International Economics: IB Economics

Larry Elliott's piece in today's Guardian makes the case for less globalisation and an increasing focus on local supply chains and self-sufficiency. This runs contrary to conventional economic theory which emphasises the benefits of specialisation and exchange, and comparative advantage.

However, he argues that the evidence of the recent past would suggest that globalisation hasn't overcome many of the problems that have emerged and as a result we should be looking for other solutions. I'm not sure I agree but events of the recent past have suggested that there's no harm in looking at the global trade system.  

Proof, if ever it were needed that whilst we quite often simplify, and assume that primary products are homogenous, this isn't actually the case. 

And in this instance - in the coffee market - this is significant. Whilst the demand for low grade coffees, used to make instant coffee, has remained high, this isn't the case for small scale producers of high quality coffees, who are more likely to sell to independent cafes, or small roasters. As a result, the livelihoods of some of the latter group are under threat, with adverse implications for their standard of living.

It's a classic application of income elasticity of demand - with the demand for inferior goods increasing as incomes fall, and the demand for luxury goods collapsing by more than the fall in incomes, and a salutory tale about the risks associated with primary product specialisation.