Monday, August 1, 2011

"Systemic Risk" in the Supply Chain

There's been a lot of talk about systemic risk since 2008, when we abruptly learned that the concentrated power of a handful of financial institutions could blow up the global economy. But systemic risk is not confined to the financial system. It has also become embedded in our global industrial system, as a smart story by Matt Stoller in The Nation points out. We witnessed this recently when the double-punch of an earthquake and tsunami in Japan knocked out a major supplier of auto parts, causing shortages that torpedoed sales at major auto makers.

The disaster also affected other, less publicized areas, such as the market for video tape, when a Sony plant was taken offline. Next time it could be life-saving medicine or the ubiquitous consumer electronics we take for granted. (China, for example, controls production of 97% of the world's rare earth metals, which are critical to many manufactured goods, from cell phones to hybrid cars).

There's a reason why a "smart" energy grid is distributed, and the most resilient computer networks (like the Internet) spread processing across many computers. When we become reliant on one "node" in a system - whether it is an electric grid, a  computer network, or an economy - the system is vulnerable to disruption.  

The article,  "How America Could Collapse," explains how our industrial supply system is full of systemic risk that could disrupt the flow of everything from food to smart phones. The problem: American corporations have outsourced so much manufacturing and production to other countries that we are dangerously dependent on foreign suppliers and imports. We have hollowed out the economy (just ask one of the 25 million un- or under-employed). 

Stoller says we need to re-engineer our global supply chain, re-orient the economy towards manufacturing and rededicate our corporations to productive uses. Good luck with that last one.

In the meantime, the localization movement taking place across the country is beginning to rebuild local economies from the ground up. By nurturing and investing in homegrown enterprises, organizations like the Business Alliance for Local Living Economies (BALLE), the Transition Network and Slow Money are helping communities become more productive, prosperous and self sufficient—and perhaps less likely to be broadsided by the next global disaster du jour.

Local production will never completely displace our global economic system. But it can reduce our vulnerability to systemic shock. And in these volatile times, wouldn't it be nice to have a back up plan?

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