Policy Approach

Deregulation

Many industries in Australia have regulatory barriers which make it difficult for new operators to enter the market. Deregulation is the process of removing these barriers. One of the assumptions of the “perfect” market place is that there are no barriers to entry – deregulation aims to help move the Australian economy closer to this ideal situation.

The dairy industry The process of deregulation will focus on an industry, rather than on one specific business. As such, we might say that a business like Telstra was "privatised", but it is the telecommunications industry that has been deregulated. Industries are deregulated when it is perceived by the government that the rules in place in that sector are leading to an inefficient allocation of resources. The results have been striking.

For example, in late 1999 the Australian government began a process that would ultimately lead to the deregulation of the dairy industry in this country. The main change that was put in place to implement this change was the removal of a subsidy that was being paid to farmers in the dairy industry. In conjunction with this, eligible farmers were able to access Dairy Structural Adjustment Program (DSAP) payments, while others chose to take advantage of the opportunity to sell their farm and receive a lump-sum payment from the government (called "Dairy Exit Payments"). The goal at the time was to increase the efficiency of dairy farms in Australia by reducing the overall number of farms, but increasing the total level of output. At the time it was believed that this would result in lower prices for Australian consumers, despite the removal of the subsidy.

The final DSAP payments were made in 2008, and the Senate Economics Reference Committee began writing a report into the impact of the deregulation process. This report was ultimately tabled in parliament in May 2010. While there are certainly issues that remain, the long term impact of the deregulation process seems to have been positive for Australian consumers. Some of the changes that were noted in that report were:

In 1980 there were 22,000 dairy farms in Australia. By 2010 there were around 8,000 farms. These farms were concentrated mainly in the south east corner of Australia.
Although there was a significant decline in the number of farms during this period, the overall level of output increased significantly. In fact, the output of the dairy industry was 70% higher by 2010.
Although the combined impact of a strong Australian dollar and the global financial crisis put significant pressure on the local dairy industry, they were still able to generate exports worth in excess of $2.7 billion in 2009.

These statistics suggest that the overall level of productivity increased in this industry. We also know that the price paid for dairy products (such as milk) fell in real terms during this period. In other words, the rate of increase in the price of dairy products was lower than the average rate of inflation. This has a direct impact on living standards, because dairy products are staple items in the diet of most families; as they consume less of each person's income, people will be able to satisfy more needs and wants. In other words, material living standards have improved as a result of this change.

We can also see a direct link to other goals of the Australian government. The increase in output has contributed to economic growth, and the ability of the industry to export has helped to improve the net merchandise balance in the CAD. Increased efficiency has reduced pressure on prices, resulting in a lower rate of inflation. On the other hand, many farmers moved off the land as a result of this change, while some found the pressure to become more efficient extremely challenging.

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