ECONOMICS FOR BUSINESS - Coursework Example

Australia is one of the many countries that were hit by the just recent global recession that hit the world. In many of the countries, they are still in the process of recovering because their banks and governments took time to work on tit and, therefore, had devastating effects on them. This led to financial instability, unemployment and the loss of investors to the country. Fig 1: Unemployment levels in Australia since July 2009- July 2011 As one can see in the graph, unemployment levels rose during the recession of 2009 but have since started declining with the improvement of the economy in 2010 through 2011. Much of this was happening with aggravation from the other European countries. [Gruen, D 2008] However, the country has done major reforms to the economy which has included restructuring in some places and introduction of structural reforms. The banks have also been at the forefront in deciding the fate of the nation especially the reserve bank of Australia. The government undertook major microeconomic policies which helped to curb the looming disaster. While these were being implemented, their application had to be prioritised so that the government would offer what was socially and economically healthy to the citizens. These policies were to be implemented to improve the supply side structure of the economy and, therefore, touched on the firms, markets and industries. In this, the government aimed at improving the efficiency of firms, its productivity efficiency and effectiveness as it argued that much of the things that made the country to lag behind were caused by micro economic factors and not majorly from the external environment. [Quiggin, John, 2009] The government minimised the distortions that apply in the market so that it remains competitive and productive and have a more efficient allocation of resources. This locative efficiency has allowed the resources to flow to areas where they are used more efficiently. The tariff protections have been removed from the industries which are inefficient. This has allowed the diversion of resources to areas which are more productive and, therefore, increasing the output. The government has subsidised the costs of importation of the new technology in a bid to increase the efficiency in production with minimum costs. This has been the case as the technically efficient industries have had reduced use of resources of which has helped to shift them to other areas of the economy. The reduction of government regulations helped the producers to venture into new markets and to respond quickly to the changing patterns in the economy and demands that come with it. This has set up the pace for the introduction of new technologies and inventions as well as bringing about competition that is fit for the structural changes. The government adopted the trade practices act that is meant to reduce competition through the collusive prices. This has also enabled new firms to enter the market and compete with the already existing firms. The government has removed the rigid regulations which used to control the market movements and has left the flow of the market been regulated by the demand and supply forces. The deregulations included the floatation of the dollar plus the removal of the control of RBA on the banks. These deregulations extended to the transport and telecommunication industries. This led to greater efficiency and productivity in these sectors, which was reflected in the whole economy. These were highlighted in the national economic reform policy which dated back to 1995. The government set up policies to ensure corporatisation and privatisation. This has brought about structural changes in the government business enterprises and has, therefore, ended up working independently from the government eradicating political interference in their working. Industries like Qantas and Telstra have been privatised to be more competitive. The government carried out reforms in the labour market, where there arose a decentralisation policy of wage determination. These wages were to be determined through productivity and the bargaining agreements and which would ensure that inefficiency is reduced plus there would be performance and promotion check. The withdrawal of the government from the wage controls led to many people desiring to improve their skills in their respective areas and becoming multi-skilled so that they would remain competitive and have efficient work practices. The government body known as the industrial relations commission paved way for enterprises to carry out the contracting tasks as independent bodies and this led to more of unitarism in organisations as even the flexible wage system was introduced. This was to ensure that employment was there during times of economic downturn and reduced inflation thus keeping the enterprises in operation. It further advocated for the redundancies and removal of inefficient workers from their job places and allowed the employers to carry out performance evaluation based on productivity. [Wooden, Mark, 2008] Promotion was also based on the same. This ensured that no worker was reluctant in their work place as this would render him jobless. The economists have the feeling that