Microeconomic Policies and Individual Industries (HSC SSCE Economics): Revision Notes

Microeconomic Policies and Individual Industries

This note examines how specific microeconomic policies affect individual sectors in the Australian economy. These policies aim to improve efficiency, increase competition, and boost productivity across different industries.

Deregulation

Deregulation is the process of simplifying or removing rules that restrict how market forces operate. The main purpose is to improve industry efficiency and encourage structural change.

Financial sector

During the 1980s, Australia's financial sector underwent major deregulation to improve efficiency and competitiveness. Key reforms included:

• Floating the Australian dollar: This removed the fixed exchange rate system
• Removing RBA controls: Banks gained autonomy to set their own interest rates on deposits and loans based on market conditions
• Opening to foreign competition: Barriers preventing foreign banks from entering Australia were removed

These changes created a more competitive environment for financial services. The benefits spread throughout the economy as consumers and businesses gained access to better-priced finance suited to their needs. Lower costs and improved access to finance facilitated increased household consumption and business investment.

Agricultural industries

Agricultural deregulation created more competitive markets for farm produce. Previously, single government-owned businesses or industry cooperatives held monopolies over buying farmers' produce in sectors like dairy, wheat and wool. Deregulation ended these monopolies and gave farmers new incentives to innovate and diversify their production.

Combined with tariff reductions, these changes transformed Australia's agricultural sector from highly regulated to one of the least regulated agricultural industries globally. Agricultural output expanded significantly after deregulation.

Transport industries

Transport is crucial to Australia's economy given the large distances within Australia and between Australia and other nations.

Aviation

Australia's domestic aviation industry is dominated by two airline groups: Qantas/Jetstar and Virgin Australia. The sector was deregulated in 1990, abolishing the official Two Airline Policy that had existed since 1952.

Several airlines have entered the market since 1990 but struggled to compete against major carriers. Two smaller airlines, Rex and Bonza (which began operations in 2023), mainly compete on regional routes.

Rail freight

The rail freight industry underwent significant efficiency reforms in recent decades. In 1997, Commonwealth and state governments established the Australian Rail Track Corporation (ARTC) to manage the 10,000-kilometre national interstate rail network.

The ARTC sells access to privately owned freight businesses such as Pacific National and oversees network maintenance and new capital works. However, establishing corporations at arm's length from government does not guarantee efficient operations. A 2023 review of Inland Rail by Dr Kerry Schott found the 1,700-kilometre infrastructure project had been poorly managed and experienced an "astonishing" cost blowout, partly due to government failure to appoint board members with necessary freight rail or infrastructure skills.

Telecommunications industry

Telecommunications contributes around 2% of economic output and plays an important role in productivity. The dominant position is still held by Telstra (formerly the government-owned monopoly Telecom Australia), but the industry has been transformed by competition since 1990s deregulation.

New technologies and competition dramatically lowered telecommunications costs. New market entrants successfully competed in different product and service markets, including internet service providers, mobile carriers and business services providers. Nevertheless, Telstra remained the largest firm in the industry.

For many years, Telstra was accused of making it difficult for competitors to access its local monopoly over residential phone connections. During the National Broadband Network (NBN) rollout in the 2010s, the decision was made to separate the wholesale business (providing infrastructure access) from retail businesses (offering services to households and businesses). The goal was to improve access and increase retail competition while making high-speed internet more widely accessible.

Effective regulation

Effective deregulation requires striking a balance between competing policy goals. Excessive regulation can increase costs, reduce investment, discourage new market entrants and ultimately lower economic growth. However, excessive deregulation (or inadequate regulation) can lead to market failure (such as lack of competition) and economic instability. This tension is especially apparent in the finance industry because financial crises have economy-wide effects.

Key areas of ongoing regulation include:

• Environmental regulations: Significant in agricultural and mining industries
• Safety regimes: Comprehensive in construction, energy and transport
• Price and investment oversight: Regulators oversee industries dominated by large players in electricity, gas, water, postal services and telecommunications
• Professional services: Industries like law and accounting help businesses navigate regulations
• Emerging commerce areas: New regulations for ridesharing (Uber), homesharing (Airbnb), online services (Google, Facebook, Amazon), and buy-now-pay-later products (Afterpay)

Two large sectors likely to undergo significant regulatory reforms are:

• National Disability Insurance Scheme (NDIS) market
• Aged-care services market

Demand for these services has grown rapidly, and determining the best model for service provision and regulation has proved difficult for successive governments.

