Managing disruptions to global supply chains
For nearly three decades, global supply chains were the quiet engines of economic globalization. From 1990 to 2008, they drove the rapid expansion of trade, accounting for 60-70 percent of its growth. More than a decade later, however, they have stalled — and may in some areas be going into reverse.
The strain on global supply chains partly reflects the turn by many governments toward protectionist policies since the openness of the world economy peaked in 2011. And now, the COVID-19 pandemic has caused a supply-shock recession.
It’s clear that shrinking production at firms worldwide will create a recession — and a recovery — unlike any we have seen. In outlooks for next year, the International Monetary Fund, the OECD and other international organizations assumed a V-shaped recovery. But this narrative was likely influenced by the rapid recovery of global value chains after the 2008-2010 Great Recession, a downturn that originated in the financial system, not the real economy worldwide. Given the importance of broken supply relationships in the current downturn, this recession is likely to be unique.
To anticipate the recovery therefore requires understanding the recession’s effects on global supply chains, because a broken link may disrupt a sector’s entire production network. And such disruptions may cascade throughout the economy, depending on the sector’s importance as an input supplier for other sectors.
Firms are vulnerable in other ways. For example, suppliers affected by a lockdown impose substantial output losses on their customers when the input they produce is specific to the customer and embodies a high level of research and development and intellectual property. In such cases, switching to another supplier is costly and slow. It’s not surprising that pandemic-related disruptions are unique. After researching three decades of major natural disasters in the United States, Jean-Noël Barrot and Julien Sauvagnat of MIT found that suppliers hit by a flood, earthquake or similar event impose large output losses on customers. Indeed, when a disaster hit one supplier, firms’ sales growth suffered an average drop of 2-3 percentage points.
The impact spilled over to other suppliers, magnifying the original shock.
It is also likely that this recession will generate lower trend GDP growth. After all, global supply chains were a major driver of productivity growth in many countries in the 1990s and for most the aughts.
In these circumstances, the only option for policymakers is to spur growth in specific sectors, which is exactly what stimulus programs are designed to do. It’s worth rethinking that decision. New macro models of the pandemic suggest that sector-specific stimulus may generate the largest fiscal stimulus per dollar spent. An economy in which 50 percent of the economy is fully shut down, as in a pandemic, is not the same as one in which all economic activity collapses by half, as in a depression. In a pandemic, a sector’s relationship to the rest of the economy determines the outcome.
That means the best way to maximize the impact of fiscal stimulus is to identify sectors that are not substitutive. The pandemic poses a huge challenge to economic policymakers. Like it or not, engineering any recovery, much less a V-shaped one, will require governments to set aside issues that would be of utmost importance in ordinary times. Their credo should be Hippocratic: First, do no further harm.
(Dalia Marin is a professor of international economics at the Technical University of Munich’s School of Management. Copyright: Project Syndicate, 2020. www.project-syndicate.org)