Op-Ed: Supply chain-driven development

Written by  //  October 9, 2012  //  Biz Views  //  No comments

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Author José J. Villamil is Chairman of economic, market strategies and planning consulting firm Estudios Técnicos Inc. (Credit: © Mauricio Pascual)

One of the many consequences of globalization, and of the technological change that to a significant extent made it possible, is that the meaning of terms used in economic development has changed. Once, when we spoke of international trade or when economic integration was the subject, the discussion was limited to exports and imports, mainly of goods.

Among salient changes, trade is now to a very significant extent in intangibles and a large share of trade is intra-company trade. The surge in intangibles refers to the exchanges that occur in advanced services, technology, medical tourism and financial flows, among others.

With respect to intra-company trade, this refers to the fact that as global firms become more important players in the world economy, the exchanges among their geographically dispersed components assume a greater share of international flows.

The rise of intangibles has meant, among other things, that distance is no longer an obstacle to linkages between economic actors widely separated by geography. Intra company trade has two consequences: 1) comparative advantage no longer explains trade and 2) intermediate goods and services — not final goods — are a major and growing component of trade.

In effect, the magnitude and direction of international exchanges now depend to a large extent on where global firms decide to locate their operations.

The increasing importance of supply chains, or networks, is a relatively new phenomenon in its present mode. Sandor Boysson, previously of the University of Puerto Rico and now at the University of Maryland, has written extensively on supply chains and has described how the vertical integration model, exemplified by Ford decades ago, has been supplanted by a horizontal integration mode characterized by the creation of complex supply networks, the prevailing condition now.

This has meant a more efficient global economic system, but also one where risks have increased for individual firms and economies, particularly for one so open and dependent on external factors as ours. These supply networks are in many ways the channels through which economies and firms insert themselves in the global economy.

Exports, as traditionally defined, are no longer the major component of international economic integration although, of course, they continue to be important, particularly in commodities related to energy and food.

The above has implications for development policy in Puerto Rico. Law 73 of 2008 incorporated some incentives for strengthening local supply chains, but these were mostly on the demand side, to stimulate multinationals in Puerto Rico to increase local purchases.

What is still needed is a coherent set of supply side policies directed to strengthening the capacity of local firms to become part of global and local supply networks and the economy’s capacity to develop and manage collaborative networks.

This will require a rethinking of present day industrial and external sector policies and the creation of a new institutional framework in support of these policies.

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