the government has been able to achieve much of its objectives like the increased efficiency, production, and reduction of unemployment and also curbed the inflationary pressures and feels that these economic activities will help achieve sustained economic growth. The government imposed trade reforms that saw the reduction of tariffs in the international trade in the manufactured goods and the agricultural import goods. To save the economy of Australia from the global crisis, the government announced that it would safeguard all Australian bank deposits and banks wholesale funding for a fee because the neighboring countries had guaranteed the borrowings of their banks and this had had a negative impact on them due to the high competition that had arose from the other banks in other countries. This was done by the government to ease the consumers and investors who had began to panic and also for the sake of economic conditions that would be influenced by the financial sector as there was a tendency of disorderliness and, therefore, the government had to for a short while take the role of the private sector, something that had not happened before in that economy. The government knew that if this approach was pulled out correctly and at the right time, then there would not be any collapse of activities when it would come to its withdrawal. The consumption aspect of the stimulus package was also designed to be quick. Within weeks of its establishment, the low income earners, the careers and seniors had received their cash bonuses. There are groups of people who have high propensities to consume and spend more with any increase of income. This would maximise the economy wide stimulus package effects. The advantage with this is that this would be channeled to the weaker people in the society who were not able to support themselves and required financial assistance. The government brought forward the commencement of large scale infrastructure projects because they foresaw that the global recession was going to be more adverse and longer than earlier predicted [Lawson, J & Rees, D 2008]. The first of these was announced to commence in December (although there were other projects in that year that were very important and worth recognising) and this led to the intensive cut of the interest rates. This saw an intensive response to the global crisis. Graph1: GDP growth in the world [2009-2010] These were the forecasts of IMF for the GDP growth, but these fell sharply over the months that followed. Graph2: GDP growth in Australia [2009-2010] After the global recession, the government released the second stimulus package that was labeled the national building and jobs plan that was worth $42 billion. It was noted that further consumption support was still necessary and this was to be done in place of the infrastructure policy as it was seen to be more effective and cost saving. [Johnson, DS, Parker, JA & Souleles, NS, 2006]. It was later discovered that these stimulus packages were more effective and when viewed from the aspect of retail trade turnover, the economy of Australia was far much ahead than those countries like Canada which never used the stimulus packages. In 2010-2011, the government drew a budget that was aimed at implementation of the third phase of the infrastructure stimulus. It was designed to improve the productivity of the economy as well as to provide medium-term support to the economy and jobs these stimulus packages were not designed to last for long and the measures that were put in place were to bring about revenues and savings for two years only and not to alter the budget in a great magnitude. The cash transfers and investment spending disaggregated provide a package of transfers first to the low income earners and the dependent children whereas some of these will spend a sizeable share of their cash transfers. The remainder goes to the investment projects which provide the country supply potential and greater demand as shown in the graph below. Graph 3– Composition of fiscal stimulus [IMF 2009] Shortly after, the financial stability measures were put in place, and the government announced a stimulus package of $ 10.4 billion which was equivalent to 1% of the GDP of Australia. Out of this, $8.7 billion would go to the pensioners and the form of cash bonuses for the low income earners, $1.5 was for housing construction and the rest for new training places. The government had taken a lot of indoor consultations before this announcement and it was to be enforced in it structure. The main target for this was the consumption and the housing sectors which advertently had taken the largest share of the economy, at 60% and, therefore, the government targeted to reinforce 60% of the economy in this manner [Gruen, D & Stevens, G 2010]. This was only to happen at this time for a short while and was very much targeted. The implementation of this began almost immediately for first home buyers and later to owner occupied rentals due to high interest rates and increased migration. The reserve bank reduced the interest rates in a bid to salvage the Australian economy from the looming danger of inflation and reduced performance and from the volatile financial market conditions. The rates were reduced from 4.75 % to 4.5%. The governor of the bank said that this would help to maintain growth amidst the raging poor economic conditions that were eminent in the world [Gruen, D, Romalis, J & Chandra, N, 2009]. The prime minister of this country, Julia Gillard, said that this rate was to be cut in full so as to offer the economy a sustained growth. This was also to end up reducing the mortgages of those families with substantial amounts. The economy was said have a projection of picking up fast, but this was not the case since its growth was moderate, which is sighted to be due to other major economies like US and Europe have their economies struggling yet they are major stakeholders in the development of the country. Fig 2: Inflation levels in Australia since July 2008- July 2011 Since July 2009, which is the period in this study’s focus, through July 2011; the inflation levels in Australia have been steadily rising as seen in the graph above. The monetary policy approach was used by the reserve bank of Australia to regulate the credit and the amount that is in circulation in the economy as well as its cost. This has involved the purchase of governments bonds from the public and reducing inflation in that aspect in doing this there would be excess liquidity and put downward pressure on the interest rates. The event of this is that there arises a reduced unemployment due to increased investment and consumer spending. When there would be tightening up of the monetary policy, the reserve bank is forced to sell the bonds and thereby pushes up the interest rates to dampen expenditure. This has been done to regulate internal balance by checking that the inflation does not go below 2% and above 3%. Sometimes, the bank does not alter the monetary approach but uses sterilisation intervention where the bank buys or sells bonds equivalent to $A so as to maintain the available cash and, therefore, smoothens the monetary policy stance. The macroeconomic policies by the Australian government have all aimed at the formation of a stable and growing economy, an internal and an external balance. These have aimed at maintaining a low inflation level and ensuring that the level of foreign debts and liabilities are limited. However, the external environment brings about ups and downs and the government has to try and reduce inflation and the unemployment rates where it uses both the micro economic policies to influence demand in conjunction with macroeconomic policies which influence the supply side through the fiscal and monetary policies. The levels of balance of payments have improved, following the various monetary measures by the government of Australia. This has since led to a better balance of payment in the economy as can be seen from the graph covering July 2009 to July 2011 presented below. Fig 3: The balance of payments in Australia since July 2009- July 2011 The macro policies have been used to influence the country’s short term demand. Where the fiscal policy has had a major impact on the policy mix and has really influenced the increase in the national savings and the governments external debt has been controlled and provided external stability which has allowed the economy to grow [ Ilzetski, E, Mendoza, EG & Vegh, CA, 2009]. The government is now ensuring that there is minimal private sector borrowing and public sector debt to the CAD and now aims at attainment of the fiscal balance amidst the economic cycles. The government is in the center of promoting private sector saving and has shifted the role of the fiscal policy from acting as a backup plan for the monetary aspect, but rather has adopted the goal of external balance and sustainable growth economically. Reference list: Gruen, D 2008, 'Opening Statement', Senate Standing Committee on Economics, 22 October, Canberra. Gruen, D, Romalis, J & Chandra, N 2009, 'The Lags of Monetary Policy', RBA Research Discussion Paper, no. 1997-02. Gruen, D & Stevens, G 2010, 'Australian Macroeconomic Performance and Policies in the 1990s', in Proceedings of a Conference – The Australian Economy in the 1990s, Reserve Bank of Australia, Sydney, pp. 32-72. Ilzetski, E, Mendoza, EG & Vegh, CA 2009, 'How big are fiscal multipliers?', Centre for Economic Policy Research, Policy Insight, no. 39. IMF 2009, 'Group of Twenty', paper prepared by the staff of the IMF for the G-20 Meeting of Deputies, 31 January-1 February, London. Johnson, DS, Parker, JA & Souleles, NS 2006, 'Household Expenditure and the Income Tax Rebates of 2001', American Economic Review, vol. 96, no. 5, pp. 1589-1610. Kennedy, S 2009, 'Australia's response to the global financial crisis', speech to the Australia Israel Leadership Forum, 24 June. Lawson, J & Rees, D 2008, 'A Sectoral Model of the Australian Economy', RBA Research Discussion Paper, no. 2008-01, Sydney. Productivity Commission 2008, Review of Australia’s General Tariff Arrangements .Canberra, Ausinfo. Quiggin, John 2009, Great Expectations: Microeconomic Reform and Australia .Sydney, Allen and Unwin. Quiggin, John 2010, ‘Estimating the benefits of Hilmer and related reforms’, Australian Economic Review, 30, 256-272. Wooden, Mark 2008, ‘Industrial relations reform in Australia: Causes, consequences and prospects’, forthcoming in Australian Economic Review. Read More