Tuesday Dec 02, 2008

Inescapable Facts of Mass and Distance

It is not clear whether Liam Denning was writing prose or an article on supply chain management and global logistics. Good writers lurk everywhere.

I will have to quote his whole article from The Wall Street Journal to make my point.

Ship Ahoy: New World's Supply Chain

By Liam Denning (The Wall Street Journal, December 3rd, 2008)

The world is bumpy.

In the age of globalization, conventional wisdom holds that supply chains prioritize labor-cost arbitrage over mere distance.

Geography, however, could make a comeback. Triple-digit oil provided the first intimation of this. Jeff Rubin, chief economist for CIBC World Markets, estimates $150 crude oil boosted the cost of shipping imports to the U.S. by 11%, costing roughly as much as trade tariffs in the 1970s.

Crude now trades under $50 a barrel, but the crash reflects faltering demand more than rising supply. When demand recovers, oil prices will, too.

Marc Levinson, author of container-shipping history "The Box," suggests the world also is hitting the limits of economies of scale in logistics, citing bottlenecks at ports and congested road and rail networks. These impose costs and delays and, as supply chains have become more complex, more potential points of failure. Initiatives forcing ships to reduce harmful emissions also will weigh on economics.

Innovation could change the equation again. But the ultimate facts of mass and distance are inescapable when it comes to rethinking logistics.

One answer will be shorter, regional supply chains -- a phenomenon observed in changing sources of U.S. imports during the 1970s oil shocks. That ought to have positive implications for exporting economies such as Mexico, while China could suffer.

U.S. workers cheered by the prospect of jobs returning home, however, shouldn't be too jubilant: Globalization and labor arbitrage aren't going away. And rising supply-chain costs mean U.S. workers will pay higher prices for the goods they buy.

Wednesday Aug 29, 2007

Diffusion of Financial Crisis among Economic Neighbors

In the last several months, as the credit crisis has rippled from the U.S. to Europe and back, I'm reminder of other historical examples:

Princes, abbots, bishops, even the Holy Roman Emperor debased the subsidiary coinage used in daily transactions (but not gold and silver coin of large denominations) by raising the denomination of existing monies, substituting baser for good metal, or reducing its weight, in order to extract more seignorage in the absence of effective tax systems and capital markets--this to prepare for the Thirty Years' War, which broke out in 1618. Debasement was limited at first to one's own territory. It was then found that one could do better by taking bad coins across the border of neighboring principalities and exchanging them for good with ignorant common people, bringing back the good coins and debasing them again. The territorial unit on which the original injury had been inflicted would debase its own coins in defense and turn to other neighbors to make good its losses and build its war chest. More and more mints were established. Debasement accelerated in hyper-fashion until a halt was called after the subsidiary coins became practically worthless, and children played with them in the street, much as recounted in Leo Tolstoy's short story, "Ivan the Fool."

Charles P. Kindleberger, Manias, Panics, and Crashes: A History of Financial Crisis, 4th edition, p. 121, John Wiley and Sons, Inc., New York (2000) 


Thursday Feb 22, 2007

Commerce and Development

In his commentary, "Competitive Cooperation" written to honor the 50th anniversary of the Treaty of Rome, the 2004 Economics Nobelist Edward C. Prescott reminds the readers of the importance of commerce in mutual economic development and growth.  

Let's review some historical facts. With the signing of the Treaty of Rome in 1957, France, Italy, Belgium, West Germany, Luxembourg and the Netherlands formed what would eventually become the European Union. For six decades prior to the treaty, those countries were about 55% as productive as the U.S. But over the following 25 years, those countries essentially caught up to the U.S. in terms of productivity.

When that historic economic treaty was signed, three countries were roughly on par with those original six -- Denmark, Ireland and the United Kingdom. However, a funny thing happened in subsequent years -- those three countries started falling behind their former peers. So in 1973 they joined the original group and their economic fortunes improved. It took time, but the U.K. now is as productive as Germany.

...And what of Latin America? Unfortunately, the region provides a case study in the perils of protectionism. Recent research by my Minneapolis Fed colleagues, Lee Ohanian and Jim Schmitz, and two co-authors, shows that from 1950 to 2001, per capita GDP for Europe increased 68% relative to the U.S.; Asia increased by 244%, while Latin America decreased by 21%. This is all the more striking when we realize that Latin America's per capita GDP actually exceeded Asia's by 75% in 1950.

Perhaps, it is time for a Latin American Union.

Some nations use trade policies to punish others. Whether politically motivated or otherwise, policies that raise barriers to potentially beneficial trade or create trade zones or alliances that exclude others are ultimately doomed to lead both groups worse off. Of course, the exclusionists, when powerful, come to believe they represent the house with infinite resources in the trade gamble.

Note: In his Getting it Right: Markets and Choices in a Free Society, Robert J. Barro advances points similar to Dr. Prescott's.




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