The world economy is built around efficiency – but is it robust enough when problems arise?

Britain is facing problems with fuel and a shortage of lorry drivers – but we are not the only country to suffer, writes Hamish McRae

Sunday 26 September 2021 12:47 EDT
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Drivers have been queueing for fuel across the UK
Drivers have been queueing for fuel across the UK (AFP via Getty)

I am all for blaming Boris Johnson and his colleagues when one of the government’s initiatives turns out to be not quite as billed. And the fact that petrol stations are running out of fuel and some supermarket shelves are empty is in part the result of lorry drivers leaving the UK after Brexit – but only in part, for there is a dearth of drivers in Europe and America too.

In any case, to focus on politics is to miss the economics. The entire world economy is facing supply-chain problems. As a country that imports a lot of stuff, we happen to be harder hit than most. A quick round-up of the global shortages by Bloomberg shows that the price of crabmeat in Maryland has tripled, there is a six-month wait for new cars in Bucharest, there are shortages of medicines in Nairobi, queues for babies’ cots in Houston, delays in getting groceries in Sydney, and cutbacks in the production of neck and knee braces in Mexico.

But why? In three words, the answer is disruption, efficiency, and complexity.

The disruption is mostly the result of the Covid-19 pandemic. The impact of that is multi-layered. For example, the shift to home delivery has created many jobs but also destroyed many others. In the early lockdowns, the new distribution chain was under great pressure and it was hard to get delivery slots. That has now settled down, but it took time to do so. Now a similar shock has run through the shipping industry, as the lack of demand for goods during the lockdowns has been replaced by a surge – “revenge shopping” – as people catch up on their purchases. The shipping industry does not have the capacity to cope, leading not only to a quadrupling of freight costs but also to a lengthening of delivery dates.

Aside from goods shortages there are also labour shortages. Our HGV-driver problem is a clear example of that, but there are many others. What I think has happened is that the shock of the pandemic has made many people question their career choices. We ask ourselves: is this really what I want to do for the rest of my life? And we realise that if we are going to make a change, this must be the time to do it, when there are plenty of jobs going. The number of job vacancies in the UK rose above 1 million in August, the highest level ever recorded by the Office for National Statistics, and a quarter of a million above its pre-coronavirus level.

But it is not just the pandemic. One reason for the surge in gas prices has been the under-investment in recent years in gas facilities. The government’s aim to cut carbon emissions is admirable and needed, but these long-term policy choices have certainly increased the level of disruption in the gas market. There would be a problem anyway, for the world is short of gas, but in the short term at least this has added to the woes.

Efficiency? Surely that is good, so how can it be a problem? The point here is that the relentless drive for efficiency right across the globe has created an economy in which everything has to happen as planned or there will be shortages. So cars are manufactured on a just-in-time basis, where components arrive a few hours before they are needed at the assembly plants so that there are no unnecessary stocks.

It is much more efficient to run factories this way, but everything has to go right. When there is a hitch in the flow of computer chips from east Asia, as there is now, they have to shut down.

Or take supermarkets. They are run on the basis that they get several deliveries a day as demand for particular items rises and falls. That is fine, until they can’t get enough drivers to keep the shelves stocked. We have designed a world economy that is wonderfully efficient, but also not very robust when the unexpected happens.

It is also very complicated. Look at the labels on the clothes you are wearing. Just now, for me, it is a fleece made in China, underwear from Bangladesh, chinos from Romania, and so on. But that is simple when set against how manufactured goods are made. An iPhone has components from 43 countries. No wonder there are delays when there is a hitch in the global supply chain.

So what happens next? Production will move back home. That is already happening: for example, Apple is now making more components in the US. Expect the UK to start manufacturing more and growing more at home, and importing less. There are practical limits, of course, but everywhere the trend will be to localise. A string of ugly words have been coined to describe this: reshoring, backshoring, nearshoring, and so on.

But there will be things that have to be imported, and here the drive will be to have several suppliers and to build up stocks. It is common sense: if fuel stations had kept higher stocks they would not now be running out of petrol and diesel.

Finally, there will be less choice. The combination of simpler supply chains with the need to carry higher stocks will mean that we will not have the vast array of services and products that we now regard as normal – or when we do, we will pay much more for them.

We will not, however, have to become accustomed to queues at the petrol station, empty shelves at the supermarket, or – a real worry – interruptions to electricity supplies. No government can survive that. Nor should it.

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