Microeconomic reform
Encyclopedia
The term microeconomic reform (or often just economic reform) refers to policies directed to achieve improvements in economic efficiency, either by eliminating or reducing distortions
in individual sectors of the economy or by reforming economy-wide policies such as tax policy
and competition policy with an emphasis on economic efficiency, rather than other goals such as equity
or employment
growth.
"Economic reform" usually refers to deregulation
, or at times to reduction in the size of government, to remove distortions caused by regulations or the presence of government, rather than new or increased regulations or government programs to reduce distortions caused by market failure
. As such, these reform policies are in the tradition of laissez faire, emphasizing the distortions caused by government, rather than in ordoliberalism
, which emphasizes the need for state regulation to maximize efficiency.
in 1983. The last major policy initiatives associated with the microeconomic reform agenda was the package of tax reforms centred on the Goods and Services Tax (GST)
which came into force in July 2000, and the privatisation of Telstra
which began in 1998 and was completed in 2006.
There were, however, some instances of microeconomic reform before the 1980s, notably including the Whitlam government’s 25 per cent tariff
cut. Similarly, the consequences of some microeconomic reforms initiated in the 1990s, such as National Competition Policy
are still being worked through.
The policy agenda associated with microeconomic reform included
(PRC) that were started in 1978 by pragmatist
s within the Communist Party of China
(CPC) led by Deng Xiaoping
and are ongoing as of the early 21st century. The goal of Chinese economic reform was to generate sufficient surplus value
to finance the modernization
of the mainland Chinese economy. Neither the socialist command economy, favored by CPC conservatives, nor the Maoist attempt at a Great Leap Forward
from socialism
to communism
in China's agriculture
(with the commune system) had generated sufficient surplus value for these purposes. The initial challenge of economic reform was to solve the problems of motivating workers and farmers to produce a larger surplus and to eliminate economic imbalances that were common in command economies. Economic reforms started since 1978 have helped lift millions of people out of poverty, bringing the poverty rate down from 53% of the population in 1981 to 8% by 2001.....
and his finance minister Manmohan Singh
, did away with investment, industrial and import licensing and ended many public monopolies, allowing automatic approval of foreign direct investment
in many sectors. Since then, the overall direction of liberalisation has remained the same, irrespective of the ruling party, although no party has yet tried to take on powerful lobbies such as the trade unions and farmers, or contentious issues such as reforming labour laws and reducing agricultural subsidies.
The effect of these reforms have been positive, and since 1990, India has had high growth rates, and has emerged as one of the wealthiest economies in the developing world. During this period, the economy has grown constantly with only a few major setbacks. This has been accompanied by increases in life expectancy, literacy rates and food security.
in New Zealand
, the new Finance Minister
, Roger Douglas
, began a speedy reform of the New Zealand economy
. The speed of the reforms can be partially attributed to the currency crisis
that resulted from the former government's refusal to devalue the New Zealand dollar
.
The policies included cutting agricultural subsidies
and trade barriers, privatising public assets and the control of inflation
through measures rooted in monetarism
. These policies were regarded in some quarters of Douglas's New Zealand Labour Party
as a betrayal of traditional Labour ideals. The Labour Party subsequently retreated from these policies, but it became the core doctrine of the New Zealand ACT party.
The reforms created a very business-friendly regulatory framework. A 2008 study ranked New Zealand
99.9% in "Business freedom", and 80% overall in "Economic freedom", noting amongst other things that it only takes 12 days to establish a business in New Zealand on average, compared with a world-wide average of 43 days. Other indicators measured were property rights, labour market conditions, government controls and corruption, the last being considered "next to non-existent" in the Heritage Foundation
and Wall Street Journal study.
when Perestroika was introduced in June 1985 by the then Soviet
leader Mikhail Gorbachev
. Its literal meaning is "restructuring", referring to the restructuring of the Soviet economy.
During the initial period (1985–1987) of Mikhail Gorbachev's time in power, he talked about modifying central planning, but did not make any truly fundamental changes (uskoreniye
, acceleration). Gorbachev and his team of economic advisers then introduced more fundamental reforms, which became known as perestroika (economic restructuring).
Market distortion
In neoclassical economics, a market distortion is any event in which a market reaches a market clearing price for an item that is substantially different from the price that a market would achieve while operating under conditions of perfect competition and state enforcement of legal contracts and...
in individual sectors of the economy or by reforming economy-wide policies such as tax policy
Tax policy
Tax policy is the government's approach to taxation, both from the practical and normative side of the question.-Philosophy:Policymakers debate the nature of the tax structure they plan to implement and how they might affect individuals and businesses .The reason for such foitution effect]],...
and competition policy with an emphasis on economic efficiency, rather than other goals such as equity
Equity (economics)
Equity is the concept or idea of fairness in economics, particularly as to taxation or welfare economics. More specifically it may refer to equal life chances regardless of identity, to provide all citizens with a basic minimum of income/goods/services or to increase funds and commitment for...
or employment
Employment
Employment is a contract between two parties, one being the employer and the other being the employee. An employee may be defined as:- Employee :...
growth.
