Structural Change

What is Structural Change?

Structural change refers to a dramatic shift in the way an industry or market functions, usually brought on by major economic developments.

Understanding Structural Change

Structural change shifts the assumptions used to determine courses of action, for instance, changing the way market orders are processed. A major driver of structural change is innovation. Areas of the economy with large research and development (R&D) components could have big impacts on existing methodology.

For example, the advent of the smartphone was a huge change for both businesses and consumers as products, such as flashlights and cameras, saw demand wane as their functionality was readily available to everyone as part of a compact device whose primary use was something else. This led to the development of "apps" (applications) for everything, including monitoring a bank or commercial account, finding information, and making purchases.

Other factors that can often spark structural change include new economic developments, global shifts in the pools of capital and labor, changes in resource availability due to war or natural disaster, changes due to the supply and demand of all resources, and changes in the political landscape with either a new regime coming to power or major overhauls in existing laws, especially with regard to business regulation and taxation.

Not only will businesses have to adapt to the new order, so will markets. For example, in the futures market, crude oil is usually in contango, which means that oil for delivery in the future is more valued than spot oil is today. If there are production cutbacks, either by decree from producing countries or political instability in the producing regions of the word, fears of scarce reserves will arise. The oil market may then undergo a structural change. Demand for near-term oil may increase, as people would fear lower supply levels in the future. Consequently, the market may shift to backwardation, where oil today is more valuable than future oil.

Technology and Structural Change

Agricultural advancements led to the rise of factory farming. Even labor unions caused changes in the workplace forcing companies to adapt. Technological proliferation is causing a structural change in service industries with online shopping, self-ordering kiosks in fast food restaurants, and voice operated devices to access information and order products without using a phone call or, even, a computer.

On a country level, structural changes in productivity could transform an economy from a developing nation to an emerging and, eventually, a developed nation. Technical progress is seen as crucial in bringing about structural change as it involves the obsolescence of skills, vocations, and permanent changes in spending and production.

The key to effect structural change is the dynamism that is inherent in that system. Currently, globalization is driving the structural change that is causing the economies of the world to adapt, and that is possible solely due to the dynamic nature of the global economic system.