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'The supply chain crisis threatening the global economy risks lasting at least another year unless governments step into help ease the disruption, one of the world's top shipping companies has warned. Jeremy Nixon, chief executive of Ocean Network Express, which carries more than 6 per cent of the world's containerised freight, urged governments to boost investment in the capacity of their ports, railways, warehousing and road systems.' - An excerpt from a recent Financial Times (FT) article 'Governments need to fix supply chain crisis, top shipping boss warns'

While demand has increased at the back of stimulus spending, especially in the developed countries, apparently artificially constrained supply to reach higher revenues has also played a significant role; resultantly, prices have seen a sharp rise and reached levels not seen in years in many cases. Separately, there is need for greater investment in improving global supply chains. The pandemic has exposed over-reliance on the idea of maximizing economic efficiency through increased globalization. Voices are now being raised to increase autarkist policies to limit supply vulnerabilities and better safeguard against price shocks to economies, especially those developing countries who are net importers of oil and agricultural/food commodities and face strong economic headwinds of difficult balance of payments along with debt situations.

Hence, there is greater consensus appearing on greater focus on industrial policy, but not that of the yesteryears of greater government support to specific industries but one that plays a more balanced role between competition and support. A recent New York Times (NYT) article 'Why does everyone suddenly care about supply chains' indicated the following in this regard: 'Globalization may have lifted hundreds of millions of people out of poverty, but to its critics, it has long been a dirty word. They associate it with enhancing corporate power, reducing the wages of workers and deepening divides between the wealthy and everyone else. ...This has led many politicians - Democrats and Republicans - to a subject that was also for a long time a dirty term: industrial policy. ...But this enthusiasm for directing billions of dollars at certain industries may not work in today's globalized economy. ...Instead, to succeed, it will take what we think of as a hybrid industrial policy. This would integrate some of the good aspects of globalization, preserve competition and coordinate policy with like-minded countries to achieve common objectives.'

Pakistan, which is immensely suffering from steep imported inflation, should also look to formulate such a 'hybrid industrial policy' that balances economic efficiency with autarkist policies for ensuring greater national security, and welfare concerns, especially as pandemic-like grave global shocks result in domestic policies of countries more inward-looking to own domestic voter-base. Too much reliance on imports from other countries for the sake of optimizing economic efficiency has shifted policies from needed rootedness in political realities and nationalistic aspirations.

In the particular case of Pakistan, which is significantly an agricultural economy, focus on enhancing domestic production of commodities, and lesser reliance on imports, is important for not just food security but also for reducing the imprint of supply and price shocks on balance of payments. Similarly, supply-constrained-price-shock in the oil sector should also push a net importer of oil, Pakistan, to greater urgency towards economy, which is greatly based on renewal energy sources; something which is also important for dealing with the fast-unfolding climate change crisis. From around $20 a barrel of Brent crude in April 2020, the prices have risen sharply this year, whereby a recent Reuter article 'Oil prices reach multi-year high on tight supply' stated, among other things, in this regard: 'Brent crude futures gained 46 cents to settle at $85.99 a barrel. The contract reached a session high of $86.70 a barrel, its highest level since October 2018. ..."The global energy supply crunch continues to show its teeth, as oil prices extend their upward march this week, a result of traders pricing in the ongoing rise in fuel demand - which amid limited supply response is depleting global stockpiles," said Louise Dickson, senior oil markets analyst at Rystad Energy.'

At the moment, the big question is whether this supply disruption is transient or long term. In Pakistan, from PM to a number of his ministers/advisors, the general consensus apparently is in favour of supply chain crisis to be of a temporary nature, and with it the associated high imported inflation component. Deregulation, 'just-in-time production' and lack of detailed data on supply chains, all limit capacity of governments, and multilateral institutions to undo supply chain bottlenecks urgently, calling in turn revisiting the highly liberal globalization model towards greater regulation, and reaching consensus with the private sector to take decisions of supply of more concerns than just price signals in the medium-to-longer term. These inherent flaws, in turn, give greater levy to private sector to continue to serve self-interest of greater revenues than being concerned over limiting the supply crisis to a short term. The inability to come out of this 'liberal' economic orthodoxy mantra, even when similar concerns were faced with by banks after the global financial crisis of the late 2000s, is indeed callous to say the least.

A recent Project Syndicate (PS) article 'The great supply chain massacre' pointed out in this regard: 'It is unclear whether current widespread product shortages are merely a temporary disruption or evidence of a global production meltdown. But today's supply shocks offer striking parallels with the 2008 global financial crisis, and may require a similarly bold policy response. ...But in the short term, decentralized markets and price signals are the problem, not the solution. Governments will need to step in... to mitigate some of the shortages. When the immediate supply concerns abate, firms and policymakers must consider what kind of insurance or slack they should build into the production system over the longer term. Just as banks needed to increase their equity buffers after 2008, we perhaps now need to step back from just-in-time production and redefine productivity in light of supply-chain risks.'

(The writer holds a PhD in Economics from the University of Barcelona; he previously worked at the International Monetary Fund)

He tweets@omerjaved7

Copyright Business Recorder, 2021

Dr Omer Javed

The writer holds a PhD in Economics from the University of Barcelona. He previously worked at the International Monetary Fund. He tweets @omerjaved7


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