Dealing With Supply Chain Stresses—Lessons From Financial Crisis

If this year’s supply chain stresses and strains had been managed like a traditional financial crisis, with governments resolute in dealing with failing financial institutions and addressing public anxieties about jobs and livelihoods, there is a high probability that we would have witnessed a concerted, coordinated effort by the international community, possibly lead by the G20 and G7. Even factoring in the lack of global cooperation which we have seen in dealing with the global pandemic, there are valuable lessons to be drawn from previous financial crisis for policymakers and the private sector.

The question is whether anyone is cataloging the many mistakes and policy missteps made this year as supply chain problems have proliferated and governments appear helpless in dealing with the crisis. The cost to the global economy has been via endemic shortages, inflation, and rising costs for essential goods, levels not seen in at least four decades, eroding a resurgence in economic activity from the lows of the previous year.

On the face of it, comparing supply chain strains with the global financial crisis of 2008 may be an overstretch. The financial crisis, which had its origins in the U.S. housing market, imploded the financial systems of Europe and America and had a profound negative impact on lives and livelihoods. While the supply chain crisis has amplified inflationary pressures and shortages, it has not (yet) been transformed into a full-blown crisis with unintended consequences for the global economy. Which is why in theory at least it should be easier to be managed by private and public sector czars. The fact that they have failed so far is an important reason why the 2008 financial crisis playbook should be studied for valuable insights. Two lessons from 2008 are particularly relevant:

First, global coordination of economic policies and the crisis response itself worked magnificently in 2008 because the G20 got its act together just in time to save the global economy. Finance ministers, central bank governors were in constant communication with their counterparts to access information and share policy insights on their national response to the impact of the financial crisis. The G20 became a powerful global policy platform and leaders matched their rhetoric with concrete action.

Second, confidence in the financial system was restored with activist (and still controversial) state intervention, through bailouts and unprecedented levels of quantitative easing by central banks worldwide. No such intervention will be required for the supply chain industry.

Skeptics at this stage will point out that supply chains are very different from the global financial system. They are heavily fragmented with complex governance structures—at national, regional, and local levels—and a single point of coordination offered by the G20 will not be effective.

The container shipping industry, which controls the most powerful of supply chain nodes—is a shining exhibit as to why global coordination and intervention is necessary. Arising from a two-decade slumber of over-capacity and stagnant freight rates, the handful of global container shipping firms dominating modern commerce are the OPEC cartel of our era. Although the industry poses a systemic risk to the global economy, through the unsustainable rise in container freight rates and questionable market dominance practices, there is little or no global coordination or regulatory oversight of the industry, precisely of the kind which is exercised by regulators over the global financial system.

As a start, the G20 should be leaning on the container shipping industry to set ground rules and principles in maintaining supply chain resilience. The other fragmented elements of the supply chain industry—port operators, ground transportation, multinational and local companies, national governments—should be an integral part of this conversation. In 2022, the world should move on from the pandemic and supply chain shortages by making new mistakes, not repeating old ones.