Reforms to public trading enterprises

Microeconomic policies have promoted efficiency in public trading enterprises (PTEs) – also known as government business enterprises – through two main approaches: corporatisation and privatisation.

Corporatisation of PTEs

Corporatisation encourages PTEs to operate independently from government, as if they are private businesses. This involves:

• Eliminating political and bureaucratic supervision
• Making public enterprise managers accountable for enterprise performance
• Attempting to achieve rates of return on assets comparable to private sector companies
• Operating in competitive markets (though some continue as regulated monopolies)

Examples of corporatised PTEs:

• Australia Post
• Energy Australia
• Sydney Water Corporation

Privatisation of PTEs

Privatisation takes corporatisation further by selling PTEs to the private sector, either wholly or partially. Australia has undertaken extensive privatisation in recent decades, with total value of privatised businesses among the highest in the world.

Examples of privatised PTEs:

• Telstra
• Qantas
• GIO
• Commonwealth Bank
• NSW Ports
• Queensland Rail
• Victorian electricity
• State banks
• Airports

The most recent major Federal Government privatisation was Medibank Private, sold for $5.6 billion in 2014 after 38 years in government ownership.

State governments have also privatised assets to free up capital for other purposes, such as transport projects. For example, the NSW Government's $20 billion privatisation of electricity "poles and wires" in the 2010s helped fund several transport infrastructure projects, including a second harbour rail crossing, light rail project and extension of Sydney's North West Rail Link.

Departures from privatisation trend:

In 2009, the Federal Government established the National Broadband Network (NBN) company to build and operate an optical fibre telecommunications system. The final cost was $51 billion. The NBN is one of the largest companies in the Australian economy and is expected to be privatised at some point in the future.

In 2023, the Minns Labor Government in NSW enacted legislation preventing future privatisation of two state-owned corporations: Sydney Water and Hunter Water.

National Competition Policy

Competition policy aims to promote market competition so firms increase efficiency and lower prices for consumers. Australia's market regulation laws underwent major reform after 1995 when Commonwealth and state governments agreed to implement the National Competition Policy.

Key reforms included:

• Governments agreed to implement reforms increasing competition in sectors where they operated monopolies (electricity, gas, water, rail and road transport)
• Removing special provisions giving publicly owned enterprises advantages over private competitors (the "competitive neutrality" principle)
• Establishing the Australian Competition and Consumer Commission (ACCC) as the national competition watchdog

Access to infrastructure regime

An important reform aspect was establishing a national regime to regulate infrastructure access costs. Where businesses owned monopoly infrastructure assets (such as airports, rail lines or telecommunications networks), they were required to give competitors access at reasonable prices.

Workable competition principle

While governments generally aim to maximise competitive forces, workable competition sometimes means reducing the number of firms in an industry to achieve international competitiveness. Remaining firms can then operate on larger scales and achieve the lowest possible long-run average costs.

Business practices outlawed by competition law:

• Monopolisation: Using dominant market position to eliminate competition, such as through temporary price cutting
• Price discrimination: Selling the same good or service in different markets at different prices (for reasons unrelated to different costs)
• Exclusive dealing: Setting supply conditions that exclude retailers from dealing with competitors
• Collusion and market sharing: Firms agreeing to fix prices or share markets to reduce effective competition

2017 competition policy changes

Several changes were made to Australia's competition policy regime in 2017, principally by expanding laws on misuse of market power:

• Previously, regulators had to prove a business actually intended to harm competitors to convict it of misusing market powers
• Under new law, regulators only need to establish that the business practice had the effect of harming competition
• "Concerted practices" were also banned, including actions like sending price information to competitors even without formal collusion agreements

Future of microeconomic policy

The period from mid-1980s to early 2000s witnessed extensive microeconomic reforms that dramatically changed industries in Australia. Fewer reforms have been achieved in the past two decades, as policy focus shifted towards macroeconomic concerns such as managing the mining boom, Global Financial Crisis, consolidating government debt and navigating the COVID-19 pandemic.

