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News: Recently, Indonesia, the world’s largest producer and exporter of the palm oil has been experiencing domestic shortages of the same. This led to spike in the domestic palm oil prices in Indonesia and the world (including India). Therefore, Indonesia has announced to ban all exports.
What is the concept of hyper-globalization?
In a hyper-globalised world, countries produce things in which they have comparative advantage and import those others can make at lower opportunity cost.
For example, Indonesia and Malaysia produce palm oil; and Ukraine and Russia produce sunflower oil. They have comparative advantages in the palm oil and sunflower oil. Therefore, Indonesia alone is the largest exporter of palm oil.
What are the issues in hyper-globalization?
It leads to too much dependence on supplies from one or two countries. For example, palm oil, which accounts for roughly 40% of India’s annual vegetable oil consumption, is almost entirely imported from Indonesia and Malaysia.
This can lead to supply disruption in case of crisis. For example, In wake of the Russia-Ukraine war, the supply of sunflower oil has been disrupted.
In fact, high international crude prices have led to diversion of palm and soyabean oil for making bio-diesel.
The disruption in the supply of commodities impacts the prices of the other commodities. For example, At present, palm oil prices are causing strain in the prices of vanaspati, margarine, bread, biscuits, noodles, frozen dessert, namkeens, mithai, soap and cosmetics etc.
Hyper-globalisation and leveraging comparative advantage work well in a world without geopolitical frictions or natural disasters. For example, 2011 Thailand floods impacted the computer hard drive supply chain.
In the real world, countries need to de-risk against overdependence on few suppliers, especially of products entailing heavy foreign exchange outgo.
The Indian government needs to reduce dependence on import of edible oils from the current 60-65%.
Domestic producers can be given one-time capital subsidy and tariff support based on long-term import parity pricing.
There are collateral benefits, too, from some paddy and wheat acreage getting diverted to oil palm or mustard.
Source: The post is based on the article “Ukraine rethinks on hyper globalisation. Nations need to de-risk against overdependence on few suppliers” published in the Indian Express on 2nd May 2022.