The FDI Scare and the fallacies

CRI is running a blog titled The “FDI in Retail” Conundrum (authored by my colleague at CRI, @rightwingdian) which has been very well received by a lot of people. On reading the blog, and after debating with Avinash Bhat, a friend of CRI, I thought I should probably attempt to counter some arguments made by my friends on the right. Before I begin my counterarguments, I want to make a few things clear. There may be some valid reasons for opposing FDI in Retail like eminent economist Dr. Bibek Debroy has expressed in his columns. However, arguments revolving around kirana employees and need to protect their jobs forever, or the fallacy that more jobs is good needs to be countered lest they condition us to get accustomed to protectionist policies.

The biggest argument against FDI in Retail expressed by a lot of people including Avinash and @Righwingdian, has been well framed by that latter in his blog:

“Study after study after study has shown that entry of Multi-brand retail has a deleterious effect on the small “mom-and-pop” stores (kiranas as we call them here); loss of business in the immediate term and business-closure in the medium to long term. This is neither a secret, nor is it an under-researched area. This same story has played itself out in the US, Europe, Mexico, Thailand, and others. The ICRIER report on the likely impact of multi-brand retail in India, acknowledges this impact, but disingenuously suggests that we should go ahead with this nevertheless.”

As I have argued on my twitter timeline, closure of businesses or loss of jobs is NOT always a negative economic indicator in the grand scheme of things. To explain this point, let me make three arguments:

1. If you do a study on the impact of automation in say a textile industry, you will find the same thing: automation put lower rung workers out of jobs. That is a bad thing for the textile workers who used to weave garments by hand. With the advent of machinery, their skills became outdated. So the glass of orange juice seems empty. But wait, who makes those machines? Well, people who have the skills to find employment in a factory that makes machinery for the textile industry. The glass is not empty, the orange juice in Glass A has just been replaced by pineapple juice in Glass B.  What happened to the erstwhile textile employees? They moved on to other jobs that matched their skill sets. If they hadn’t, our poverty levels would have risen dramatically since the industrial revolution. They certainly weren’t wiped off the face of the earth. The case with computer jobs is not too different. Programmers have graduated from DOS to much more advanced programming languages. Did the DOS programmers lose their jobs or did they improve their skill sets to keep their jobs & progress in their careers?

2. Now the example above is bound to bring up this point: but the employees of kirana stores are illiterate. Big Box stores will put them out of their jobs (hugely exaggerated claim countered later in this blog) and they don’t have the skills to find jobs elsewhere. The problem with this argument is that it only looks at the visible group while totally ignoring an invisible (dispersed & non-cohesive) group, the educated but unemployed youth. According to the Ministry of Labor, India had approximately 29.2 million educated job seekers (not all may be unemployed) in 2010. That’s not it; various studies have found that only 20-25% of our graduates are employable in their fields of expertise. So, every year we are adding educated but unemployable youth to our workforce. Where do they go? As a critic of FDI in retail, and a proponent of defending kirana jobs, you must also understand that when you ensure jobs for 12 million kiranawalas, you are costing our unemployed graduates the opportunity to earn a living by working at a Big Box (in comparison to doing nothing). And, for the unemployed, it’s not a choice between low wage and high wage. The choice is between low wage and no wage. These 29+ million young people are not a visible & cohesive group and hence in a way, are also part of an unorganised sector. So, let me ask you again, on what basis should we take sides in this competition between employees of kirana stores and prospective employees of a big box stores? To take this further, do a survey during your next visit to the mall in your city. Look at the sales assistants in the mall, talk to them, and ask yourselves if those boys and girls would have been better off had the mall not been there. Those 20-something boys and girls probably put employees of a garment-selling mom’n’pop shop out of job. But did that make us worse than we were before the mall came along? There are many like them who would give an arm to take up a job at the big box with dreams of climbing the social ladder.  Again, on what basis should we penalize these boys & girls? As I have been repeating for the past few days, it is impossible to benefit everyone without hurting anyone. Impossible. It’s a utopian dream.

