Structural change

Structural change of an economy refers to a long-term widespread change of the fundamental structure, rather than microscale or short-term output and employment. For example, a subsistence economy is transformed into a manufacturing economy, or a regulated mixed economy is liberalized. A current structural change in the world economy is globalization.

Fisher (1939) [Fisher, A (1939) Production: Primary, Secondary and Tertiary, Economic Record, June] and Clark (1940) [Clark, C (1940) The Conditions of Economic Progress] look at patterns in changes in sectoral employment. The logic of their arguments being that patterns of production are functions of the level of income and that resource and production shifts are an integral part of development. The major determinant of these shifts is the income elasticity of demand. Goods or sectors for which there is a high income elasticity of demand will grow in importance as income grows. Countries start with their production dominated by primary production, then secondary activities start to dominate and finally the tertiary sector dominates.

Structural change can be initiated by policy decisions or permanent changes in resources, population or the society. The downfall of communism, for example, is a political change that has had far-reaching implications on the economies dependent on the state-run Soviet economy. Structural change involves obsolescence of skills, vocations, and permanent changes in spending and production resulting in structural unemployment.

Short-term economical challenges can be managed with short-term fiscal or monetary policy decisions, and fluctuations are expected to even out in a few years. Managing structural change requires long-term investments such as education, and reforms aimed at increasing labor mobility. The Trade Adjustment Assistance is an example of such a program. [Elaine L. Chao. Remarks Prepared for Delivery by U.S. Secretary of Labor Elaine L. Chao, G-8 Labor and Employment Ministers Conference Stuttgart, Germany, December 15, 2003. “Globalization and Structural Change” http://www.dol.gov/_sec/media/speeches/20031215_G-8.htm]

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