Policy Approach

Policy Strengths

When assessing the process of aggregate supply policies, it is important to remember that we are actually considering a very broad range of policy options. It is not advisable to make blanket statements about these reforms, as what is true of one part of the process may not be true of another. However, there are a few general strengths of the microeconomic reform process as it has been used in Australia.

Productivity Gains: The evidence in regards to productivity gains in Australia is very clear. During the 1980’s, Australia managed productivity gains of just 1% per year. This was well below the OECD average. With the increasing use of microeconomic reforms during the late 1980’s and early 1990’s, productivity increases in Australia have improved to almost 2% per year. Given that the long run average for productivity gains in Australian is 1.2% per year, this is a very significant result. The process of microeconomic reform has played an important role in these improvements. On the other hand, part of the reason productivity has stalled in more recent years is because we have seen very few significant supply side reforms; the Howard government was accused of "reform fatigue", while the Labor government has struggled to ensure that proposed reforms pass through the Senate.
Flow on effects of lower prices: Productivity gains have been made possible due to the improvement in resource allocation. However, the increase in competition has resulted in an actual decrease in prices. While this has immediate benefits to consumers, it also has a more indirect benefit. Lower prices have resulted in infrastructure industries, such as telecommunications, transport and banking. As a result, all businesses in Australia will have lower input costs, and this should also result in a reduction in upward pressure on prices in Australia. The result has been an extended period of low rates of inflation. It is significant that inflation started to increase as the number of supply side reforms declined.
Quality Improvements: While it is common to focus on the price falls that have resulted from the microeconomic reform process, it is also true to say that the general quality of goods and services has increased. This is due in part to the increase in competition that has occurred due to the microeconomic reform process. For example, mobile telephones are now much smaller than they were just a few years ago, and they are able to do far more.
Improved International Competitiveness: Some microeconomic reforms have been put in place to assist in making Australian industry more internationally competitive. For example, the decision to exempt exports from the GST during the reform of taxation, and the decision in the 2010/11 budget to reduce the company tax rate. This should help to increase exports in the long term, which will increase economic growth, generate employment and help to ensure that the current account deficit does not become unsustainable.
Focus: While monetary policy is considered a blunt instrument, and fiscal policy can only be used to affect some sectors of the economy, microeconomic reforms can be implemented in any sector that is deemed to be in need of change. The ability to identify problems and implement solutions on a “case by case” basis is a major strength of the microeconomic reform process.

You will need to be able to assess the strengths of aggregate supply policies in relation to the economic goals of the Australian government. As such, you would be wise to consider mentioning specific reforms in any discussion about this process. For example, we will consider the strengths of the reform process to achieve sustainable economic growth.

No matter which party is in power, the immigration program will always be controversial. Over the last ten years net migration has added around 1.5 million people to the Australian population. The majority of these people have arrived under the general skilled migration program, which has added to the skill base of the Australian workforce. The demand created by these people has also helped to ensure that aggregate consumption and investment spending have increased, generating both jobs and growth.

This demonstrates several strengths of the microeconomic reform process. The need for reform in the employment sector was identified, and so the government was able to focus on this area. As new people entered the market, output increased and employment was generated. As the majority of people arrived under the general skilled migration program, this helped to minimise the impact of the skills shortage on the Australian economy. In other words, the quality of the Australian workforce increased. It is also worth noting that increased competition for jobs helped to reduce wage pressures. This has resulted in flow on benefits, as many firms have been able to increase their output due to the impact of lower input costs.

Overall, it is reasonable to conclude that Australian immigration program has added to economic growth during the last ten years.

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