'Shortage economy'

25 Oct, 2021

Oil prices spiraling. Gas disappearing. Coal burning. Freight hiking. Trucks overloading. Flights cancelling. Economy heating and public screaming. From the UK to US and from China to Pakistan the scenario is looking grim and stingy. Welcome to the 'shortage economy'. Scarcity of natural resources has become stark. Lack of production and supply chain capacity has become a norm. Unavailability of labour has become a handicap. Result- prices have sky-rocketed everywhere. Production has halted. Hoarders have been activated. Manipulators are working overtime. Combine all this and you are in for a period of unease, unrest, inequality and inequity.

A shortage is a situation in which demand for a product or service exceeds the available supply. When this occurs, the market is said to be in a state of disequilibrium. This disequilibrium distorts pricing, disturbs supply chains and disbalances economies. As this is happening everywhere in the world, the strategies that were practiced pre- Covid days are no longer valid. Previously, it used to be the norm to go for multiple or alternative suppliers. In today's economy there are none available as shortage is everywhere. Similarly, previous strategies of offering substitutes is no longer an option as substitutes are also spiking. This poses the question of what has caused these shortages and what are the solutions:

  1. The pandemic shutdown- Coronavirus is still causing havoc in many countries. The fourth and fifth waves in many nations have been more severe despite vaccines. The USA in September was facing 2000 deaths per day. The vaccine divide has made corona taming of the virus difficult. Almost 80% of the world is still waiting for the first dose while in the developed countries people are getting 3rd booster jabs. This has affected supply chains. The world's biggest factory China has huge energy crisis. Electricity cut offs, gas shortages have curtailed raw materials' production like chips and semiconductors. This in turn has halted the production of electronics, cars and so much else. Labour shortages have disturbed distribution and logistics. Organizations had laid off employees during pandemic. Loaders on ports, drivers of containers have all become scarce. There are severe congestions on ports where ships are anchored without having the logistics capacity to unload and deliver cargoes. This has unleashed the inflation bomb. A container of books that used to cost $ 2500 on US ports is now charging $25000.

  2. The V-shaped recovery- The V-shaped recovery is causing imbalances. While lifting of the lockdowns has unleashed pent up demand, and that too near the Christmas season, there are hardly enough goods available to fulfill this sudden rush of buying. Again, the price hikes are unprecedented. Inflation in the USA has climbed to 5% from 1%. In Euro Zone from 0% in December 2020 it is 3% in September. It is up to 4.5% among the broader Group of 20, the collection of nations that account for 80 percent of global gross domestic product. China this week reported that its producer price index, which measures the cost of goods sold to businesses, rose by a record 10.7 percent last month. In Pakistan, inflation has risen from 8.9% to 14.50% in one month.

  3. The political economy- With shortages the biggest casualty is free trade. The giants have become inward focused on politics of protectionism. We saw that India, which was the biggest producer of vaccines, stopped supplying to the rest of the world when its own demand for vaccines could not be met. With shortages all over free markets and exchange of goods has taken a summersault. Brexit has made Europe divided. The UK was trying to strike a free trade deal with the US but is now finding the latter reluctant. Tariffs on Chinese products imposed by Trump but supposed to be removed by Biden administration remain imposed. Just imagine the gravity of the situation - the richest country, the USA, has warned of empty shelves on Christmas. Turkey dinners on thanksgiving may have to be postponed and Christmas trees are also endangered species this winter. The American Christmas Tree Association warned consumers last month that both live and artificial trees will be in short supply this year due to supply chain disruptions.

In this scenario, where the global world is blistering with inflation heat, Pakistan is bearing the brunt too. While the more educated public understands the global impact, the ordinary person with little understanding of economy is screaming due to spiraling prices. Some immediate and long-term steps needed to cool the inflation and the tempers of the public are:

  1. Policy innovations- Extraordinary times merit extraordinary interventions. While the West is doing its western fiscal management of protectionism, bail-outs, dole-outs, etc, Pakistan's economic feasibilities demand creativity. Just like in Corona, Pakistan needs to set up a food security fund. This fund needs to explore opportunities of barter with Central Asian Countries to provide flour and other basic food items on immediate basis to deal with price issues in the country. Similarly, the subsidy to small and medium enterprises in energy prices in the form of three months deferment of bills should also be considered to let them grow as planned.

  2. Make in Pakistan- This shortage has exposed Pakistan's 3 decades policy disasters of being an import-led economy. From oil to agri products, from consumer items to luxury items, everything was made in foreign countries. This has to be reversed. While we are learning from China's development, we must realize that the first step Chinese did was to produce most things at home. China became known as the world's factory. The government has taken the right steps of boosting agri products but must also invest in home-based logistics industry to support the storage and transfer of these products.

  3. Protecting the vulnerable- Ehsaas programme-targeted subsidy is an excellent initiative that will help the poorest of the poor. Strict monitoring is needed to ensure exploitation and reselling of the subsidized products in the market. To make every day vegetables, etc, cheap the government can introduce the concept of home kitchen gardening. It is a cheap and very simple concept of sowing main vegetables in a small grassy area with little effort and no cost. Through videos it can go viral and give middle class households relief from the market as well as keeping the prices in check.

The shortage economy has exposed the flaws in the way countries govern, behave and produce. The unregulated capitalism and the unlimited consumerism have made this world unsafe, insecure and more inequitable. Many countries are resorting to closing borders, putting themselves first, breaking commitments. This may dilute the immediate pressure but will have a long-term repercussion. For Pakistan these are critical times. Its traditional partners, the USA and Europe, are themselves starved of goods. Let this be an opportunity for finding new partners, new products and a new focus on a self-reliant and sustainable Pakistan.

(The writer can be reached at andleeb.abbas1@gmail.com)

Copyright Business Recorder, 2021

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