Nation of Beancounters

It’s not the lower classes that are hurt by FDI in retail

Posted in Essays by Navin Kumar on September 29, 2012

A large part of the fear of the entry of WalMart etc isn’t merely that people in retail will be hurt – it’s that poor people in retail will be hurt. This fear is unfounded.

Imagine a Kirana store: it’ll consist of a middle-class, petty capitalist proprietor and, perhaps, some employees who engage in unskilled physical labour – stocking shelves etc. This employee has no ‘firm-specific skills’ – the price of his labour is determined by the market for physical labour. The proprietor – like WalMart – has no incentive to offer anything above the market rate, which is determined by the next best option that the labourer has.

Now imagine that WalMart drives the store out of business. The proprietor is obviously ruined, but few people have much sympathy for the relatively wealthy (although they should). The large, unspoken concern seems to be that his employees – and lakhs of such labourers along the distribution chain – will suffer lower incomes permanently.  But they were previously being paid according to the wages determined in the national labour market – and they still will be! After a temporary bout of unemployment, they’ll find another menial job in which they’re paid, in my opinion, at least the same wage.

(A similar logic applies to street vendors: if petty vending allowed them to earn more money than physical labour, there would be an influx of physical labourers driving down ‘profits’ untill the returns on the two occupations equalized.)

How do I know that the wage will be the same or higher? The answer isn’t simple. On the one hand, the demand for physical labour has declined*. On the other hand, consider two facts: firstly, the price of consumer goods will have declined as well, increasing the purchasing power (i.e. real wage) of the labourer. Secondly, large retail outlets generates more output with less labour – the productivity of labour has risen. Since workers are paid according to the how productive their labour is, a rise in productivity means a rise in wages (albeit not necessarily one-to-one).

The overall impact of these two conflicting forces is hard to gauge. The main reason for my belief is this: over the last century, we’ve seen enormous technological change, with all the attendant job destruction, inequality, and productivity boosts. The overall impact: lower poverty and higher real wages, despite spells of temporary unemployment.

Imagine if technology leaped forward allowing us to deliver to consumers the same produce but with less labour as input. The ‘wedge’ that acquisition-transport-storage-delivery drives between the prices consumers and farmers face shrinks. Consumers would enjoy lower prices and farmers, higher prices. On the other hand, some labourers would no longer be needed to work in the retail sector, resulting in temporary unemployment as they look for jobs elsewhere.

The entry of efficient firms has exactly the same effect, the only difference being they use economies of scale rather than better machines. The long-run impact of FDI is the same as the long-run effect of  technology i.e. higher wages and lower prices. If one opposes FDI on the grounds of harm, one must explain how it’s different from technological change, which few oppose.

If one objects to FDI entry on the grounds that lower middle- and middle-class storeowners would suffer without compensation, I’d understand (if not agree that banning FDI is the solution). But the poor will benefit from higher wages and lower prices, although they’d be temporarily displaced.

*The decline will not be overnight: it takes times for stores to be built, chains established, personnel to be hired etc. There’s a learning curve involved – India isn’t the same as the US. So the displacement will occur (if it does) over the period of several years. So one need not worry about an overnight “demand shock” to the labour market. The number of unemployed due to changes in retail will be a small portion of the overall number of unemployed at any point in time.

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2 Responses

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  1. Rizwan said, on September 29, 2012 at 9:00 pm

    Very nicely placed !

  2. […] century-and-a-half despite technology shocks that render some unemployed temporarily. I direct Adi here. I don’t see any economic reason to replace the current local mom & pop stores, which operate […]


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