"Economic reform" usually refers to deregulation
Deregulation
Deregulation is the removal or simplification of government rules and regulations that constrain the operation of market forces.Deregulation is the removal or simplification of government rules and regulations that constrain the operation of market forces.Deregulation is the removal or...
, or at times to reduction in the size of government, to remove distortions caused by regulations or the presence of government, rather than new or increased regulations or government programs to reduce distortions caused by market failure
Market failure
Market failure is a concept within economic theory wherein the allocation of goods and services by a free market is not efficient. That is, there exists another conceivable outcome where a market participant may be made better-off without making someone else worse-off...
. As such, these reform policies are in the tradition of laissez faire, emphasizing the distortions caused by government, rather than in ordoliberalism
Ordoliberalism
Ordoliberalism is a school of liberalism that emphasised the need for the state to ensure that the free market produces results close to its theoretical potential . The theory was developed by German economists and legal scholars such as Walter Eucken, Franz Böhm, Hans Grossmann-Doerth and Leonhard...
, which emphasizes the need for state regulation to maximize efficiency.
Microeconomic reform in Australia
Microeconomic reform dominated Australian economic policy from the early 1980s until the end of the 20th century. The beginning of microeconomic reform is commonly dated to the floating of the Australian dollarAustralian dollar
The Australian dollar is the currency of the Commonwealth of Australia, including Christmas Island, Cocos Islands, and Norfolk Island, as well as the independent Pacific Island states of Kiribati, Nauru and Tuvalu...
in 1983. The last major policy initiatives associated with the microeconomic reform agenda was the package of tax reforms centred on the Goods and Services Tax (GST)
Goods and Services Tax (Australia)
The GST is a broad sales tax of 10% on most goods and services transactions in Australia. It is a value added tax, not a sales tax, in that it is refunded to all parties in the chain of production other than the final consumer....
which came into force in July 2000, and the privatisation of Telstra
Telstra
Telstra Corporation Limited is an Australian telecommunications and media company, building and operating telecommunications networks and marketing voice, mobile, internet access and pay television products and services....
which began in 1998 and was completed in 2006.
There were, however, some instances of microeconomic reform before the 1980s, notably including the Whitlam government’s 25 per cent tariff
Tariff
A tariff may be either tax on imports or exports , or a list or schedule of prices for such things as rail service, bus routes, and electrical usage ....
cut. Similarly, the consequences of some microeconomic reforms initiated in the 1990s, such as National Competition Policy
National Competition Policy
The term National Competition Policy refers to a set of policies introduced in Australia in the 1990s with the aim of promoting microeconomic reform.-Origins:...
are still being worked through.
The policy agenda associated with microeconomic reform included
- reductions in and eventual removal of tariffTariffA tariff may be either tax on imports or exports , or a list or schedule of prices for such things as rail service, bus routes, and electrical usage ....
protectionProtectionismProtectionism is the economic policy of restraining trade between states through methods such as tariffs on imported goods, restrictive quotas, and a variety of other government regulations designed to allow "fair competition" between imports and goods and services produced domestically.This... - corporatisation and privatisation of government business enterprises.
- deregulationDeregulationDeregulation is the removal or simplification of government rules and regulations that constrain the operation of market forces.Deregulation is the removal or simplification of government rules and regulations that constrain the operation of market forces.Deregulation is the removal or...
of industries including airlines - new forms of regulationRegulationRegulation is administrative legislation that constitutes or constrains rights and allocates responsibilities. It can be distinguished from primary legislation on the one hand and judge-made law on the other...
in industries subject to privatisation and corporatisation - tax reformTax reformTax reform is the process of changing the way taxes are collected or managed by the government.Tax reformers have different goals. Some seek to reduce the level of taxation of all people by the government. Some seek to make the tax system more progressive or less progressive. Some seek to simplify...
Microeconomic reform in the People's Republic of China
The Chinese economic reform refers to the program of economic changes called "Socialism with Chinese characteristics" in the People's Republic of ChinaPeople's Republic of China
China , officially the People's Republic of China , is the most populous country in the world, with over 1.3 billion citizens. Located in East Asia, the country covers approximately 9.6 million square kilometres...
