Scales

Accelerating and Broadening
Australia’s Microeconomic Reform Agenda
Speaker: Bill Scales AO, Chairman, Industry Commission, Abstract
Australia is undoubtably a nation rich with opportunities, with extensive social andeconomic infrastructure, stable and responsible government, and abundant naturaland developed resources. But Australia also faces some significant challenges, including reducingunacceptably high levels of unemployment, managing environmental concerns, andresponding effectively to global competition and structural and regional change. To meet these challenges and make the most of our opportunities, we need to gainfurther leverage on our resources by improving our nation’s productivity and,importantly, flexibility. Microeconomic reform plays an important role in thisregard by improving the incentives, which govern the way we use our resources. While Australia has certainly implemented some significant microeconomicreforms in the last decade or so  the benefits of which are beginning to show the task is far from complete. For example, further reform is needed in transport,particularly rail and the waterfront; utilities; the labour market; resource access;and our tax system  areas which impact on various sectors of our economy, notleast of all our agricultural and resource sectors. But setting the right incentives for the productive use of our resources needs toextend beyond these traditional areas of reform. We also need to be sure weprovide efficient and effective education, health care and community services. Themanagement of our environment is also of critical importance, particularly ourwaterways. How we manage these resources, in both rural and urban areas, needsto be subject to rigorous scrutiny and, where appropriate, reform  in many ofthese areas the reform process has only just begun. Accelerating and Broadening Australia’s Microeconomic Reform Agenda Introduction
Microeconomic reform has become an important policy focus over the last decadeor so.
Microeconomic reform almost defies precise definition. Our understanding ofmicroeconomic reform has broadened, as Australians have discovered additionalimpediments to the efficient operation of their society. I suggest that in the 1970s,microeconomic reform would have been described almost exclusively in terms oftrade reform, and in particular, reductions in tariffs. In the late 1980s, it becameassociated with corporatisation and privitisation of public sector organisations. Inthe 1990s, it has become associated with a broader range of sectors and activities.
When I think about microeconomic reform, I think about reform of any part of ournation’s economic activity which undermines or impedes the efficient allocation ofits resources. Therefore, it embodies concerns about the efficient and effective useof our peoples’ skills and capabilities; the efficient and effective use of our naturalresources; and the efficient and effective use of our social capital  that is, ourhospitals, our schools, our community services.
Microeconomic reform aims to ensure that we have efficient regulations, effectiveregulatory institutions, and that the incentives are in place to encourage peopleacross our nation to use our nation’s resources, human, physical and financial,wisely. As productivity growth slowed in Australia in the three decades to 1990,there has been particular interest in this important issue amongst policy makers.
However, for many in the rural sector, the need to remove impediments toincreasing our wealth creating abilities has been only too obvious for decades. BertKelly, writing in the ‘60s and ‘70s as the ‘Modest Member’, and later as the‘Modest Farmer’, attests to that.
Supporters of such reforms, including the Industry Commission, have long arguedthe case for improving the incentives and institutions which guide the use of ournation’s resources. This is not to argue for reform for its own sake. But reform sothat Australians can enjoy improved living standards and quality of life.
It seems appropriate therefore at the beginning of 1998 to remind ourselves of whyit is important to pursue microeconomic reform, and indeed why it is important thatsuch reform be broadened.
The main points I will make in this paper are: • that Australia faces some very important opportunities and challenges over • that it will be improved productivity growth that provides the key to improving the living standards of Australians; Accelerating and Broadening Australia’s Microeconomic Reform Agenda • that microeconomic reforms are going to be central to our ability to reach our • that while much has been achieved over the last decade or so by many dedicated people, microeconomic reform is never finished. As one reform toimprove our living standard is implemented, it often discloses other long-standing impediments. The task for Australia is to continue with and broadenreforms, particularly regarding our economic and social infrastructure, ourlabour markets, and the environment, so that we continue to increase ourproductivity performance, and through improved productivity, create thepossibility for sustainable improvements in the living standards of our people.
Opportunities and challenges: A context for reform
Without question Australia faces many opportunities and challenges.
In terms of opportunities, we have a strong democracy with stable governments andwell functioning institutions a point easily taken for granted but which recentevents in Asia have shown to be very important. We have abundant naturalresources including enviable reserves of high grade coal, iron ore and uranium andextensive farming land; an educated workforce; and good economic and socialinfrastructure. We have world competitive agriculture and mining organisations,growing services industries, and a manufacturing base which is, arguably, strongertoday than in any previous period in our history and becoming increasinglycompetitive.
For our agricultural and resource sectors there are several key opportunitiesincluding: • a growing world population with increasingly sophisticated tastes and preferences which will further stimulate demand for more innovative foodproducts, as well as energy to support economic development; • new technologies which will make more resource deposits viable and new • the opening up of access to overseas markets  one example of the potential scope of some of these opportunities is the estimate by the Supermarket toAsia Council (albeit prior to the current financial crises in Asia) that the Asianfood market will approach $1000 billion by the year 2000. The recentdecision by APEC nations in Canada to include both food and energy sectorson a short list for early liberalisation is an encouraging sign for these sectors.
