Australian Economic Institutions and Performance - Assignment Example

Australian Economic Institutions and Performance Name Course Name Date 1) The Commonwealth influences provision of transport and communication infrastructure in three core ways. Firstly, investments by agencies as well as government business enterprises (GBEs), by offering financial support to the states as well as territories in form of explicit payment purposes as well as through formulation of framework policies, for instance, National Competition Policy and tax provisions. According to Commonwealth of Australia (2009), during early 1990s, the Commonwealth did account for one quarter of the public infrastructure. Majorly, this was provided by government business enterprises. Nonetheless, privatization was a key trend since 1980s and this is the key reason why some of the government business enterprises to collapse. The trend has declined as the rate of privatization has also declined Commonwealth of Australia (2009). The Commonwealth is a focal source of funds meant for infrastructure for Territories and State. For capital purposes, commonwealth funds are paid for specific goals. For instance, in 2002-2003, the government business enterprises payments exceeded $2.5 billion. Road program received the largest funding of $977 million, secondly was public housing that received $824 million and state schools got $265 million (Commonwealth of Australia, 2009) The Commonwealth is influencing provision of infrastructure through framework policies (OECD, 2010). These are the legislations, regulations as well as policies, which set measures that other governments as well as private sector investment decisions. For instance, the infrastructure provisions in the Income Tax Assessment Act 1936, setting decision for industries, and National Competition Policy (Australia, cch, 2011). Commonwealths actions as well as statements of intent have an impact on the direction as well as strategies, which different government levels as well as private sector make when providing infrastructure however, Commonwealth may not fund the projects. The National Land Transport seeks to give strategic direction to the Commonwealth, other government as well as private sector investment in the land transport infrastructure. Framework policies are instrumental in influencing investment decisions in a number of ways. The infrastructure provision in the Income Tax Assessment Act 1936 has an impact on the private sector infrastructure decisions as they have both incentives as well as disincentives to the private sector investment (Commonwealth of Australia, 2009). In Australia, most of the framework policies indirectly influence investment. These policies operate in institutions whose responsibility is to interpret as well as implement legislation. For instance, the National Competition Council in evaluating the progress that the State governments have danced in enforcing the National Competition Policy reforms. The National Competition Policy reforms are tailored to embolden competition. The developments provide for: Institution of competitive neutrality so that there can be equal footing between government and privately owned enterprises. Review and repeal laws which restrict rivalry To outspread trade policies laws that inhibit anti-competitive activities Development of a national access regime so that business can use nationally important infrastructure that are owned by the state and other enterprises. In general, Constitution does not give specific powers between the States and the Commonwealth. In its place, it gives specific sections that the Commonwealth can legislate. Commonwealth powers are contemporaneous with those of States however, there are few exceptions. Nonetheless, by virtue of section 109, the Commonwealth constitution is paramount to the States law in case there is a conflict or inconsistency between the two laws. The main sections that Commonwealth can legislate are elucidated in sections 51, 52 as well as 96 of the Constitution. Section 51 gives legislative authority of Commonwealth Parliament and section 52 is exclusively on the Parliaments exclusive powers (Commonwealth of Australia, 2009). The most fundamental areas include telecommunications, defence, taxation, social security, interstate and international trade and commerce, foreign affairs, banking and finance, immigration, marriage as well as mandate to give financial grants to States. Areas that Commonwealth exclusive powers on imposition of customs, excise, payment of subsides, currency, defence as well as making laws with that are about Commonwealth airports. The Commonwealth lacks constitutional rights to legislate on pertinent areas. For instance, provision of medical and sickness benefits as well as its quarantine powers. Additionally, Commonwealth has little power to make legislation on education. Exclusively, the Constitution does not recognize local government that is established according in State legislation. Generally, the Commonwealth treats local government as part of extended services of the State. In practice, the Commonwealth plays an instrumental part in areas that have been traditionally considered responsibilities of the State. Two main trends have come up with respect to the role of Commonwealth in provision of infrastructure. Firstly, is decline in the relevance of providing infrastructure directly through GBEs. Previously, the Commonwealth had various GBE however, privatization has led to decline in their number. Still, the Commonwealth plays an instrumental task in providing infrastructure, for instance, through Australia Post and Telstra even though there is privatization. Secondly, the Commonwealth influences provision of infrastructure through framework policies. To some extent, this is a consequence of the Commonwealth