(PRC) that were started in 1978 by pragmatist
Pragmatist
Pragmatist may refer to:*A person who subscribes to pragmatism, a field of philosophy*A person who subscribes to pragmaticism, Charles Sanders Peirce's post-1905 branch of philosophy...
s within the Communist Party of China
Communist Party of China
The Communist Party of China , also known as the Chinese Communist Party , is the founding and ruling political party of the People's Republic of China...
(CPC) led by Deng Xiaoping
Deng Xiaoping
Deng Xiaoping was a Chinese politician, statesman, and diplomat. As leader of the Communist Party of China, Deng was a reformer who led China towards a market economy...
and are ongoing as of the early 21st century. The goal of Chinese economic reform was to generate sufficient surplus value
Surplus value
Surplus value is a concept used famously by Karl Marx in his critique of political economy. Although Marx did not himself invent the term, he developed the concept...
to finance the modernization
Modernization
In the social sciences, modernization or modernisation refers to a model of an evolutionary transition from a 'pre-modern' or 'traditional' to a 'modern' society. The teleology of modernization is described in social evolutionism theories, existing as a template that has been generally followed by...
of the mainland Chinese economy. Neither the socialist command economy, favored by CPC conservatives, nor the Maoist attempt at a Great Leap Forward
Great Leap Forward
The Great Leap Forward of the People's Republic of China was an economic and social campaign of the Communist Party of China , reflected in planning decisions from 1958 to 1961, which aimed to use China's vast population to rapidly transform the country from an agrarian economy into a modern...
from socialism
Socialism
Socialism is an economic system characterized by social ownership of the means of production and cooperative management of the economy; or a political philosophy advocating such a system. "Social ownership" may refer to any one of, or a combination of, the following: cooperative enterprises,...
to communism
Communism
Communism is a social, political and economic ideology that aims at the establishment of a classless, moneyless, revolutionary and stateless socialist society structured upon common ownership of the means of production...
in China's agriculture
Agriculture in China
Agriculture is an important economic sector of China, employing over 300 million farmers. China ranks first in worldwide farm output, primarily producing rice, wheat, potatoes, sorghum, peanuts, tea, millet, barley, cotton, oilseed, pork, and fish.-History:...
(with the commune system) had generated sufficient surplus value for these purposes. The initial challenge of economic reform was to solve the problems of motivating workers and farmers to produce a larger surplus and to eliminate economic imbalances that were common in command economies. Economic reforms started since 1978 have helped lift millions of people out of poverty, bringing the poverty rate down from 53% of the population in 1981 to 8% by 2001.....
Microeconomic reform in India
The economic liberalisation of 1991, initiated by then Indian prime minister P. V. Narasimha RaoP. V. Narasimha Rao
Pamulaparti Venkata "Narasimha Rao" was the ninth Prime Minister of India . He led an important administration, overseeing a major economic transformation and several home incidents affecting national security of India. Rao accelerated the dismantling of the Licence Raj. He is often referred to as...
and his finance minister Manmohan Singh
Manmohan Singh
Manmohan Singh is the 13th and current Prime Minister of India. He is the only Prime Minister since Jawaharlal Nehru to return to power after completing a full five-year term. A Sikh, he is the first non-Hindu to occupy the office. Singh is also the 7th Prime Minister belonging to the Indian...
, did away with investment, industrial and import licensing and ended many public monopolies, allowing automatic approval of foreign direct investment
Foreign direct investment
Foreign direct investment or foreign investment refers to the net inflows of investment to acquire a lasting management interest in an enterprise operating in an economy other than that of the investor.. It is the sum of equity capital,other long-term capital, and short-term capital as shown in...
in many sectors. Since then, the overall direction of liberalisation has remained the same, irrespective of the ruling party, although no party has yet tried to take on powerful lobbies such as the trade unions and farmers, or contentious issues such as reforming labour laws and reducing agricultural subsidies.
The effect of these reforms have been positive, and since 1990, India has had high growth rates, and has emerged as one of the wealthiest economies in the developing world. During this period, the economy has grown constantly with only a few major setbacks. This has been accompanied by increases in life expectancy, literacy rates and food security.
Economic reform in New Zealand
After the snap election of 1984New Zealand general election, 1984
The 1984 New Zealand general election was a nationwide vote to determine the shape of the 41st New Zealand Parliament. It marked the beginning of the Fourth Labour Government, with David Lange's Labour Party defeating long-serving Prime Minister Robert Muldoon of the National Party. It was also the...
in New Zealand
New Zealand
New Zealand is an island country in the south-western Pacific Ocean comprising two main landmasses and numerous smaller islands. The country is situated some east of Australia across the Tasman Sea, and roughly south of the Pacific island nations of New Caledonia, Fiji, and Tonga...