The dynamic changes in communications are also helping to bridge distance, notonly between ourselves and overseas nations, but also within our nation. Thisoffers the prospect of new business, social, educational and cultural possibilities,especially for some remote rural communities.
There is also little doubt that Australia faces some significant challenges.
Accelerating and Broadening Australia’s Microeconomic Reform Agenda Reducing Australia’s unacceptably high levels of unemployment is certainly one ofthem. Continuing to improve the standard of living that Australians can enjoy isanother, including the provision of quality health care and community services,education and training, and improved environmental and cultural amenity.
Making sure we have the capability to adjust rapidly and effectively to changes inthe world around us and further integrate our economy with the rest of the world,while at the same time providing Australians with a sense of belonging andcommunity, is going to be one of the more significant challenges of our lifetimes.
In facing these challenges, challenges common to many developed countries,Australia also has to overcome the fact that we have regions within our nationwhich are quite isolated from one another, making labour mobility more difficult.
We are also a long way away from many of our markets. We have a smallpopulation with a small domestic market  making exports crucial for those firmswhere economies of scale and scope are important.
In our agricultural and resources sectors there remain some fundamentalrestrictions on performance (as there are in other sectors). The uncertainty withrespect to resource access; land degradation and water supply issues; and transportinefficiencies are but a few. There is also a need for the right institutionalframework from which the appropriate amount of research and development canemerge, and for the efficient and effective provision of essential social servicesespecially in remote areas.
To meet these challenges and opportunities it is therefore critical that all sectors ofour economy are performing at their very best  including our agricultural andresource sectors which have played such a critical role in Australia’s developmentin the past, and will continue to do so in the future (see Box 1 below). To do so itis essential that we get the incentives and institutional arrangements that guide ouruse of resources right  and it is here that pushing ahead with microeconomicreform is important. It is here that microeconomic reform fits into the ‘big picture’of improving the living standards and quality of life of Australians, by helping us tocontinually improve our nation’s productivity.
Box 1: A snapshot of the importance of our agricultural and
resource sectors (1995-96)
(Source: ABS, Catalogue Nos 7503.0, 8401.0, 6203.0 and 5422.0) Accelerating and Broadening Australia’s Microeconomic Reform Agenda The importance of productivity
Productivity is often the forgotten part of the efficiency and equity story.
As Baumol et al (1988) said in introducing their book Economics: Principles andPolicies: “Economic issues such as inflation, unemployment, and monopoly areimportant to us all, and will receive great attention in this book. But in thelong run nothing has as great an effect on our material well-being and theamounts society can afford to spend on hospitals, schools and socialamenities as the rate of growth of productivity.” In short, Australia’s productivity growth is important because it is the majordeterminant of our economic growth and growing living standards. Recentresearch by the Industry Commission shows that since the 1960s, productivitygrowth has accounted for about: • half the increase in Australia’s real output, that is around $140 billion of the • two-thirds of the growth in real incomes, that is around $6,750 of the $10,400 Productivity growth therefore provides us with the wherewithal to provide on amore sustainable basis more education, health care, environmental and culturalamenity, social services, consumer goods and services, and leisure. (Box 2 belowprovides a few specific examples of productivity improvements and the benefitsthey bring.) What makes efforts to lift our productivity performance particularly important isthat even small increases, if sustained, can add up to significant improvements inliving standards over time. Indeed, if Australia could lift its living standards overthe next decade by half a percent over what we have achieved over the last 30years, the next generation will be able to benefit from a standard of living around13 per cent higher than would otherwise be the case (IC, 1997a).
At a time of high unemployment, however, there are understandably communityconcerns about the possible employment effects of increased productivity, andassociated reforms.
Significantly, however, the best available evidence does not in fact suggest thatproductivity growth means lower employment or higher unemployment in theaggregate. There may be jobs losses in some firms, occupations or regions, but itcan also mean job growth for others. For example, productivity improvements inmotor vehicle production may reduce employment as well as costs in that industry,but if those cost savings are passed onto user industries, they may be able toincrease their output and employment. Indeed, sustained employment growth has Accelerating and Broadening Australia’s Microeconomic Reform Agenda coincided with productivity growth over long periods in Australia and other OECDcountries (IC, 1997a).
Box 2: Examples of productivity improvements and the
benefits they bring
• The move to mechanical harvesting of Australia’s wine grapes over the past 30 years — which now extends to 80 per cent of the crop — hasreduced the cost of harvesting grapes by $1500 per hectare. It has alsohelped to meet demand for improved quality by enabling night timeharvests when temperatures are cooler (CIWWI 1995, p. 45).
• Since 1950 productivity improvements in the dairy industry have seen average production per cow more than double (ABARE 1993, p. 79 and1997, p. 164).
• Most surface irrigation systems for crops such as cotton and rice constructed in Australia over the past couple of decades have employedlaser grading technology which has meant savings in water used, higherreturn and better crops. In horticulture the introduction of under treemicro irrigation systems is said to have achieved efficiencies in water usein the order of 85–90 per cent (IC 1992, p. 194).
• Rapid technological advances in book publishing and printing such as computer based type-setting, composing and image manipulation haveincreased the speed and output of printing presses and reduced manninglevels (IC 1996a, p. 24).
