Improving resilience and economic efficiency in global supply chains to counter shocks

From COVID-19 and war in Ukraine to terrorist attacks on the Red Sea and climate-induced drought in the Panama Canal, global supply chains have been hit by an unprecedented barrage of shocks in the past four years. 

Mitigating the impact of these shocks is of utmost importance considering the harm they have inflicted on the availability of essential goods, and on prices to some extent (the impact on prices is difficult to distinguish from the effect of the massive and simultaneous surge in demand for many goods in advanced economies.) The strike in ports of the US East Coast poses a new risk of global disruption in supply chains. 

What lessons have we learned from these events, and how can we fortify supply chains to ensure that they continue to deliver food, medicine, and other essential goods?

Early talk of building inventories—moving from “just in time” to “just in case”—was quickly forgotten given their cost. Instead, we have seen governments—principally in the world’s biggest economies—move aggressively to secure supplies of goods deemed strategic through policies variously known as re-shoring, near-shoring, or friend-shoring. According to Global Trade Alert, the number of government subsidy programs and other measures to support specific sectors grew substantially in 2023; almost a fourth of those were motivated by supply-chain “resilience” considerations.

Yet this type of intervention isn’t necessarily the answer. By distorting resource allocation and reducing economic efficiency, reshoring or nearshoring would inevitably reduce incomes without automatically improving resilience. World Bank research shows that if major economies were to reshore production through subsidies and tariffs, global incomes could decline by 1.5 percent. And these measures would leave the subsidizing economies exposed to a smaller, less diversified set of suppliers. In some cases, efforts to isolate domestic markets from global volatility (through export bans, for instance) have backfired and generated more volatility in domestic markets than in global ones.

So there is a strong case to address the problem at its roots—to improve global logistics rather than trying to mitigate the consequences of weak logistical systems by turning to more expensive and riskier local suppliers.

From such a logistics-service perspective, resilience means having sufficient network capacity and connectivity to absorb and recover from disruptions; think for instance of the additional shipping capacity needed to reroute ships away from the Suez Canal around the Horn of Africa, or how rail and truck transport substituted for the ships stalled by Russia’s blockade of Ukraine’s Black Sea ports.  There is also considerable scope to use efficiency measures to reduce so-called dwell times, or the time that elapses between a shipping container’s arrival at port and subsequent departure.

_{^{Source: World Bank Logistics Performance Index data for 2022}}

^{Note: The whiskers represent the range of values, which extends from less than a day to 10 days for advanced economies and from less than a day to 16 days for developing economies. The boxes depict the interquartile range (IQR), with the middle 50% of data falling from approximately 2 to 6 days for advanced economies and from 4 to 8 days for developing economies.} 

Those examples tell us that solutions should come primarily from the private sector; it’s in their business interest to build reliable, cost-effective, and agile supply chains to be able to satisfactorily serve their customers. That said, policies matter, and international organizations have an important role to play by promoting innovative solutions to improve the reliability, interoperability, and predictability of value chains and developing analytical tools to measure and anticipate stress. 

For example, the World Bank is using artificial intelligence, big data, and satellite imagery to support countries’ efforts to fortify their supply chains. Measures include installing digital platforms for port management known as Port Community Systems and digitalizing documents such as bills of lading and phytosanitary certificates, which are used in inspections of plant and animal products crossing borders. 

We are developing a new, real-time measure of stress to detect inefficiencies in global maritime supply chains, trace shipments, and quickly inform operators of the extent and location of disruptions. Our revamped Logistics Performance Index (LPI) uses big data sets to track shipments of 139 countries, helping them assess their performance and identify ways to improve their efficiency. 

By emphasizing resilience in tandem with cost efficiency, we foster a race to the top in global value chains rather than a detrimental race to the bottom. It is hoped that these efforts will encourage countries to reevaluate their reliance on subsidies and trade restrictions to secure access to strategic goods and instead work to improve their logistics systems—and those of their trade partners—for greater resilience, economic efficiency, and eventually greater welfare.

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