, the new Finance Minister
Minister of Finance (New Zealand)
The Minister of Finance is a senior figure within the government of New Zealand. The position is often considered to be the most important Cabinet role after that of the Prime Minister....
, Roger Douglas
Roger Douglas
Sir Roger Owen Douglas , is a New Zealand politician who formerly served as a senior New Zealand Labour Party Cabinet minister. He became arguably best-known for his prominent role in the radical economic restructuring undertaken by the Fourth Labour Government during the 1980s...
, began a speedy reform of the New Zealand economy
Economy of New Zealand
New Zealand has a market economy which is greatly dependent on international trade, mainly with Australia, the European Union, the United States, China, and Japan. It has only small manufacturing and high-tech sectors, being strongly focused on tourism and primary industries like agriculture...
. The speed of the reforms can be partially attributed to the currency crisis
Currency crisis
A currency crisis, which is also called a balance-of-payments crisis, is a sudden devaluation of a currency caused by chronic balance-of-payments deficits which usually ends in a speculative attack in the foreign exchange market. It occurs when the value of a currency changes quickly, undermining...
that resulted from the former government's refusal to devalue the New Zealand dollar
New Zealand dollar
The New Zealand dollar is the currency of New Zealand. It also circulates in the Cook Islands , Niue, Tokelau, and the Pitcairn Islands. It is divided into 100 cents....
.
The policies included cutting agricultural subsidies
Subsidy
A subsidy is an assistance paid to a business or economic sector. Most subsidies are made by the government to producers or distributors in an industry to prevent the decline of that industry or an increase in the prices of its products or simply to encourage it to hire more labor A subsidy (also...
and trade barriers, privatising public assets and the control of inflation
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
through measures rooted in monetarism
Monetarism
Monetarism is a tendency in economic thought that emphasizes the role of governments in controlling the amount of money in circulation. It is the view within monetary economics that variation in the money supply has major influences on national output in the short run and the price level over...
. These policies were regarded in some quarters of Douglas's New Zealand Labour Party
New Zealand Labour Party
The New Zealand Labour Party is a New Zealand political party. It describes itself as centre-left and socially progressive and has been one of the two primary parties of New Zealand politics since 1935....
as a betrayal of traditional Labour ideals. The Labour Party subsequently retreated from these policies, but it became the core doctrine of the New Zealand ACT party.
The reforms created a very business-friendly regulatory framework. A 2008 study ranked New Zealand
New Zealand
New Zealand is an island country in the south-western Pacific Ocean comprising two main landmasses and numerous smaller islands. The country is situated some east of Australia across the Tasman Sea, and roughly south of the Pacific island nations of New Caledonia, Fiji, and Tonga...
99.9% in "Business freedom", and 80% overall in "Economic freedom", noting amongst other things that it only takes 12 days to establish a business in New Zealand on average, compared with a world-wide average of 43 days. Other indicators measured were property rights, labour market conditions, government controls and corruption, the last being considered "next to non-existent" in the Heritage Foundation
Heritage Foundation
The Heritage Foundation is a conservative American think tank based in Washington, D.C. Heritage's stated mission is to "formulate and promote conservative public policies based on the principles of free enterprise, limited government, individual freedom, traditional American values, and a strong...
and Wall Street Journal study.
Economic reform in the USSR and Russia
Economic reforms began in the Soviet UnionSoviet Union
The Soviet Union , officially the Union of Soviet Socialist Republics , was a constitutionally socialist state that existed in Eurasia between 1922 and 1991....
when Perestroika was introduced in June 1985 by the then Soviet
Soviet Union
The Soviet Union , officially the Union of Soviet Socialist Republics , was a constitutionally socialist state that existed in Eurasia between 1922 and 1991....
leader Mikhail Gorbachev
Mikhail Gorbachev
Mikhail Sergeyevich Gorbachev is a former Soviet statesman, having served as General Secretary of the Communist Party of the Soviet Union from 1985 until 1991, and as the last head of state of the USSR, having served from 1988 until its dissolution in 1991...
. Its literal meaning is "restructuring", referring to the restructuring of the Soviet economy.
During the initial period (1985–1987) of Mikhail Gorbachev's time in power, he talked about modifying central planning, but did not make any truly fundamental changes (uskoreniye
Uskoreniye
Uskoreniye was a slogan and a policy announced by Communist Party General Secretary Mikhail Gorbachev on April 20, 1985 at a Soviet Party Plenum, aimed at the acceleration of social and economical development of the Soviet Union...
, acceleration). Gorbachev and his team of economic advisers then introduced more fundamental reforms, which became known as perestroika (economic restructuring).