• A 1992 study by Rolls Royce showed that the use of advanced ceramic components in aircraft turbine engines would provide a 10 per centsaving in engine weight, a 12.5 per cent increase in thrust to weight ratioand a saving of US$7m per engine in life-cycle cost to the customer (IC1995b, p. 175).
• According to a BIE study, more widespread application of high efficiency motors by industry has the potential to reduce energyconsumption and costs. Current market share for high efficiency motorsis currently only about 2 per cent but the introduction of energy efficiencylabelling could see this rise to nearly a quarter, with potential savings tothe manufacturing sector of $39 million (BIE 1994, p. xi).
• The competitive tendering of a contract to maintain F-111 aircraft at Amberley RAAF base resulted in the successful tenderer (an in-houseteam) reducing costs by $8m annually due largely to flatter managementstructures and redesigned work teams which reduced maintenancepersonnel from 356 to 214 (IC 1996b, p. 565–72).
(Source: Industry Commission, Assessing Australia’s Productivity Performance, 1997) Accelerating and Broadening Australia’s Microeconomic Reform Agenda Instead, unemployment is more likely to be affected by other factors such as: • macroeconomic performance and the level of economic growth; • labour market flexibility and mobility; and • the interaction between our taxation and social security systems.
Indeed, the OECD in its Job Study released last year outlined ninerecommendations to improve the conditions for job creation, all of which areconsistent with improved productivity and further microeconomic reform (theserecommendations are contained in Box 3).
Box 3: OECD Job Study recommendations
1. Set macroeconomic policy such that it will both encourage growth and, in conjunction with good structural policies, make it sustainable (that is noninflationary).
2. Enhance the creation and diffusion of technological know-how by improving 3. Increase flexibility of working-time (both short-term and lifetime) voluntarily 4. Nurture an entrepreneurial climate by eliminating impediments to, and restrictions on, the creation or expansion of enterprises.
5. Make wage and labour costs more flexible by removing restrictions that prevent wages from reflecting local conditions and individual skill levels, in particularfor younger workers.
6. Reform employment security provisions that inhibit the expansion of 7. Strengthen the emphasis on active labour market policies and reinforce their 8. Improve labour force skills and competencies through wide-ranging changes in 9. Reform unemployment and related benefit systems  and their interaction with the tax system  such that societies’ fundamental equity goals are achieved inways that impinge far less on the efficient functioning of labour markets.
Microeconomic reform and productivity
Is microeconomic reform important in lifting Australia’s productivity performance? Accelerating and Broadening Australia’s Microeconomic Reform Agenda An appropriate starting point is to look at what drives productivity growth. TheCommission addressed some of these in its report Assessing Australia’sProductivity Performance (1997), grouping them into three: • new knowledge or ‘technology’  which includes new products, new processes, new equipment and new production and marketing techniques; • better organisation of production within firms and between industries  which involves the improved organisation of production within existingbounds of technology, such as adopting best practice, and the efficientallocation of resources between industries; and • incidental effects  such as when a firm grows and therefore gains Of course, the creators of most productivity improvements will be private, publicand not for profit firms and organisations and their workforce. But it is also clearthat government microeconomic policy can play an important role. For example,there is a role for government to ensure that market failures in the area of researchand development are dealt with such that there are appropriate incentives to pursueand implement new knowledge and technology. Governments also play a role inproviding and regulating education, which is almost universally acknowledged byeconomists as being a key driver of the development of new knowledge and thetransfer of existing knowledge.
Governments can also influence the efficiency of capital markets and productmarkets by ensuring there is sufficient competition; by providing a robust set ofanti-trust and pro-consumer laws; and by creating incentives for rewards toindividuals and organisations from innovation and best practice.
Governments can also facilitate changes in workplace arrangements. These canboth directly improve the way production is organised, as well as stimulate thecontribution of employees to new ideas and their adoption at the enterprise level.
Governments also have a key role in maintaining the legal system, includingallocating and enforcing property rights. This system needs to be clear and welldefined if confidence and the capacity to productively use Australian’s assets is tobe achieved. It is not well understood within the Australian community how a lackof clarity about property rights combined with rigid enforcement of ‘due diligence’laws rightly imposed on company directors and key decision makers, can createuncertainty and combine to undermine the capacity for investment.
While it is important not to overstate its role and effect, microeconomic reforms doplay a central role in sharpening the incentives and institutions that driveAustralia’s productivity performance and assist in making our economy moreflexible.
Accelerating and Broadening Australia’s Microeconomic Reform Agenda The progress so far
The last decade or so has truly been a remarkable period of reform, and I wouldargue, bringing with it significant benefits to the Australian community.
One of the most significant areas of reform has been our moves to liberalise andinternationalise our economy, with key decisions to remove exchange rate controls,deregulate our financial system, and remove many of the impediments to trade withother nations. In particular, quantitative import restrictions and many exportcontrols have been removed, and distortive import taxes reduced by over half.
Foreign investment regulations have also been considerably reformed.