withdrawal from providing infrastructure through GBEs. On the other hand, it shows decisions to take part in developing framework for specific industries though they may not involve the Commonwealth funding. Notably, the trend for framework policies to be more important is different from the previous when Commonwealth took part in influencing industry development through strategies such as tariff protection. Generally, the Commonwealth has shifted from directly providing infrastructure through owning of transport GBEs. For instance, in the aviation sector, the Commonwealth sold Qantas as well as airports that are owned by Federal Airports Corporation and deprived regional airports in the Aerodrome Local Ownership Plan. The Government has ensured that Australian National is privatized. The Commonwealth owns a section of interstate rail network through Australian Rail Track Corporation. Prior to 1990, the Commonwealth controlled domestic aviation in the two airlines policy. Since privatization of the National Rail and Australian National, the Commonwealth has established a standard operational requirement for interstate rail network (Commonwealth of Australia, 2009). The States and the Commonwealth, under the Inter- Government Agreement for Rail Operational Uniformity consented to develop the Australian Rail Operations Unit so that it could develop a National Code to ensure that there are standard operations as well as other elements on interstate track. The Commonwealth is a key source of infrastructure funding by payment to the States since it has both financial power and constitutional mandate. 2) According to Latimer (2012), the Australian financial system was at one time protected by government policy as well as by distance from the world. However, all this has changed because of international forces, competition, technology as well as government microeconomic reforms that comprise of commercialization, reducing trade barriers, privatization of government enterprise along with deregulation of the financial system in 1980s. According to Lewis, Lewis & Conaty (2013), between World War II and late 1970s, the financial system was heavily regulated. Australia had controls over various aspects of finance, domestically through quantity regulation, type as well as pricing of bank services, and externally through a controlled exchange rate system as well as regulation of foreign banks entry along with foreign exchange. Nonetheless, from early 1980 the financial system became deregulated in a key redirection of policy. Formation of the inquiry symbolized beginning of a program tailored at widespread financial reforms and the Final Report (AFSU 1981) offered a reliable case of extensive deregulation that was to be based on benefits of increased competition as well as efficiency of a free market. A strand of policy choice, for instance, pluralist theory, emphasizes responsibility of interest group pressure in instigating policy reform. Most of the OECD countries had deregulated their financial structure in 1970s and in some instance; reform was a consequence of entrusted interests’ group pressure. For instance, financiers and banks were “chaffing at the bit under restrictive financial controls” (Bell 1997, p.104). Banks lobbied so that financial regulations can be removed so that they can be able to compete in the intercontinental markets, envisage greater chances along with higher gains without the limitations of post-war regulation. Harper (1985) argues that financial deregulation in Australia was catapulted by the financial sector. The financial system regulations that was in operation in late 1970s changed from wartime banking controls that was established in 1941. Additionally, between 1940 and 1970 Australia operated in a two tier financial system that consisted of regulated trade as well as savings banks. The logic behind this financial system was that financial intermediation was synonymous with banking. Nonetheless, between 1950s and 1960s several non-bank financial institutions emerged, including merchant banks, finance companies, building societies and credit unions (n.a, 1988). These institutions challenged the domination of banks at that time since each offered specialist service that could not be offered by banks within the regulated environment. Finance companies were developed to give consumer credit. A majority of these financial companies were developed by banks as subsidies or were companies that were existing and banks bought shares. These companies were in position of raising funds through approaches that were not available to banks and lend these funds on conditions that are not available in banks. Merchant banks offered services such as money and securities trading, long-term financing, advising on takeovers, finance projects, offer portfolio management. Banks developed merchant banks as subsidiaries. This implied that banks were not excluded totally from offering these kinds of financial services. Foreign banks were key players in merchant banking. Consequently, this offered foreign banks a method that they could use to take part in the Australian finance market (n.a, 1988). Notwithstanding, banks owned substantial shares of these non-bank financial institutions, banks experienced cut-competition for funds. The non-bank financial institutions were in position of providing higher returns and take risks higher than the bank. Furthermore, the non-bank financial institutions had more flexible lending terms and this too prompted considerable competition to the banks at that time. The Financial Corporations Act was enacted so that the Australian government through the Reserve Bank could examine and at the same time regulate non-bank financial institutions activities (Previts, Walton & Wolnizer, 2012). Under this Act, the Reserve Bank was authorized to