billions

Commonwealth*State

* Includes the full proceeds of $14.3 billion from the sale of Telstra in financial year 1997/98, although payment is in two instalments in 1997/98 and 1998/99.

Flows pre- privatisation - thinFlows at privatisation - thick

Post privatisation - ++++

STATE GOVERNMENT

FEDERALGOVERNMENT

PRIVATEINVESTORS

GOVERNMENTENTERPRISES

NotionalTax

After taxreturnTax loss

compensation

Proceedsof theprivatisation

Aftertax

return

Corporatetax

Investor tax

+++++++

+++++++++

Explanation of chartPre-privatisation position:

- State GBEs were not subject to Federal income taxbut many paid "notional" income to their State owners.Rate is usually same as Federal corporate income tax.

Post-privatisation:

- These tax payments now collected by the FederalGovernment- State governments also lose their claims to after-tax returns - ie future dividends and capital gains -of their GBEs. These now owned by private sectorinvestors.

RESULT? - Federal Government collects a no-costwindfall gain. Hence State uproar.




Electricity industry: productivity up but jobs down

ABS 8401.0

-7-6

1

Jobs Wages & salaries bill Value added

0

2

-2

-4

-6

-8

% change, 1996-97

Microeconomic reform lowered many prices

Productivity Commission, 1998 Report on Government Trading Enterprises

-24

-11

-23

-23

-9

-9

-3

Electricity

Rail services

Port charges

Phone charges

Water

Main postal charge

Landing charges

0 5-5-10-15-20-25-30% change in average prices, 1993-98

Australia has had one of the larger programs among OECD countries – second, by value, to the UK and, relative to GDP, to New Zealand.

Privatisation proceeds are estimated to have been about $61 billion in the 1990s - coming roughly 50:50 from State and Commonwealth privatisations.

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Australian privatisations: a check-list

Governments have sold assets both by offering equity to the public and through trade sales.

Proceeds of sales have been used largely to reduce government debt.

Privatisation has dramatically increased share ownership in Australia.

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However, will the godfathers defeat the Treasurer?

“Let's make it clear.. the reason why we're in favour of a competitive economy is to benefit consumers.” (The Treasurer, Peter Costello, immediately after the 1996 Election.)

“Like many businessmen of genius he learned that free competition was wasteful, monopoly efficient.”. (Mario Puzo, The Godfather.)

Critics of MER got egg all over their keyboards - & reputations

Most quoted critic: the author, Bob Ellis.

Ellis' main argument was that by sacking people and cutting expenditure, economic rationalists will 'abolish the customer', that is, that they will reduce the capacity of ordinary people to consume the goods produced by the market economy and therefore create a downward spiral towards economic disaster.(See B. Ellis, First Abolish the Customer: 202 Arguments against Economic Rationalism.)

Most quoted academic economist critic: Professor John Quiggin

"The fact that a decade of intensive effort has produced no measurable improvement in economic performance is clear evidence that a new approach is needed”. (Professor John Quiggin, 1996, www.ecocomm.anu.edu.au).

Both horribly wrong: Since 1996, GDP growth, consumer spending growth, productivity, and living standards improvement among the very best in Western world|

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Government regulation index (1998)OECD Annual Economic Outlook Conference, Stockholm, Oct. 02

Our great deregulation paid offDifference in av. productivity growth rate, 1990-2000 compared with 1980-90

AUSTRALIA

More restrictive Less restrictive




A case study of MER: Australia's waterfront

See http://www.btre.gov.au/wline.htm for latest developments

Why waterfront productivity especially important

Over half of our goods export income usually comes from commodities and most of these are bulky - eg. coal, alumina, iron ore.

We face heavy competition on world markets with these exports. Hence even small cost differentials on getting goods across wharves, onto ships and to foreign markets can be very important.

Higher value-added exports are usually exported in containers. The fact that our container handling productivity is particularly poor by internat ional standards does nothing to encourage growth in such exports

Delays on our wharves can also encourage customers to seek more reliable sources of supply. Hence strikes can do long-term damage to our export trade

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Waterfront workers once had it tough but:

Mid 1980s examples

In Newcastle, 54 foremen and supervisors were employed for the 186 waterside waterside workers employed at the port

"Nick off days" were common - i.e. members of a gang drew straws to see who could return home for the day on full pay

Two employees were required to observe wheat being poured into the hold of a vessel. But jobs with much more danger to the public - such as bus and train driving - did not have such conditions

Under union rules, shippers of containers of mixed goods had to have the containers packed by union members, either on the wharves or at nominated depots. This prevented, for example, farmers from loading their own containers at a much lower cost.

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Australian unloading rates poor(Number of hours to load 600 boxes, 1994)

Bureau of Transport and Communications Economics

FremantleHamburg

MelbourneSydney

BrisbanePiraeus

AdelaideBangkok

WellingtonAntwerp

BarcelonaZeebrugge

Name of port

0 10 20 30 40 50Hours

Australian crane rates likewise

Bureau of Industry Economics

Adelaide

Fremantle

Melbourne

Sydney

Brisbane

Five ports average

Fed. Govt. target

World's best practice

Name of port

0 5 10 15 20 25 30Boxes per hours, irrespective of container size

Australian perks for seamen

A seamen who was sick for more than seven days was entitled to a further seven days leave, even if he had fully recovered and was fit for work

First class travel and accommodation had to be provided for seamen travelling between ports

Trans-Tasman ferries had one full-time barman for every 8 crew members - and many bars self-service!

And such conditions approved by Industrial Relations Commission.

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Result?

Inter-State Commission, Waterfront Investigation. (Canberra, 1988)

It cost more to ship goods Sydney- Wellington on Australian or New Zealand crewed ships than from Sydney to San Francisco!

Also cabotage - restrictions on foreign ships moving goods around Australia - made it more expensive to add value to Australian minerals. For example, it cost the same to ship newsprint from Hobart to Sydney as from Hobart to Tokyo

Australian National Shipping Line - set up to reduce our dependence on foreign shipping companies - became a joke - but Labor and Liberal governments have found it very hard to change.

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Net crane rate per port & liner shipping trade, lifts per net hour

Productivity Commission (1998), Report on the Waterfront

* Australian terminals Overseas terminals

* * ** *

*

** *

**

**

*

* * * * * *

*

Europeeast bound

Europewest bound

North Asia South EastAsia

US east coast

US west coast

Ham

burg

Tilb

ury

Mel

bour

neFr

eman

tleAd

elai

deSy

dney

*

Frem

antle

Mel

bour

neSi

ngap

ore

Sydn

eyPo

rt K

lang

Bris

bane

Adel

aide

Nag

oya

Pusa

nAd

elai

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elbo

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Bris

bane

Sydn

ey

Ham

burg

Tilb

ury

Mel

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neSy

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Frem

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Phila

delp

.B

risba

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elbo

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Sydn

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elbo

urne

L.A

.Sy

dney

Net

cr a

ne ra

tes,

lifts

per

hou

r

35

25

10

Container handling productivity has improved dramatically

Average containers lifts per hour, December quarter figures

www.btre.gov.au/wline.htm

$

$

$

$

$

$

$$

$

1995 1996 1997 1998 1999 2000 2001 2002 200314

16

18

20

22

24

26Melbourne Sydney Five major ports average$

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