The process of improving the efficiency of our economic infrastructure has alsobegun, deregulating, corporatising and, in some cases, privatising in areas such aselectricity generators; water suppliers; railway operators; telecommunicationproviders; and airports and airlines.
A landmark set of national competition reforms to inject competition into areas ofactivity previously sheltered from change has also been agreed to by state, territoryand Commonwealth governments. These competition policy reforms willcontribute to changing the economic landscape for many years to come. As part ofthese reforms, the states, territories and the Commonwealth have agreed to afundamental review of regulations which restrict competition, many of thesedirectly relating to the agricultural and resource sectors.
Labour market reforms have also been progressively introduced over the pastdecade by the states and the Commonwealth to restructure awards, support a moveto enterprise-based agreements, and to improve the flexibility and skills of theworkforce.
Policy makers have also turned their minds to the performance of our socialinfrastructure. Areas such as health, education and community services haveundergone significant change, particularly at the state and territory governmentlevel. For example, more choice is being offered to the disabled in terms of whereand how they access services, and to low income earners in terms of how theyaccess housing support.
We have also recently seen a period of considerable fiscal consolidation at theCommonwealth level and by some state governments.
In the agriculture and resource sectors, we have seen the liberalisation of manyexport controls on our minerals sector, including on iron ore, and the restructuringof rural assistance measures. Effective rates of assistance have declined in theagriculture sector, falling from 28 per cent in 1970-71 to 12 per cent in 1995-96,and in the manufacturing sector falling from 36 per cent in 1968-69 to 6 per cent in1996-97 (with a projected fall to five per cent by 2000-01) (IC, 1997b). We havealso seen moves to a national food safety system, with national hygiene standardsnow in place for food premises.
Accelerating and Broadening Australia’s Microeconomic Reform Agenda As we look back over 1997, we see that progress was continued. Many aspects ofthe National Competition Policy were implemented, including establishing the firststage of the national electricity market in south-east Australia. Full deregulation ofthe telecommunications industry started on 1 July 1997, and further reform of thefinancial system was agreed to following the Wallace inquiry. Significantly, therewere further moves to simplify the regulation of Australian workplaces throughenterprise bargaining and the simplification of awards under the CommonwealthGovernment’s new Workplace Relations Act. Tariff reductions continued withsugar tariffs removed, and the reduction in the tariff rates for the automotive andtextile, clothing and footwear industries in line with the previously announcedschedule of reductions to 15 per cent by the year 2000 confirmed.
The benefits of such reforms are now beginning to show.
While not wanting to overstate their importance, and accepting the difficulty ofattributing cause and effect, it seems reasonable to argue that such reforms havecontributed to a positive macroeconomic environment where we have seen: • the longest period of low inflation since the 1960s; • over 6 years of continuous economic growth in a low inflation environment; • over 1.4 million jobs created over the past 10 years; and • our trade orientation increase significantly, with both exports and imports up, allowing us to specialise in those areas we are relatively efficient as well asgaining access to the best the world has to offer. (Australia’s exports andimports as a percentage of Gross Domestic Products have risen from 14.8 percent to 20.1 per cent and from 16.1 per cent to 20.2 per cent respectivelybetween 1984 and 1996 (ABSb).) These positive macroeconomic achievements have assisted in creating anenvironment more conducive to long term planning and investment.
At the microeconomic level we have also seen some impressive gains.
The prices and charges of utilities have generally fallen. For example, the realprice of telecommunications fell 16 per cent between 1989-90 and 1993-94, withinternational calls falling 40 per cent in real terms between 1989 and 1995. Thereal price of electricity has also fallen, declining an average six per cent between1989-90 and 1994-95. Indeed, the prices of services provided by 58Commonwealth, state and territory government trading enterprises fell by around10 per cent in the first half of the 1990s (IC, 1996a).
There have also been some gains in transport. Road reforms have been introduced,including changes to the regulation of B-double vehicles along with MinisterialCouncil approval for changes to dangerous goods transport laws and heavy vehicleregistrations. There have also been some gains in rail freight with a move to morecost reflective pricing  with non-urban passenger service prices rising by 18 percent in real terms and average freight rates falling around 12 per cent in real terms Accelerating and Broadening Australia’s Microeconomic Reform Agenda in the five years to 1994-95 (IC, 1996a). On the waterfront, while there is muchleft to do, some productivity improvements have been achieved. For example, aBureau of Transport Economics review in 1995 indicated that stevedoringproductivity improvements have benefited Australia by $203 million in 1993(Bureau of Industry Economics, 1995). Average crane rates across Brisbane,Sydney, Melbourne, Adelaide and Fremantle ports have increased from around13.4 containers per hour in December 1989 to 22.8 in June 1997 (BTCE, 1997).
In the automotive industry, prices have been kept down with the productivity andquality of vehicle production improving as tariffs have fallen and quotas removed.
Indeed, if tariffs had remained at 57.5 per cent, the rate which applied in the lastyears of the Fraser Government, consumers and businesses would be paying around$4,600 more for a Ford Laser, or around $8000 for a Honda Accord. Consumerchoice has also expanded considerably, from 69 models in 1985 to 101 in 1995 (IC,1997c).
