Structural Adjustment Policies Becoming Increasingly Important

Throughout history we have seen major structural economic changes as workers have moved from agriculture into manufacturing during the industrial revolution and then from manufacturing into services during the post-war period. While the impacts of, and global policy responses to, climate change are highly uncertain, economies are likely to experience major adjustments over the next few decades as new policy measures are taken. Regions that rely on thermal coal mines and coal-fired power generators for employment opportunities will be particularly vulnerable.  Furthermore, automation and AI are other factors that may adversely affect employment opportunities across industries. This is a good time to start thinking about and preparing for structural adjustment.

Structural adjustment policies (SAPs) refer to government programs that aim to mitigate the effects of industry contractions. Especially for communities that are economically dependent on certain industries, SAPs can play an important role in ensuring a smooth transition process for the affected workers and business owners, if they are well-designed.

 

In this article, structural adjustment policy will be investigated with regard to the resources sector, which is a major source of employment in many Queensland regions and makes a huge contribution to national export earnings.

A Brief History of SAPs in Australia

In a study spanning from 2000-12, Professor Andrew Beer counted 109 structural adjustment packages worth $88 billion (see below). Precise quantification is not readily available, but overall it appears that the major categories of SAPs, other than “Miscellaneous”, were the manufacturing sector and environment, water, and climate change (see below).  Major examples of structural adjustment within Australia include adjustments in the dairy, sugar, and car manufacturing industries.

Australia has engaged with SAPs across all levels of government, although typically in a reactive fashion that has been ineffective in achieving objectives. In a report on regional investment, the Grattan Institute argued that SAPs typically:

  • “have a high cost per job;
  • do not appear to have significantly affected overall long-term employment trends in the region; and
  • did not result in the regions performing any better than other regions that lose a major employer but did not receive any government assistance.”

Indeed, the view from many authorities, including the Productivity Commission, the Grattan Institute, and CSIRO, is that governments should refrain from trying to prevent adjustments from occurring, and instead facilitate the adjustment process while seeking to identify and manage adverse consequences. Hence, SAPs that include re-establishment grants or loans, and assistance to obtain professional advice are typically viewed more favourably than protectionist policies such as tax breaks for affected industries. For instance, consider the billions of dollars that were spent over the years trying to prop up Australia’s car industry which ultimately proved to be unviable.

Mining and Resources Industry Overview

One sector which may require structural adjustment assistance in the future in Queensland is the coal mining industry, particularly the thermal coal mining component of it. Coal is Queensland’s largest output in the resources sector, and is mostly concentrated in the Central Queensland and Mackay regions. Ongoing mining operations are crucial for the economic prosperity of the surrounding regions. According to the QRC’s Economic Contribution Data, the resources sector employs 58% of the local population in the Mackay-Isaac-Whitsunday regions, for example.

There is no doubt that Queensland will continue to mine and export coal for at least several decades to come. But there is considerable conjecture over the future of Australia’s mining industry, and there are plausible scenarios in which it is subject to adverse shocks – i.e. in scenarios where there are more aggressive global policy responses to climate change . Hence, thinking about structural adjustment policies for the industry in advance may be beneficial.

Generally, over the long-term, the outlook for thermal coal is concerning. The prospects for metallurgical or coking coal are much better as coking coal is necessary for steel production. While the majority of Queensland’s coal production is of coking coal, the share of thermal coal (28%) is still substantial, and a major global shift away from thermal coal would have substantial impacts on resources sector employment in Queensland.

The most recent federal Department of Industry Chief Economist’s Resources and Energy Quarterly report predicted a record high of $26 billion of thermal coal exports in 2018-19 before steep declines of 19.3% and 14.6% in the real value of exports in 2019-20 and 2020-21, respectively. The Chief Economist explains this fall to be largely due to the external market dynamics mentioned at the beginning of this article:

  • lower thermal coal imports into China, as their domestic coal production grows and GDP growth rate declines; and
  • a global push toward renewable energy sources which has dampened the thermal coal trade in recent years.

Although metallurgical coal prices in 2018-19 surpassed seven-year highs and the persistent weakness in the AUD/USD exchange rate has boosted export earnings, the Chief Economist warned back in June 2019 that even this market may not be immune to unsettling market permutations. The Chief Economist predicted correctly, and metallurgical coal prices have dropped from 198 USD/metric ton in June to 137.04 USD in December of the same year.

