Provision for adversity - Managing supply uncertainties in an era of globalization

As contemporary globalization of the world economy continues, each nation e njoys the benefits of greater exploitation of scale economies and of specia lization and exchange. But equally true, globalization causes greater depen dence among regions, nations, and localities, and this necessarily implies greater vulnerability to disruption of supply to and from each other. Alter native actions that countries might take or actually have taken to manage t his vulnerability include (1) stockpiling of goods that might be lost due t o political, economic, or natural causes; (2) protection of domestic indust ries that otherwise could not compete in world markets (the classical "nati onal security" argument for protectionism); (3) maintenance of standby prod uction capabilities, itself closely related to stockpiling; and (4) formati on of special economic unions or contingency agreements to guarantee stable supply and exchange. This article develops a unified analysis of the first two of these alternative policies. The analysis examines and summarizes ho w all these factors combine to determine the optimal level and mix of polic ies.