Many of these gains are particularly important to the agriculture and resourcesectors. These sectors depend for their long term viability on the cost, reliabilityand quality of our economic infrastructure, particularly transport, and operate incompetitive international markets where costs cannot easily be passed on.
There have also been some significant changes in our management of theenvironment.
State governments have started to shift towards addressing environmentalproblems, including water scarcity, air pollution and waste dumping, with a mix ofmeasures but now including market based instruments such as tradeable permits,environmental taxes and charges and user charges  a move consistent with worldwide trends. The most recent example of this trend was seen at the Kyoto summiton greenhouse gas emissions where industrialised countries endorsed a regime ofinternational tradeable greenhouse emission permits.
The Commonwealth, NSW, Victorian, South Australia and Queenslandgovernments have also agreed to place a cap on water diversions in the Murray-Darling basin in order to assist the economic and environmental management of theriver systems in the basin.
Significantly, and at least in part because of these and other widespread reforms,we are now beginning to see noticeable improvements in Australia’s productivity.
Australia’s productivity has increased from an average of 1.5 per cent over the lastthree decades to around 2 per cent since 1990. Indeed, Australia’s productivitygrowth over the 1990s has been around 50 per cent above the OECD average.
Productivity gains have been particularly significant in the Transport, storage andcommunication sector, and the Electricity, gas and water sector, with these sectorsexperiencing multi-factor productivity growth of 3.6 per cent on average between1988-89 and 1994-95 (IC, 1997a).
There are also anecdotal signs of a more competitive, diverse and rigorouseconomy. For example, Australia now exports fresh milk to Hong Kong on a daily Accelerating and Broadening Australia’s Microeconomic Reform Agenda basis; wine exports reached 400,000 bottles per day in 1996-97; Australiancomputer software is being installed in Thailand; and BTR Nylex makes gearboxesfor a Korean car maker. Many Australian firms are also starting to invest overseasas well as export, with the number of Australian firms investing overseas nearlydoubling between 1975-76 and 1993-94 (IC, 1996b).
Some of the estimated benefits of microeconomic reforms are briefly summarisedbelow in Box 4 (IC 1996a).
Box 4: Modelling the gains from reform
• The IC (1990a) modelled reform in transport, aviation, communications,
water and electricity, contracting out by governments and the removal of ruralmanufacturing assistance. The results suggested long term annual gains inreal GDP of 6.5 per cent and the generation of an extra 53,000 jobs.
• The BIE (1990a) estimated the benefits from reform over the seven year period from 1988-89 to 1994-95. In addition to those examined by the IC,the reforms modelled included the impact of investment incentives and labourmarket reforms assumed to result in large increases in labour productivity.
The study found that reform would increase GDP by 9.5 per cent.
• For EPAC, Filmer and Dao (1994) analysed the effects of: the reduction in tariffs and subsidies; labour market reform; facilitation of the operation ofmarkets; transport and communications reforms; GBE reform; gains frominternational trade negotiations; support for emerging exporters; and theefficient provision of government services. The model also projected thebenefits of reducing the sustainable unemployment rate from 7.3 to 5.0 percent. It estimated reform would increase GDP by 12.7 per cent. All of themodel’s 25 industries experienced growth.
• Reforms modelled by the BCA (1994) included: the replacement of the existing indirect taxation system with a broad based consumption tax;improvements in the level and efficiency of government services; furtherimprovements in the efficiency of GBEs; and improvements to labourproductivity in the private sector that were assumed to bridge the gap betweenAustralian productivity levels and world’s best practice (except where theywere due to economies of scale). The model estimated reform could increasereal GDP by 20.5 per cent over a 20 year period.
• The IC (1995a) estimated that the growth and revenue implications of the Hilmer and related reforms. Specifically, the IC modelled the impact ofreforms in the transport, communications and utilities sectors, and to statutorymarketing arrangements, government services, unincorporated enterprises andanti-competitive legislation. The IC results suggested that over time therewould be a gain in real GDP of 5.5 per cent, an increase in real wages of 3per cent and 30,000 extra jobs.
Accelerating and Broadening Australia’s Microeconomic Reform Agenda The case for further reform
Despite these impressive gains, much more can be achieved to increase Australia’sproductivity performance. This is partly because the reform process over the lastdecade remains incomplete in some areas; partly because our economic and socialenvironment is continually changing; and partly because there is growingacceptance of the need to do more to tackle important areas such as health andeducation, and, very importantly, the level of long term unemployment.
Before I outline what the Commission sees as important reforms for the next fewyears, it is instructive to look at what we know about Australia’s recent productivity(IC, 1997a).
• Firstly, we know it has been a broad range of industry sectors that have contributed to Australia’s productivity growth.
• Secondly, we know that Australia’s productivity performance over the long term has been well below potential, being one of the lowest in the OECDsince the 1950s  see Figure 3 (although very significant improvements havebeen made recently).
• Thirdly, we know that the gains from productivity growth have been more widely distributed throughout the community because they have beenincreasingly distributed through lower prices rather than retained as higherprofits and wages.
• And fourthly, we know that productivity growth has had a more positive influence on employment when the benefits of productivity growth have beenpassed on in the form of lower prices.
