Provision for Adversity: Managing Supply Uncertainty in an Era of Globalization
As contemporary globalization of the world economy continues, each nation enjoys the benefits of greater exploitation of scale economies and of specialization and exchange. But equally true, globalization causes greater dependence among regions, nations, and localities, and this necessarily implies greater vulnerability to disruption of supply to and from each other. Alternative actions that countries might take or actually have taken to manage this vulnerability include (1) stockpiling of goods that might be lost due to political, economic, or natural causes; (2) protection of domestic industries that otherwise could not compete in world markets (the classical “national security” argument for protectionism); (3) maintenance of standby production capabilities, itself closely related to stockpiling; and (4) formation of special economic unions or contingency agreements to guarantee stable supply and exchange. This article develops a unified analysis of the first two of these alternative policies. The analysis examines and summarizes how all these factors combine to determine the optimal level and mix of policies.