Do Governments have a role to play in Supply Chains?

Fragilities that the COVID-19 highlighted in the regional and global supply chains can be a catalyst for change.

COVID-19 brought to a new level the discussion about global supply chains. The pandemic has triggered debates at different levels of society and governments about how firms source, manufacture and distribute their products and how they manage their risk and social responsibility. We have seen in the past months, at an unprecedented level, CEOs of large corporations, Presidents and Prime Ministers discussing supply chains.

            Not only policymakers, but regular consumers, businessmen and researchers became suddenly interested in the very concept of supply chains. To illustrate it, I ran a quick query in “Google Trends” with the word “supply chains”  in the past five years, see  what I found in the figure 1!

Many of the conversations during the pandemic have been around essential products like medical supplies, respirators or protective equipment [1], but also included consumer goods, as the food supply chain was disrupted in many levels[2], and the garment industry, with its problematic labor practices that left many workers abandoned during the pandemic[3] .

Supply chains move products that are essential for our lifestyle but that we never realize the complexity of networks of firms, people and technologies that are needed to make it happen and the pandemic ask for a reflexion:

Do global supply chains are resilient? What role governments play in making them more resilient and sustainable? Can we learn something  from this pandemic?

I used to work as a supply chain manager in a big tech company about a decade ago, my role was to define the best sourcing and manufacturing strategy to bring our products to market, including, for example, establishing factories in China and warehouses in Mexico to sell products in Brazil. The concept of supply chain management was at its apex, but we realized there were risks that had to be managed. Since then, supply chains evolved to become even more global, but apparently risk management practices did not follow.

Keith Oliver, the father of the Supply Chain concept, outlined recently in an article [4] the three key risks any supply chain faces: internal risks, like workers going on strike; external risk such as a trade war that boosts tariffs; and acts of nature like a pandemic. Many of these risks have been materialized in 2020 and companies realized they were not ready.

            We can probably all agree that the management of Supply Chains is primarily a private business, governments should try not to interfere or try to tell private firms what to do.

However, the pandemic caused by the COVID-19 has shown us that there are asymmetries and fragilities that were not solved by the market, so, there  is a role that public policy can play, mainly to make them more resilient, sustainable and fair. Some of these asymmetries  were clear during the pandemic:

• The spike in demand for medical equipment and supplies were not easily met by individual companies.
• Agriculture producers were throwing production away because their big clients, the restaurants were shut down, and they could not establish new distribution channels easily.
• Countries that are net food importers faced important disruptions that threatened the food security and exacerbated the economic impact of the COVID-19.
• Commodity exporters in the region faced new regulations to export their products
• Small and medium enterprises connected to regional and global supply chains faced liquidity problems and could not survive.

Despite the challenges, the pandemic to the LAC region, some opportunities also arise and countries in Central America, for example, could experiment a boost in their manufacturing exports, especially textile and electronics, if the revival of the nearshoring concept materializes.^[1]

Beyond the fragilities highlighted during the pandemic, there are many intersections between supply chains and public policies that must be tacked in our countries: providing good logistics infrastructure (ports, airports, railways, roads), modernizing border regulations like customs and sanitary inspections,  reducing or optimizing tariffs and taxes, developing human capital, and creating an environment where medium and small firms can be integrated into the regional and global supply chains. Furthermore, the advent of technology and digitization will also be a game changer that will require incentives, monitoring and understanding from policymakers.

At the IDB we have been working in this issue for some time now, and the Bank has been supporting countries in their infrastructure investments but also in institutional and regulatory reforms that put supply chains in the center of the policy discussion: The Bank has worked in what we call Logistics and Trade Facilitation reforms in Colombia, Peru, Panama, Dominican Republic, Honduras, among others, toward supporting governments to create an environment where supply chains can flourish.

Yes, Governments have a role to play in supply chains. 

Governments need to collaborate with the private sector to understand the dynamics of domestic, regional, and global supply chains and how they are interconnected. Industrial policy and trade policy need to incorporate this view, and governments need to monitor the performance and risks to respond efficiently with regulations and investments . 

The World Post-Covid will be different and is likely that in the following years we will witness some structural changes in regional and global supply chains. Governments must be proactive toward making that happen in a way that it translates to more economic development, jobs and quality of life for their citizens. IDB will be here to help them.

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