What this highlights is the importance of broad ranging microeconomic reformwhich cuts across all sectors of the economy to remove impediments to increasingour nation’s productivity.
Of course, there is only so much that can be achieved at the one time. In this paperI will highlight what the Commission argues are some of the priority areas. Theseinclude reforms to ensure the efficiency of our economic infrastructure, our labourmarkets, our social infrastructure, our tax system, and finding ways to efficientlyand effectively care for our environment. I will also discuss some adjustmentissues which are important to the microeconomic reform process.
Accelerating and Broadening Australia’s Microeconomic Reform Agenda Figure 3: Australia’s comparative productivity growth rates, 1970 to 1994 Reform of our economic infrastructure In terms of our economic infrastructure, significant work remains to be done inmany areas, including: In terms of the waterfront, the Australian Bureau of Statistics has estimated thatdays lost on the waterfront are currently around 800 per 1000 employees comparedto an industry average of 131. While industrial disputation on the waterfront hasimproved considerably over recent years, this is clearly not yet best practice, and thefact alone shows the enormity of the task still required to create an efficient,effective and reliable ‘waterfront’. Work the Commission has done in this areaalso indicates that labour productivity on the waterfront, measured by the numberof container lifts per terminal employee, while again having improved over recentyears, is considerably lower in Australia than overseas. The reliability of Australiancontainer terminals is also poor, with about one in five ships calling at Australianterminals experiencing delays.
That said, measuring and accounting for performance on our waterfront is adifficult and complex problem. Performance is not universally poor. Some ofAustralia’s bulk ports in fact perform well compared to other international ports. In Accelerating and Broadening Australia’s Microeconomic Reform Agenda addition, the causes of poor performance vary, with a lack of competition, poormanagement and union actions all being contributors.
In terms of rail reform, while third party access regimes are coming on stream andtrack infrastructure in most states are now managed by authorities independentfrom rail operators, the process has been slow and protracted. Reform here couldbe accelerated, expanding incentives for increased productivity, removing crosssubsidies between firms, and refining access regime arrangements to ensurecompetition can be effectively implemented.
In terms of road reform, charges faced by users need to better match the costs theyimpose; further contracting out of road maintenance could be considered; andprogress made with the development and implementation of national road transportreforms.
While continuing with these transport reforms, it is important that governments aimto achieve neutrality between the different modes of transport, allowing each tocompete on their merits rather than on explicit or implicit subsidies and crosssubsidies.
Regulatory reform, competition policy, taxation reform, government assistance tobusiness, trade reforms, and the labour market.
The reform agenda facing Australian governments should also encompass theabove mentioned areas, particularly labour market reform.
Clearly, not all regulations are bad. However, regulations need to be necessary,efficient and effective, achieving their regulatory objective in the most costeffective way with the minium of compliance costs. The current program oflegislation reviews under the National Competition Policy need to be pursuedrigorously and comprehensively. To this end the review process should betransparent and conducted as independently as possible.
We can, as a community, reduce the down sides of regulation if we consider inadvance the reasons for the regulation and alternatives to new regulation. Toachieve this aim new regulations need to be rigorously assessed from an economy-wide perceptive before they are implemented. An important first step in thisprocess would be to fully implement recent changes to the way regulation makingis conducted at the Commonwealth level in response to the Small BusinessDeregulation Taskforce’s report. The efficiency of other processes for regulationmaking, particularly in national forums through Ministerial Councils and nationalstandard setting bodies, is also important. Of particular relevance to the agricultureand resource sectors is the establishment of the National Environment ProtectionCouncil and its process of regulation making. While welcome, this process needs tobe sure it involves, and considers, a full assessment of all the costs and benefits of avariety of options. These options should include economic instruments such astradeable permits, environmental taxes, user charges and performance bonds.
Accelerating and Broadening Australia’s Microeconomic Reform Agenda While the Commonwealth and the states and territories have a strong commitmentto the principles of competition policy, competition policy also needs to berigorously supported both in expanding its scope and in its implementation. TheCommission’s report, The Growth and Revenue Implications of Hilmer andRelated Reforms, estimated that the benefits to the economy of implementing acomprehensive package of competition reforms would be a long run gain in realGDP of around 5.5 per cent. While there are clearly limitations to modellingexercises like this, it nevertheless clearly indicates that there is a lot to be gainedfrom the effective application of competition policy across the Australian economy.
Another important aspect of this work, while now dated, was that the gains camefrom an accumulation of a large number of reforms, rather than two or three majorreforms. The lesson here is that improving the performance of the economyrequires us to address a large range of what may seem small or insignificantreforms but which, taken together, make a significant difference to economicoutcomes in the medium to long term.
In the area of taxation, there is significant scope for, and it seems widespreadcommitment to, reform. Our current system is distortive, inequitable andadministratively complex. In our agriculture and resource sectors, as with othersectors, taxes are levied at different rates on different goods and exclude mostservices; concessions are given to some groups and not others; payroll taxes applyto medium and large sized business but not small businesses; and the cost of manyinputs are inappropriately inflated by taxes. Crucial to these reforms is the need toclarify and improve the nature of the Commonwealth and state/territory fiscalarrangements, and in doing so address to the greatest extent possible distortive stateand territory taxes.