3. Another issue I have with critics of Big Box stores is that their image of a small business is that of a small mom’n’pop grocery store where the mom’n’pop actually sit in the shop (See the comments in response to my previous blog, Wal-Mart and Small Businesses). In doing so, they get hung up on the fact that there are no grocery stores around Wal-Marts, while totally ignoring the prospects of all other forms of complementary small businesses like restaurants (yes, the poha selling thela is a small business, and so is the paani poori wala), auto repair shops, “pumpture” shops for cycles, barber shops, liquor shops, paan shops, furniture shops, and all franchisees (yes, they are also small businesses operated by lower-middle/middle class families) and a host of other small businesses. All these businesses exist in a symbiotic relationship with Big-Box stores as I have shown in my previous blogs (see the images & time lapse clips here: Wal-Mart and Small Businesses). So, again, if at the cost of one kirana wala, we get 5 other small businesses, on what basis do we take sides? Also, why should we underestimate the business acumen of a kirana store owner? The owner might well start selling mithai right next to a Big-Box? Did horse-cart drivers walk off the face of the earth after the advent of automobiles? No, the world doesn’t end for them; they go on to take up other jobs. Similarly, the recently laid off kirana employee can find employment in a mithai shop, restaurant, or a liquor shop, that will open next to a big box store. So, this prophecy that 12 million people are about to jobless is unfortunately way too exaggerated a claim. I request all my friends to reconsider this stand.

Studies may be right in concluding that a Big-Box store puts grocery stores out of business but do these studies tell you the change in regional, statewide or national employment, cost of living and productivity? The widely retweeted news report about the Austin neighbourhood of Chicago published here is slightly misleading. Shri S Gurumurthy, a venerable intellectual also cites the news report in his latest column “Reform” at Nation’s Cost”. However, if you read the actual study you will realize two striking issues:

1. The study was conducted on a) one Wal-Mart (one data point), b) in a crime infested neighborhood of Chicago, and c) during a period (2006 – 2008) when the US was facing its worst ever recession since the Great Depression. The study did not include a control group to compare the findings with. In any “before” and “after” study, establishing a control group is of prime importance unless the study is aggregated at a higher level to absorb the external factors. Retal jobs around US haven’t been painting a rosy picture for quite a while. In fact, data from the U.S. Bureau of Labor Statistics indicates that Chicago was the worst hit during the recession and tops losses in retail jobs. So a small or no change in employment actually reflects well on Wal-Mart since the study compares employment levels of 2006 (economy was at its peak) with those of 2008 (the historic economic meltdown). Lack of a control group gives rise to the possibility of conflating correlation with causation. Take this for example. For the same period, if you analyze rise of bad loans in the area you will come to the same conclusion that starting a Wal-Mart leads to bad loans (and drop in home prices, rise in crime, etc). Yes, there is a correlation between Wal-Mart and bad loans but did Wal-Mart cause the bad loans (causation)? The way you detect this problem is by comparing bad loans (or job losses) in a non Wal-Mart neighborhood with similar characteristics as the one being evaluated. What do you think your finding would be on employment/business closures for the 2006-2008 period for a neighborhood that doesn’t have a Wal-Mart? The answer is, some serious job losses. You can do the same experiment in another manner. Look at other businesses that opened in the neighborhood that opened at the same time as that Wal-Mart.  Your findings will be the same, Business X caused closure of Y businesses. The perils of conflating correlation with causation.   (Also read: Recession Killed 170,000 Small Businesses Between 2008 And 2010: Report)

2. Despite all this, the study found that net change in both employment and retail sales did not change much in the zip code that saw the Wal-Mart come up (ignoring indirect jobs it created elsewhere). However, jobs in the neighboring zip codes decreased. Without a control group, it cannot be said with certainty which of the following is true:

• The arrival of Wal-Mart helped keep employment levels the same in that zip code while neighboring zip codes saw a decline in employment levels. Remember, 2008 national statistics will tell you that not seeing a drop in employment is a commendable feat.
• The arrival of Wal-Mart cost the neighboring zip codes some jobs.