For example, only limited progress was made with "seamless national economy" reforms to simplify business regulations under the Rudd and Gillard Governments between 2007 and 2013. Many major recommendations from policy reviews over the past decade have not been implemented.

In 2020, the Morrison Government announced it would use the post-COVID-19 recovery phase as an opportunity to revisit long-standing economic reform opportunities in taxation, industrial relations and business regulation. This included replacing the Council of Australian Governments (COAG) with a National Federation Reform Council (NFRC) based on the "National Cabinet" success in responding to COVID-19.

While some changes were achieved (for example, business insolvency law reforms in 2021), little progress occurred in difficult reform areas including health care, schools, pharmacies and stamp duty on residential property.

Productivity Commission five-yearly reports

In 2016, the Australian Government commissioned the Productivity Commission to publish a report every five years assessing Australia's productivity performance and recommending productivity-enhancing microeconomic reforms.

Productivity performance concerns

Australia has achieved weaker productivity growth since the mid-2000s, with especially weak growth in labour productivity. In years leading up to the COVID-19 pandemic, productivity growth in Australia fell sharply to below the average rate in OECD countries.

The Productivity Commission, IMF and OECD have all recommended that further reforms are needed for Australia to return to higher productivity growth required to generate higher living standards.

In a 2021 review, the OECD recommended:

• Measures to strengthen competition and improve operating environment for businesses
• Reducing Australia's reliance on income tax revenue towards more use of consumption taxes
• Steps to reduce inequality in educational attainment

Overall impacts

Microeconomic policies have generally been championed by Australian governments because of their potential to lift economic growth and living standards. However, microeconomic reform has always been associated with shorter-term costs, such as job losses, business closures and damage to regional economies. Many reforms were met with strong opposition, especially from sectors that stood to lose from the changes.

Nevertheless, microeconomic policies have achieved extensive long-term benefits that have become clearer over time.

Benefits

Higher productivity and economic output

According to the Productivity Commission, Australia's GDP was around 2.5% (or $25 billion) higher in 2005–06 as a result of Australia's extensive National Competition Policy reforms of the 1990s. This translated into higher living standards of around $1,200 per person.

These improved outcomes resulted from increased productivity growth as sectors became more competitive, innovative and flexible. The Productivity Commission has cited as evidence the pattern of higher productivity growth in sectors most affected by microeconomic reform in years following implementation, such as telecommunications and financial services in the 1990s.

Lower unemployment

Higher productivity growth from microeconomic policies has contributed to increased economic output and lower unemployment.

Lower inflation

Greater competitive pressures and increased supply (both lowering cost-push inflation) in sectors affected by microeconomic reforms have reduced inflation. The Productivity Commission estimated that since the early 1990s:

• Rail freight rates have fallen by as much as 42%
• Port and telecommunications charges have dropped by up to 50%

Equitable distribution

Other Commission research concluded that because of lower prices and higher wages, the benefits of microeconomic policies have been relatively evenly shared between individuals and businesses.

Costs and criticisms

Short-term adjustment costs:

• Higher unemployment in the short term
• Closure of inefficient businesses
• Damage to regional economies

Poorly designed reforms

Some critics argue that poorly designed reforms have simply replaced one problem with another. For example, the former ACCC chairperson Rod Sims argued in 2017 that privatisation was "severely damaging" the Australian economy because governments were selling vital assets like ports and airports to private-sector monopolies. This resulted in higher one-off revenues for governments but then large price increases for consumers.

Uneven distribution of benefits

A common criticism is that reforms have often benefited wealthy investors while costs have been borne unevenly by lower-income earners. This is often cited as criticism of globalisation-encouraging policies, such as reduced trade protection and barriers to foreign investment.

Productivity statistics concerns

Critics question whether productivity statistics exaggerate microeconomic policy benefits. Research has demonstrated that many workers are experiencing increased work intensity – working longer hours without extra pay. This means some claimed increases in labour productivity may disguise the fact that people now work longer hours than in previous decades, but these extra hours are not recorded.

Evaluation

While microeconomic reforms are vital for generating increased productivity, growth and living standards, each reform needs evaluation on its own merits since not all reforms are effective. Designing and implementing microeconomic reforms is one of the greatest challenges for governments.

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