There is also a need to gain greater consistency in government business programs,ensuring that they clearly meet their objectives and offer net benefits to the publicas suggested by Mortimer (Mortimer, 1997), and accepted by the CommonwealthGovernment. New programs or incentives should be rigorously analysed beforetheir implementation. Of particular importance are the various arrangements forresearch and development. To be most effective these need to be well targeted atmarket failures, and be effectively implemented and monitored with as fewinconsistencies in the treatment between firms and industries as possible.
Continuing with trade liberalisation will ensure Australian firms and individualsgain access to the world’s best products at world prices, and will further stimulatethe efficient allocation of our resources across the economy.
Perhaps one of the greatest areas for reform relates to our labour market. But I amnot just referring to the regulations that guide work arrangements, important thoughthey are, but the whole relationship between employees and firms. In many areasthere needs to be a shift in thinking. We need to improve the direction andrelevance of education and training towards work outcomes. There also needs tobe further encouragement of negotiations at the enterprise level with the focus onproductivity improvement, and flexibility in work rules and arrangements.
Australia has many hundreds of thousands of firms, each one different to some Accelerating and Broadening Australia’s Microeconomic Reform Agenda extent with regard to products and services provided, and the processes andpractices used. Some firms will use an enterprise level approach, some will followan award. Some will have individual contracts. The important point is that they,that is the employees and their employers, should be free to choose, with minimaldiscomfort, the system which suits them best. Competition in the choice of systemcan be just as important as competition in the supply of goods or services inimproving our productivity. It is also important that in re-adjusting our mind set towork relations that these are reflected in the institutional arrangements that we havein place.
There is also room for further reform of our many and varied workerscompensation and occupational health and safety arrangements, and the interactionof our taxation and social security systems as they affect employment incentives.
Further attention could also be given to labour mobility issues (which are discussedlater). Overall, we need to remove the disincentives which our people face whetherit be for improving output, safety, training, or service quality, with these incentivesapplying to management and professional occupations as well as others.
Further reforms are also possible at the industry level.
Remaining statutory marketing boards should be reviewed to determine theircontinued relevance and contribution to national welfare. There are currentlyseveral marketing boards due for review under the National Competition Policy.
One such review of the barley industry and its marketing board in Victoria andSouth Australia has recently recommended that the domestic market for feed barleyand malting barley be deregulated and, significantly, that the Australian BarleyBoard abolish its single desk for exports.
There is also significant scope for reform of the dairy industry. In a submission tothe recent review of the NSW dairy industry, the Commission estimated thatexisting farm gate controls on milk were costing NSW consumers around $130million per year (IC, 1997d).
Reforms to our social infrastructure There is also scope for the reform agenda to be broadened to include Australia’ssocial infrastructure. Such areas are important not only because of their directimportance to the lives of Australians, but also because they affect the productivityof our firms through improvements in the education and health of our workforce,and because they represent a significant proportion of our GDP  withgovernment expenditure alone in 1996-97 in these areas being around $54 billion,representing around 11 per cent of our GDP (ABS (c)).
Accelerating and Broadening Australia’s Microeconomic Reform Agenda In particular, we need to be continually improving our education and trainingsystems because of their importance in helping us to address our long termunemployment difficulties.
Further development of social infrastructure in remote areas is particularlyimportant. Research undertaken by the Commission for the Council of AustralianGovernments has indicated variations in the efficiency and effectiveness of somegovernment services between rural and urban areas. For example, in secondaryschools year 12 completion rates in remote areas have been around 58 per centbetween 1991 and 1994 (years for which data are available) compared to around 69per cent for Australia as a whole (IC, 1997e). There are also significant variationacross the states and territories in some areas. For example, the average cost of anepisode in hospital varies from $2,113 in South Australia to $3,506 in the ACT,and the administration of public housing varies from an average of $633 inQueensland to $1,666 in NSW (IC, 1997e). A recent study by the AustralianInstitute of Health and Welfare has also indicated that the health of ruralAustralians is behind that of urban Australians in many areas.
Broadening the reform agenda should also include our environment as a centrestage issue. Both land degradation and water supply issues are of great significanceto Australia, as is Australia’s response to global warming, particularly as a result ofAustralia’s commitments at the Kyoto conference to cap emission rises to anaverage of 8 per cent above 1990 levels between 2008 and 2012 (Department ofForeign Affairs and Trade, 1997).
The greater use of market instruments could form an important part of Australia’sresponse to these concerns. A report the Commission released in 1997, The Role ofEconomic Instruments in Managing the Environment, (IC,1997f) canvasses someof the opportunities in this area, indicating that market instruments, such ascharges/levies and tradeable permits, can entail least cost solutions toenvironmental problems. What will help is a flexible system which rewardsefficiency gains in environmental conservation and creates the right frameworkfrom which new technologies can emerge to further assist our environment, often atsignificantly reduced abatement costs.
