Materials Shortages and Industrial Bottlenecks:

Causes, Trends, Prospects

EMD-81-42: Published: Jun 25, 1981. Publicly Released: Jun 25, 1981.

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The availability of industrial materials to the manufacturing sector and the economy at large is essential to supporting growth without accelerating inflation. Access to critical raw materials is important in ensuring that the industrial materials are available. Equally important is the capacity of manufacturing industries to process the raw materials into industrial materials. GAO made a study of the meaning and importance of having adequate capacity to make industrial materials. In it, GAO defined adequate capacity, reviewed its relationship to the economy, analyzed the causes of the severe capacity shortages of 1973 and 1974, reviewed the current trends in capacity growth, and identified some relationships to Government activities.

Among the reasons that capacity may fail to grow as fast as demand are: (1) prior periods of depressed prices, and (2) Government intervention which lowers the economics of expansion or an industry's ability to finance the proper amount of capacity in time. Capacity expansion is an expensive process, frequently costing hundreds of millions of dollars. As the decisionmaking environment for business grows more complex and uncertain, the cost and lead times for capacity growth are likely to grow. Prevailing opinion held that the 1973 and 1974 shortages were created by Government intervention. GAO examined the event and found that instabilities in the private market played a commensurate if not greater role in these capacity shortages. Clearly, industrial capacity was deficient. This was a result, in part, of the temporary shift in industry financing and competitive behavior in the 1960's. The experience suggests that capacity shortages can arise irrespective of Government intervention. Some capacity problems reappeared in the late 1970's and shortages of major materials such as steel, aluminum, and ethylene have been forecast for the 1980's. Current Government policies dealing with environmental controls, energy prices, or foreign trade have the potential for exacerbating supply problems of specific industries. GAO believes that due consideration should be given to ensuring adequate materials capacity while rebuilding the strategic industrial base.

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