If the study had analyzed a similar region elsewhere which did not have a Wal-Mart during the same period, one of the above two possibilities could have been eliminated. I have emailed the researchers of the above study with these questions and will post their response at the end of my blog.  Another thing that the study misses out on is comparing the “before” and “after” cost-of-living index for the same region. How did the arrival of Wal-Mart impact prices of goods consumed in the neighborhood?  Did sales tax collections drop despite unchanged levels of private expenditure?  To understand this better, let take a simple example.  Let’s say the goods incur a sales tax of 10% in that neighborhood. Before Wal-Mart, the local stores sold goods worth $1000. The sales tax revenue in that case would’ve been $100. Now since Wal-Mart pushed them out of business, Wal-Mart must have sold the same basket of goods for something less than $1000. Let’s assume the number was $900. The sales tax revenue with that Wal-Mart dropped to $90. The neighbors saved $100 that they previously weren’t saving and hence there is a perfectly valid explanation for the drop in sales tax. That’s a good thing for the community, isn’t it? The other way that sales tax collection could’ve dropped would be if the neighbors started buying fewer goods although that wouldn’t make sense since Wal-Mart had out-priced the competition. The argument about low sales tax revenue therefore must be seen together with changes in retail prices in the neighborhood and the possibility of cut back in private expenditure due to the recession.

But do big-box stores really reduce retail employment? This study published by the Cato Institute refutes the claim.  Take a look at the analysis conducted using a wide variety of data to arrive at the final conclusion. Let’s look at it in another way. The study conducted in Chicago claims that each Wal-Mart job costs 1.4 retail jobs. Wal-Mart employs 1.4 million in its various US stores at an average rate of 325 employees per store. That means unemployment due to Wal-Mart alone is 1.96 million (1.4 million x 1.4). The total unemployment in US is 12.5 million. So, Wal-Mart alone accounts for 15% of the 12.5 unemployed people in the US? Now add similar unemployment caused by other big box stores and you will see how unbelievable these numbers seem to be. Also, if big-boxes really hurt employment, the US’ national retail employment numbers should show a perpetually downward trend over the years in the Big-Box country US has become.  However, that is not the case even after accounting for the onslaught of online retailers like Amazon who eliminate the need for physical employment (which is good for the economy just like automation). As you can see from the chart below, retail employment has dipped only around the two recessions, 2002-03 and 2008-10 and has picked up after the recessions are over.  Also, according to the same source, even in the land of big-boxes, and even after a devastating economic meltdown of 2008, jobs in Fruit and Vegetable markets declined 19% while jobs at convenience stores (American Kiranas, i.e. direct competitors of Big-Boxes) declined only 4%.  Now compare that with the claim that Wal-Mart will make 12 million Indians jobless. Remember, Wal-Mart along has 4300 stores in the US. How many stores do you think it will take to render 12 million Indians jobless? Let’s do the math. Each Wal-Mart store employs approximately 325 people, which means, each store makes 455 (325 x 1.4) people jobless. We will need a whopping 26,373 WalMart-like Big-Box stores across India to put 12 million people out of jobs (ignore the fact that others will find employment at these stores). Another important trivia, Wal-Mart has built 4300 stores in the most developed & consumer driven country in the world and it took them 50 years to get there. How long do you think it will take them (and others) to build 26,373 stores in India? Hopefully, that back of the envelope calculation should give you an idea of how exaggerated the claims of job loss are.

Source

Is less employment necessarily an evil? I could go on and on and on about automation vs manual labor, and why lower wages are beneficial to the economy, but I won’t be able to make the argument as well as Mises Institute’s arguments. If you don’t have time, please at least read the sections on “wealth” and “jobs”.  http://www.mises.org/daily/2219/

Before I end, I want to reiterate that my arguments above are not an endorsement of UPA’s overnight transformation from Karl Marx to Milton Friedman. I understand that there may be more valid reasons to resist FDI in Retail in the short to short-medium term (but definitely not in the long term). The arguments above have been made just so that the Indian right could debate on popularly held notions and realize the pitfalls and fallacies that surround protectionist measures, one way or other. It’s definitely not a debate about left wing, right wing or buffalo wing. Even self-described libertarians/free-market proponents in the US often argue against “shipping jobs abroad” without realizing the immense benefits it brings to American families.

 (Image Courtesy- http://www.madhyamam.com/en/)