Adam Smith, writing in The Wealth of Nations, was probably the first to call England a nation of shopkeepers. But few remember that Smith used the phrase to argue that England was a “nation whose government is influenced by shopkeepers”. And that influence was malign. Thus, he blamed the founding of the British Empire on the desire of shopkeepers to secure monopoly of trade in colonial commodities.
India’s shopkeepers today invite a similar, if different, opprobrium. By opposing retail sector reform, they and their political supporters in the BJP, Trianmool Congress and the communists, are not merely sabotaging this important reform. They are also throwing up roadblocks to the deepening and broadening of the post-1991 reforms that is so badly needed today.
But if the UPA government is to overcome the shopkeepers’ opposition, the different issues which have brought diverse groups together against the proposed reform must be distinguished and refuted vigorously by the UPA government’s leaders. What are they?
First, there is the fear that the small ‘mom-and-pop’ retailers, who number in the millions, will be crushed. This is a common fear when restrictions on the expansion of the larger retailers, even when entirely domestically owned, are proposed. When the Japanese restrictions on such expansion were repealed under US pressure, there was a similar fear. But little of what had been feared transpired. Supachai Panitchpakdi, secretary general of UNCTAD, told one of us (Bhagwati) recently that when he had overseen similar Thai reform as deputy prime minister, there had been widespread such fears; again they proved groundless. The same is true of China. What enables the little shopkeepers to survive, even flourish?
In the absence of refrigerators and cars, most Indian customers do their shopping daily and from local stores ‘down the road’ or ‘around the corner’. It is impossible also to establish personal rapport, which many consumers seek, with a Wal-Mart employee, the way one can with the local storekeeper.
Second, the proposed Indian reform additionally raises the traditional bogeyman about foreign direct investment (FDI) because the opening of the large stores is linked to the entry of foreign multi-brand retail giants such as Wal-Mart, Tesco and Carrefour. India today is perhaps the only developing country where the jaundiced view of FDI persists; everywhere else it has been consigned to the dust-bin. In fact, most developing countries today compete to attract FDI.
The anti-FDI attitudes are held particularly by populist NGO leaders whose assertions have little credibility but a big megaphone effect. Quite typical is the articulate Vandana Shiva, who has raised several objections to the reform of the retail sector. Take just one example: “First, the model of FDI in multi-brand retail has completely failed. The failure has been established in the West. Why else do you have the Occupy Wall Street protests?”
Every one of the three statements is false. FDI in multi-brand retail has definitely not failed: the sales by such stores have grown in several developing countries. For example, Wal-Mart and Carrefour made large investments in China in the mid-1990s, and are today prosperous companies that employ thousands of workers, sell in local markets, and procure products to sell overseas. Wal-Mart and Carrefour have also succeeded in Brazil, where they have substantial investments.
With rare exceptions, as with Wal-Mart in Germany, FDI multi-brand stores have flourished in the West as well. Carrefour and Tesco have not failed in the US; Wal-Mart has not failed in the UK.
Again, it takes a heroic imagination to believe that the disparate Occupy Wall Street protesters have FDI multi-brand retailers as their targets. Surely, these retail stores, by bringing cheaper goods into the US, help consumers cope with the stagnant wages at work, an effect that is pro-poor, not pro-rich!
Unlike in the West, we also have to see the major multi-brand retailers, not just from the viewpoint of imports, but also from the perspective of our exports. The evidence is extremely strong that the productivity in agriculture, and attendant prosperity in the countryside, follows the entry of such retailers who can introduce refrigeration, storage and other productivity-enhancing changes that small retailers cannot manage.
Retail reform therefore is a win-win proposition. But the ineptitude of the government lies in not making this case forcefully. It is also surprising that dissidents like Mamata Banerjee were not won over before the launch of the initiative, or that Sonia and Rahul Gandhi were not among the prominent Congress leaders brought in to support the proposal, leaving the prime minister to twist in the wind when the going predictably got tough. If the UPA government was itself plagued by hostility from some and lukewarm support from others within its own leadership, the reform was doomed.
In the end, this debacle points to a lesson larger than itself: a government plagued by absence of shared objectives and strategies to take India forward is unlikely to deliver.
Bhagwati is the university professor of economics and law and Kohli is the Ira Leon Rennert professor of business at Columbia University.
The original article appeared in Times of India.
Hopefully this won’t happen, quite yet.
I have lived in the U.S. northeast, before, during and after its “walmartization,” and hope India can avoid our solution to the problem. Starting in the late 1970s, despite denials similar to those heard in India, within a few years, most of the traditional ‘downtown’ villages and small cities shut down completely. There was immense market capital loss, though ‘economic’ losses were smaller, these places being much depreciated.
Simultaneously, political climates waxed stormier. The connection? Village and city community life was a positive externality whose loss was not compensated. The “walmarts” stole a ton of social capital, whose incomplete replacement has taken decades. The new equilibrium is more concentrated; and one wonders whether that is not responsible in part for the present depression.
Leaving social consequences aside, another key economic problem is that of monopolistic competition. Perhaps economically walmartization is only an intermediate solution. Include a climate constraint and reduced information costs, and a post-walmart, more disaggregated but efficient order is plausible. This is emergent but faces barriers to entry in the U.S. northeast. Where I live, the web and other social means of improving consumption are for the most part gratuitous at the local level, until some critical mass is reached. At that point business is re-attracted; but it has involved rebuilding entire downtowns often against great odds.
India should just skip this entire middle phase, and go directly toward more refined consumption technologies. Don’t build an unnecessary dam you will be unable to tear down without great pain and suffering. The big box store, BTW, is nothing more special than a market-hall. These have worked relatively well, as public conveniences, for thousands of years, needn’t be completely privatized, and could become transparent.
PS, perhaps the social externatities decompensated by local walmartization are also phenomena that scale, and thusl underlie the clarity of Adam Smith, whose “invisible hand” in the Wealth of Nations acts in favor of “Domestick Manufactures.” Your excoriation of India’s capitalist controls is contra-Smithian!
As always, great insights from Professor Bhagwati. I do think that Kohli should be properly credited, however.