Can government assistance create jobs?

Jun 30, 2014
The now-closed Mitsubishi factory in Adelaide's south.

The now-closed Mitsubishi factory in Adelaide's south.

Australian governments have spent billions of dollars over the past decade to sandbag industries and support regional jobs – but what actually works?

Every year governments across Australia spend substantial sums either creating jobs for particular places or supporting regions at risk of losing their employment base.

Between 2000 and 2012 governments across Australia committed approximately $57 billion to 135 structural adjustment programs in various guises.

There is no denying that job losses create a demand for government action. The recent closure of Penrice and the announced relocation of staff from Health Workforce Australia to Canberra remind us that our economy is changing and that our previously comfortable assumptions about South Australia’s place in the world are no longer valid.

Over the past decade our economy has been affected by a raft of major plant closures and economic shocks, and while we often focus on change in the manufacturing sector, agriculture, service industries – and even mining – have been affected.

Governments across Australia have reacted to plant closures and job losses by introducing structural adjustment programs. And while the Abbott Coalition Government has begun to pull back from these measures, they remain an important part of the public policy landscape and the economy of some sectors.

Structural adjustment programs vary considerably: some are very large with budgets greater than $3 billion over a number of years, while others are small and may assist one or two businesses only.

Structural adjustment programs take many forms and may contain elements of labour market assistance; industry support to improve efficiency, often by helping smaller participants leave the sector; enterprise assistance to ensure the viability of one or more businesses; and, community compensation, where funds are provided to help affected places create a new future though inward investment strategies or other measures.

At first glance, there are grounds to question the benefit resulting from structural adjustment programs.

Many places and many sectors have been the beneficiaries of multiple structural adjustment measures – southern Adelaide, for example, was the beneficiary of two dedicated adjustment packages and received its share of two automotive industry programs.

However, the need for repeat investment by government suggests the earlier attempts failed to address entrenched problems.

Structural adjustment programs can also be questioned because of the sheer scale of investment by governments: over the last dozen years the Australian Government has spent approximately $1 on structural adjustment and industry support for every $2 it spends on higher education. This is a significant commitment of scarce public sector resources and one that should be scrutinised.

What does national and international experience tell us about what works and what doesn’t work in assisting an industry or community recover from a major economic shock?

Perhaps the most important lesson comes from England, with recent work providing clear evidence that structural adjustment programs can be very effective in helping retrenched workers back into full-time jobs, reducing the vulnerability of other businesses within the region and speeding the recovery process at the community level. The key to success appears to be early planning for all eventualities and rolling out a comprehensive program of assistance, rather than adopting a piecemeal approach.

Other important lessons can be found closer to home.

Both the South Australian and federal governments invested in southern Adelaide after Mitsubishi closed their Lonsdale plant in 2005. Some of that money supported the expansion of existing businesses and investment in new productive capacity. Anyone visiting that site today can see clear evidence of success, with land which might otherwise have been left vacant used by a number of businesses, creating jobs and value within the economy.

The EU concluded that assistance to affected regions was most effective when it was targeted to small and medium sized enterprises…

There is a substantial body of work that supports the integration of labour market programs into the suite of measures used to help a local or regional economy recover. When coupled with the acquisition of formal training and qualifications, labour market programs have been shown to reduce the time spent unemployed, increase the likelihood of finding a full time job and raise the probability of moving to a better-paying job.

The European Union directs a great deal of funding to industry and regional programs and casts a very careful eye over its program expenditures. Its research suggests that overall structural adjustment programs have a clear and positive impact on investment in affected communities.

These programs leverage investment from the private sector, resulting in total capital investment in excess of anything that would have occurred in the absence of public sector action. This investment then results in increased long-term employment and volumes of production. Many of the jobs created are of high quality in terms of earnings and security. These programs can also stimulate innovation in the local economy, especially when that goal is inbuilt from inception.

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Not all programs, of course, are equally effective. The EU concluded that assistance to affected regions was most effective when it was targeted to small and medium sized enterprises (SMEs) of up to 50 employees and that providing assistance to large firms delivered few, if any, benefits in terms of job creation of productivity gains.

As the EU concluded: “support does not change the behaviour of large firms in terms of investment and productive activity. If nothing changes inside the firm, how can one argue change has been produced elsewhere?”

The EU evaluation also confirmed the value of providing non-financial assistance – such as business advice – for the survival of business start-ups and for job growth. Soft loans, they concluded, were more effective than grants, and smaller grants were more effective than larger ones.

Structural adjustment programs appear to be an inescapable feature of the Australian economy for the foreseeable future.

The good news is that there is evidence that they are effective and can make a positive contribution to communities and regions undergoing change.

As a nation the challenge is to make sure we are using the best possible policies and programs. Getting to that point may require a fine-tuning of our current measures.

Further reading, for those interested:

Bailey, D. Bentley, G. de Ruyter, A. and Hall, S. 2014 Plant Closures and Taskforce Responses: An Analysis of the Impact of, and Policy Response to, MG Rover in Birmingham, Regional Studies, Regional Science, Vol 1, Nos 1

Beer, A. 2014 Structural Adjustment and the Automotive Industry: Insights for Regional Policy and Programs, Regional Studies, Regional Science, Vol 1, Nos 1

Mouque, D. 2012 What are Counterfactual Impact Evaluations Teaching Us About Enterprises and Innovation Support? Regional Focus, 2/12, Directorate General for Regional and Urban Policy, Brussels

Professor Andrew Beer is Director of the Centre for Housing, Urban and Regional Planning at the University of Adelaide.


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