At this point it is worth stressing the importance of reforms to our water resourceswhich are scarce and yet so crucial to our agriculture, environment and economicviability. In particular, it is important that the reforms set out in recent years byCOAG, including moves to beneficiary pricing and water trading, are implementedappropriately and on time. Cost recovery should be based on sound principles andtake account of the various users of the our water systems. The establishment of atrading system should include clearly defined and readily tradeable property rights,which also allows for interstate trading. Moves to greater community responsibilityfor water resources is to be encouraged, but again appropriate incentives are Accelerating and Broadening Australia’s Microeconomic Reform Agenda required before such moves can improve the efficient allocation of our waterresources. Arrangements for allocating water to maintain environment values alsoneeds to be progressed.
These reforms will have a profound affect on many rural communities and farmers,encouraging high yield crops as opposed to lower value, water intensive ones, andquite possibly reducing the amount of irrigated land. Adopting user pays principlesfor water will clearly increase costs for some farmers, particularly in the short term.
That fact cannot be denied or hidden. At the same time, however, it is most likelyto improve the quality and sustainability of our water infrastructure for the longterm benefit of the farming community as a whole.
Further reform in all these areas will assist Australia is to get maximum leverageover our resources and maintain community support for further reform.
Of course, there will be some losers as well as winners from individual reforms.
However, work by the Commission indicates that losses are minimised whenreforms are wide spread throughout the economy (IC, 1995-96). Widespreadreform has the effect of ‘averaging out’ the impact of reforms, with the importantpoint being that on average the gains are positive. This will be the case in ouragriculture and resources sectors as it is in others. It will also hold true for themany regional areas across Australia which by virtue of their relatively small sizeand isolation may find themselves particularly vulnerable to the effects of someindividual changes.
This then raises the important question of adjustment to firms or individuals in theface of widespread microeconomic reform.
The question of adjustment covers several issues. Perhaps the most commonlythought of is adjustment assistance  which for the rural community makes upmost of the total assistance received from government. But adjustment is alsoabout labour flexibility, training and mobility; competitive firms; efficientregulatory systems; and efficient and effective economic and social infrastructure many of the areas which I have already flagged.
Some of the more specific findings which the Commission has reported on in itsautomotive; textile, footwear and clothing; and industry regional adjustment reportsregarding adjustment assistance may help to guide the thinking on this importantissue (IC, 1997c, 1997g, 1993). These include: • that workplace flexibility is central to adjustment, and this could involve allowing different employment remuneration and conditions to emerge fordifferent firms in the same industry; • that adjustment assistance can play an important role, often with assistance provided directly to individuals affected, although there is a need to ensure it Accelerating and Broadening Australia’s Microeconomic Reform Agenda is appropriately targeted, well designed and efficiently administered withregular independent reviews; • that the social security and taxation systems can act as a constraint on mobility, particularly stamp duties applicable to the selling of the home andhigh effective marginal tax rates (where social security withdrawals andmarginal personal tax rates combine); • that there can be an important role for governments in providing information and other assistance, sometimes in foreign languages, on opportunities fordisplaced workers; • that maintaining solid economic growth is important to help assimilate labour, and other resources, into other productive activities; and • that one of the best adjustment mechanisms for regional areas is to develop a portfolio of competitive advantages  making the most of technologicaladvancements in production, transport and, importantly, communications.
Conclusion
The important point of this paper is that Australia, through the hard work of manydedicated people, has implemented a range of what is described as microeconomicreforms for over a decade, and the reforms in my view are paying dividends.
However, Australia still has a significant and extensive reform agenda which, ifappropriately implemented, can help to reduce our high levels of long termunemployment, increase our long term productivity and increase our livingstandards. With such an extensive agenda of microeconomic reform it is importantthat Australia as a nation is focused on implementing it. It is also important thatAustralians are encouraged to understand and be supportive of the process  achallenge the Industry Commission, and others, are well aware and are attemptingto address.
Accelerating and Broadening Australia’s Microeconomic Reform Agenda References
ABSa (Australian Bureau of Statistics), Catalogue Numbers 7503.0, 8401.0, Baumol, Blinder, Gunther and Hicks (1988), Economic Principles and Policy Bureau of Industry Economics (1995), Waterfront 1995: International BTCE (Bureau of Transport Economics and Communication Economics) (1995), Department of Foreign Affairs and Trade, Media Release, 11 December 1997 IC (Industry Commission) 1993, Impediments to Regional Industry Adjustment  1995, The Growth and Revenue Implications of Hilmer and Related Reforms  1996a, Stocktake of Progress in Microeconomic Reform (Productivity  1996b, Implications for Australia of Firms Locating Offshore  1997a, Assessing Australia’s Productivity Performance  1997b, Trade and Assistance Review 1996-97, Annual Report Series 1996-97  1997c, The Automotive Industry, Volume 1  1997d, Submission to the NSW Dairy Industry  1997e, Steering Committee for the Review of Commonwealth/State Service Provision, Report on Government Service Provision, Volume 1  1997f, The Role of Economic Instruments in Managing the Environment  1997g, The Textiles, Clothing and Footwear Industries, Volume 1 Mortimer 1997, Going for Growth: Business Programs for Investment, Innovation OECD (Organisation for Economic Cooperation and Development) 1997, Job Study: Facts, Analysis, Strategies

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