Stress testing the supply chain is the key to a lasting global recovery

The writer is the Executive Director of the Economic Diplomacy Committee of the London School of Economics and Political Science

In recent months, it has been shown that the supply chain not only carries the world’s commodities, but also carries inflationary anxiety, geopolitical differences, climate challenges and health risks.

As the drought hit Taiwanese manufacturers, geopolitics split the market, and semiconductor shortages are dragging down the industrial recovery. At the same time, the tight supply of construction materials has led to an increase in contractor costs, intensifying concerns about inflationary pressures in the global economy. With insufficient supply of medical supplies and insufficient production of vaccines, the new coronavirus pandemic continues to wreak havoc.

Therefore, it is welcome Final version The agenda of the G7 summit last weekend should include acknowledging the threats faced by the global supply chain and proposing a common framework for stress testing.

Consider alternatives. As high-income countries emerge from the coronavirus pandemic, demand has surged.with Supply chain disruption caused by Covid Being put Upward pressure Various way or another temporary These price increases may mean that inflation anxiety is back, and calls for traditional remedies—cutting spending and raising interest rates—have already emerged. But directly curbing demand can be counterproductive.

The problem becomes more complicated when the interruption in inflation is driven by the following factors Geopolitics. in case semiconductor Because G7 countries are unwilling to cooperate with them, there is a serious shortage of supply Military-owned Chinese Hardware Enterprise, Does the domestic economy have to be punished with lower expenditures and higher interest rates? Will those who are worried about inflation make these countries abandon sanctions and eliminate their security concerns in the name of stable price levels?

The problem facing the G7 is how to adapt to changing economic and geopolitical conditions. In the long run, the answer will be approximated by rough market adjustments.

But at the same time, by stress testing the supply chain, the government can simulate and prepare for sudden shocks and changing conditions. Adverse scenario analysis will enable them to model the resilience of critical supply chains in the face of familiar financial events and urgent non-financial risks.

How can the supply chain withstand tariffs and cyber attacks, droughts and storms, or disease outbreaks and demand for certain medical products?This Key calculation It is the difference between the supply chain’s “time to live” (how long can the demand be met after an interruption) and its “recovery time” (the time required to mitigate or adapt to the interruption). If the recovery time is greater than the survival time, the company and the authorities will see that the supply chain needs to be strengthened.

Conversely, the G7 countries should actively carry out stress testing of financial institutions and work together as they did after the financial crisis. Implementing micro-prudential stress testing on the supply chain will reduce the possibility of disruptive disruption by informing better private sector practices and guiding smarter investment and regulation.

This”Supply Chain Resilience ForumThe recommendations made by the United States also provide an environment for regulatory agencies to coordinate macro-prudential policies to predict broader contagion risks and systemic threats.

Hide in another G7 press release Announced a new doctrine of interventionist economic policy. It is called”Cornish Consensus“.

If it is to succeed, where its predecessor, laissez-faire, the Washington Consensus failed, the Cornish Consensus will have to take a more serious look at the supply chain that constitutes the world’s greatest challenge.

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