make sure that non-bank financial institutions maintained specific types of assets at a particular amount, develop policies touching on the amount of money to be lent to whom as well as inhibiting paying interest beyond a specific limit (n.a, 1988). Primarily, the financial system regulations were designed to regulate bank activities. On the other hand, there was little regulation in non-bank financial institutions (NBFIs) until 1974 (n.a, 1988). Apparently, non-bank financial institutions had developed because of inability of regulated banks to offer certain services and facilities. In 1974, regulation of non-bank financial institutions came into effect with enactment of the Financial Corporations Act that imposed particular requirements on non-bank financial institutions in respect of liquidity and reporting (n.a, 1988). Banks had extended privileges of having access to cheque clearing system, foreign exchange dealings, as well as guarantee of lender last resort facilities from central bank however they were subjected to tight regulation of lending terms as well as deposit activities. The Reserve Bank Act 1959 along with the Banking Act 1959 was the key legislative instigators of bank regulation (n.a, 1988). The RBA took up the Commonwealth Bank function of central banking. The functions of the Reserve Bank entailed formulation and implementation of monetary policy, observing financial system operations along with taking the responsibility of government’s banker. The Reserve Bank was to use its authority so that it could contribute to stabilization of Australian currency, maintain full employment, economic development as well as welfare of Australia (n.a, 1988). Partly, institutional changes in the financial sector were due to economic development along with the need for an erudite financial system. Additionally, they were because of bank regulations. Harper (1985) emphasized that regulations limited bank’s capacity to compete effectively with non-bank financial institutions. Consequently, the government imposed controls, which lowered interest rates in banks below the market level as well as quantitative policy on lending that limited bank loan to have tough conditions. Additionally, the asset ratio requirement surpassed commercially resolute holdings and limited banks from competing equally with non-bank financial institutions. In savings banks asset controls were prohibitive since most of their assets were held in determined holdings of government securities, which had low returns. The citadel intentions of regulating the financial market was to facilitate enforcement of economic policy, shield investors, encourage free and fair competition as well as attain particular sectoral policies. Banks were experiencing increased pressure in getting funds owing to the low rates as well as terms they were allowed to give to depositors. Consequently, this implied that banks had inadequate funds especially for housing. Limitations regarding who could offer deposits also limited the savings banks capability to get funds. Likewise, restrictions on interest rates as well as purpose of lending implied that given the incentive of direct lending towards profitable lending – this did not favour the housing sector (n.a, 1988). 3) According to Rosston & Waterman (2013), in 1996, the Australian government instituted Financial System Inquiry. The inquiry was instituted so that it could make recommendations on governing structure that would retort to previous decade development as well as ensure responsive, efficient, malleable and competitive financial system. Particularly the fundamental goals of the inquiry were: Embolden greater efficiency through improved competition Maintain stability along with confidence in the financial organization and at the same time stabilizing the aptitude to be receptive to novelty as well as market developments The Wallis Inquiry discovered that the amount of prudential regulation ought to be comparative to the level of market failure it intends to address, however it ought not to entail a government warranty in any section of the financial arrangement. Profoundly, it is the role of the board along with the administration of financial organizations to make sure that financial promises that are made to the consumers are observed. Prudential regulation as well as supervision ought to not to be after adding one discipline by emboldening sagacious risk-management activities by organizations as well as offering early detection as well as resolution of financial issues. The Wallis Inquiry stated that while sagacious regulation is required in particular situations. According to Wallis inquiry in the Final Report in 1997 it was aimed at being flexible with the change that was going on in the financial industry. Generally, the evolution in the market necessitates a paradigm shift in the regulatory philosophy aimed at increasing reliance on disclosure as well as market-based signs and away from the highly specialized prudential regulation. Most of the commendations of Wallis Inquiry were accepted. The fundamental recommendation was a newfangled organizational structure of regulating the financial structure. The Wallis Inquiry acclaimed a model of regulation that was founded on the functional objectives that had three ‘peaks’ – a prudential regulator, regulate conduct and disclosure as well as an organization responsible for stability along with payments. Before the Wallis reforms the framework was entirely on a sectoral method, in that, different regulatory institutions were responsible for particular tasks in the financial industry. Wallis reforms were developed basing on the past regulatory structure that based entirely on institutional supervisory body and shifted them to agencies developed on functional lines. According to the Wallis reforms, Reserve Bank