On Wednesday 17 December 2019, Bounty Mining’s Cook Colliery entered into voluntary administration, leaving hundreds of Central Queensland workers unemployed. Bounty Mining publicly announced that  the decision was spurred by “a period of depressed coking coal prices and production shortfalls”. The Cook Colliery incident starkly contrasts with articles published just hours before by The Courier Mail and The Australian, which were prompted by an International Energy Agency report that forecasted stable international coal demand through to 2024.

These conflicting perspectives underline the extent of uncertainty currently clouding the mining and resources industry. In addition to coal mines, we may also need to be concerned about the eventual shutdown of several coal-fired power stations in Queensland. Coal-fired power stations tend to employ hundreds of people and some regional communities can be highly dependent on them. Regional Queensland communities such as Biloela, where the Callide Power Station is location, need to be well prepared.

Structural Adaptation Policies for Resource Dependent Regions and Towns

The uncertainty surrounding Australia’s mining and resources sector should prompt all levels of government to consider SAPs for resource dependent regions and towns. Depopulated mining towns serve as reminders of the impact that structural change can have on once booming mining towns. Charters Towers, for example, was populated by around 25,000 people in the late 19th century, making it the second most populated city in Queensland outside of Brisbane. Now, nearly 150 years after gold was discovered in Charters Towers, the town is only inhabited by 8,120 people.

From Australia’s experience with SAPs, there are three key principles that should be considered in the formulation of these policy packages:

Key principle 1: Policy makers should rely largely on the natural industry adjustment that will occur anyway. Caution needs to be exercised in the use of regional support and investment programs to ensure they do not work against the adjustment that needs to occur.

To illustrate, in 2000, the dairy industry was subject to large restructuring reforms following the removal of dairy farmer price support. The $1.63 billion Dairy Structural Adjustment Package, Dairy Exit Program and Dairy Regional Adjustment Program supported the principle of facilitating naturally occurring adjustments. That said, although these payments facilitated adjustment, they came at a high cost and disregarded the fact that “producers are not passive market participants”, and that farmers would have probably adjusted adequately in time without such high levels of assistance. The Australian National Audit Office’s performance report of the structural adjustment program also recognised the lack of “a detailed implementation plan” due to the adoption of an unreasonably short timeframe. This leads us to the second key principle.

Key principle 2: Contingency planning should begin early, and any government policy response should be proactive, not reactive. Contingency planning is valuable for communities heavily reliant on a single industry, even in the case where the industry survives, as it acts as risk reduction.

Examples of proactive industry engagement include town hall meetings, financial and emotional counselling, community groups, and business advisory assistance.

The policy experience with the Birmingham-situated carmaker MG Rover shutdown confirms that “it is helpful to have knowledge and actions in place rather than attempting to ‘fight fire’ after the event”. Despite average pay within these reallocated workers falling by £5,640 on average per year in real terms, almost 90% of workers found new employment and a majority said they liked their work and expected to be doing it for the foreseeable future, according to Andrew Beer. MG Rover SAPs were developed well in advance of the determined shutdown date in 2005 and included exemplary governmental and consultation processes. For instance, the free training places offered by local agencies were taken up by around two thirds of the factory workers, and ultimately contributed to 60% of the group’s continued employment.

Key principle 3: Funding and subsidy models should be needs based and highly targeted to the types of jobs appropriate to laid-off workers and to the types of businesses most in need of assistance.

Consultation with at-risk workers is necessary to ensure smooth and reliable labour transitions, and decisions should be made on a case-by-case basis. For instance, if there is an overwhelming interest or overlap of skill sets with another industry, assistance could be directed to help laid off workers transition to this new industry. For instance, it turned out that redundant workers from Holden’s Elizabeth factory were attractive to a South-West Victorian logistics business. This appears to be an example where there could be an overlap of skills sets, and governments should consider such potential overlaps in designing SAPs in the future.

Conclusion

The resources sector constituted 8.8% of GDP last year, but such dependence may contribute to economic instability over the medium to long term. If Australia’s working population, particularly workers in mining-dependent towns and regions, are unable to transition smoothly into other areas of the economy, then higher rates of long-term unemployment and lower regional economic activity may be expected. SAPs will be necessary for a smooth transition, and policy formulation should begin sooner rather than later.

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