of Australia (RBA) is accountable for enforcement of monetary policy, financial system stability along with regulating system of payments. The RBA emphasizes on financial system stabilization. In the Wallis Inquiry, the RBA maintained the task of systemic stability. Extensively, the RBA liaises with different regulators in the financial sector in observing systemic stability. The main adjustment that was made to the RBA was removal of the role of prudential bank supervision as well as depositor protection. This change was instrumental in clarifying that even though the RBA may intervene so that the system could be stable. This also made clarification on accountabilities of the regulatory structure. Upon enforcement of Wallis Inquiry the Australian Prudential Regulation Authority (APRA) was accountable for prudential regulation of all life insurance, general insurance, deposit-taking institutions along with superannuation (Hill & Moloney, 2012). Eventually, there was a prudentially controlled body in the financial organization that was brought in the Commonwealth jurisdiction as well as a regulated single agency. This move emboldened elimination of artificial as well as anti-competitive distinctions between various bodies that offer same products and helped control of financial service conglomerates. Before the Wallis Inquiry was enforced, prudential regulations were undertaken by various agencies both at the State and Commonwealth levels. When the Wallis reforms were enforced, the Australian Securities and Investments Commission (ASIC) were responsible for ensuring consumer protection, market integrity as well as regulation of companies in the financial system. These roles were shifted from different regulators with the aim of reducing inconsistencies, inefficiencies as well as regulatory gap, which compromised rivalry in financial bodies. To ensure that regulators perform their responsibilities they were bestowed with considerable independence in operation from the Australian Government in enforcement of legislation and when dealing with specific scenarios in prudential supervision as well as disclosure. Regulators in the financial sector have a charter of objectives as well as accountabilities that is clear. Accountability of operational supervision of markets as well as financial institutions is upon the regulators. The responsibility of the Australian Government includes developing broad policy direction as well as priorities for regulation in the financial sector as well as forwarding proposal to the amendments or for new legislation. Furthermore in 1998 the Australian Government developed a Financial Sector Advisory Council (FSAC) so that it could unite various financial market participants to advice the Australian Government on policies that would embolden growth of an ardent as well as competitive financial sector (Carlon, Mladenovic-McAlpine & Palm, 2012). According to evidence that was compiled by Wallis during the inquiry, Australia had a high cost of regulation. Partly, the high cost was linked to the Campbell Report. This legislation did not antedate the rate of advances in the financial markets. Statistics on recent data show that the cost of regulation has decreased. This is attributed to the regulatory organization following the Wallis Inquiry. Reforms developed following the Wallis Inquiry were developed to make sure that the regulatory structure was coherent, minimized duplication as well as elimination of unnecessary imposts. Following Wallis reforms there was efficiency benefits. Owing to increased effectiveness operation expenditures of domestic banks have been moving downwards from 3 percent of total assets in 1978 to less than 2.5% of the total assets in 2002. Institution of reforms in the financial regulations in the previous two decades prompted competitive pressure in the financial sector. Specifically, competition in the markets, for instance, personal and home lending has been emboldened by various changes. Some of these changes include entry of foreign banks in the Australian market as well as development of specialist provider in home lending market (Wood & Demirbag, 2012). References Australia, Cch. (2010). Australia income tax legislation 2011: Income Tax Assessment Act 1997 (div 719-end). Sydney: CCH Australia Limited. Bell, S. (1997). Ungoverning the economy: The political economy of Australian Economic Policy. Oxford: Oxford University Press. Carlon, S., Mladenovic-McAlpine, R & Palm, C. (2012). Accounting, google eBook: Building business skills. Milton: John Wiley & Sons. Commonwealth of Australia (2009). The Commonwealth government’s role in infrastructure provision. Retrieved from Harper, I.R. (1985). “Why financial deregulation?”, ANU discussion paper, No. 132, October. Canberra: Australian National University. Hill, J & Moloney, N. (2012). The regulatory aftermath of the global financial crisis. New York: Cambridge University Press. Latimer, P (2012). Australian Business Law 2012. Sydney: CCH Australia Limited. Lewis, M., Lewis, M & Conaty, P. (2013). The resilience imperative: Cooperative transitions to a steady-estate economy. Gabriola Island: New Society Publishers. n.a (1988). Year Book Australia, issue 71; Issue 1988. Aust. Bereau of Statistics. OECD (2010). OECD science, technology and industry outlook, OECD Publishing. http://dx.doi.org/10.1787/sti_outlook-2010-en. Previts, G., Walton, P & Wolnizer, P. (2012). A global history of accounting, financial reporting and public policy. Bingley: Emerald Group Publishing. Rosston, G & Waterman, D. (2013). Interconnection and the internet: Selected papers from the 1996 telecommunications policy research conference. London: Routledge. Wood, G & Demirbag, M. (2012). Handbook of institutional approaches to international business. Cheltenham: Edward Elgar Publishing. Read More