Stiglitz on FDI in India's retail

Nobel laureate Joseph E. Stiglitz is one of the world’s leading economists. A former chief economist at the World Bank and currently University Professor at the Columbia Business School, he was recently in India to attend an international conference on development and to promote his new book, The Price of Inequality. He spoke to Pranay Sharma about growing inequality in the world and the challenges facing India. Excerpts:

Your coinage, “one per cent versus 99 per cent”, has caught the imagination of different people in the world. What does that reflect?

It reflects a different view of society. The nomenclature, ‘one per cent and ninety nine per cent’, is a way of saying that almost everybody today is in one boat and a few people are in another boat. There is now that huge divide from the very top that is no longer class-based but money-based. So it’s really the redefining of the divisions within our societies.

And this is not specific to the US but something seen all over the world?

That’s correct, it’s all over the world. India has become famous for being the land with the highest per capita of billionaires. This is striking for a country which is average and has a large number of poor people.

“India’s famous for being the land with the highest per capita of billionaires. Striking for an average country with so many poor people.”

Some of your detractors describe you as “the prophet of gloom and doom”. Is that a correct assessment?

I had accurately perceived the crisis of 2008 and there were those who drew a rosy scenario and did not see it happening. The same people started seeing the ‘green shoots’ in 2009 which again did not happen and we did not get the recovery. Those who are described as ‘gloom and doom’ people are the ones who have predicted, as people jokingly say, five out of the last 10 recessions.

Everybody now talks about the global economic crisis and how it has affected countries across the world, including the US. But are you overstating the case about the US?

The statistics are what they are. The fact that the median income of a full-time worker is lower than what it was in 1968 is part of it. I have gathered some of the statistics that may not have been given sufficient attention by others, but those are facts. The question is, what do you make of those facts? Where the US economy is going is obviously a matter of interpretation. But some of the facts that I think are disturbing may be different from the facts that others are looking at.

What you describe in your book is not only an economic or political failure, but a systemic failure in the US. Is democracy in the US in crisis?

Yes, it is. We have changed the rules of the game to give more weight to money and moneyed interests just at the time when inequality is growing. So we now have an out-of-balance political system.

“There is that huge divide now from the very top that is no longer class-based but money-based...a redefining of divisions within societies.”

You say in your book that if the economic benefits were shared better, Americans would have forgiven many of the ‘sins’ of the US corporates. If that were to happen, then who would have paid the price, people in other countries?

What I was trying to suggest was two-fold. That people in America would not have been so concerned if the top had walked away with just a larger share and did not damage the environment too much. The typical American would have felt that he himself was getting better without asking a lot from the corporation. But part of what is going on in terms of global warming is that the price is being borne by people outside the US. People of America had not paid any attention to that at all.

In India, we have the experience of the Bhopal gas tragedy. An American national responsible for it paid very little compensation and refused to share the burden of guilt. Now we have a debate on ‘nuclear liability’ where the US government and American companies planning to set up N-plants in India are opposed to accepting a larger share of the burden if an accident occurs in any of their plants. How do you react to this?

This is a perfect example of why I say that we have a distorted market economy through politics. Markets don’t exist in a vacuum, we create frameworks. They give money to special interest groups—the one per cent. The nuclear industry is a good example. If the government had not been subsidising them, then in a calamity there would be no one to pick up the tab. They say they have insurance but that is a price no company is willing to pay. We pick up the cost of nuclear exposure, nuclear waste...nobody is willing to pay for that. So there is this massive subsidy given by the government to the nuclear industry.

“We have changed the rules of the game to give more weight to moneyed interests, just at the time when inequality is growing.”

So you think US companies planning to set up N-plants here should share a larger burden of that liability?

They should bear it all. In the global context, they don’t bear that in the US either. The nuclear industry exists only because of government subsidies. But subsidy in the form of liability; the oil industry is also protected in the same way. They have a law that limits the liability in the event of a spillover. If you look at the way the legal system is designed, many of those who are injured by the spill will never be compensated.

You have praised governments in China and India for intervening in the market to make globalisation work better for their respective people. How do you now see the performance of the two countries?

China represents what is the success of globalisation, where over 400 million people moved out of poverty. The gap between their income and that of people in the US has reduced enormously. Same is perhaps also true for India. But when you have rising aspirations in a country like China—which has been slow in implementing good working conditions—it can lead to agitations by workers.

What about India?

India has not grown as fast as China but it is growing significantly. There have been very significant successes, though there hasn’t been much reduction in poverty in a big way.

“US firms planning to set up N-plants should bear all the liability. But they don’t do that even in the US, state ‘subsidies’ protect them.”

PM Manmohan Singh announced a clutch of economic reforms recently, particularly in regard to allowing FDI in multi-brand retail. Do you think India needs to open up its market?

India is an unusual country and different from many other developing and emerging markets. It has a large entrepreneurial class and has lots of savings, wealth. And this entrepreneurial class is very talented. So that raises the question as to why India needs foreign entrepreneurs in any sector, particularly the retail or the financial sectors.

And what’s your answer to that?

I have not seen a good explanation yet. To me, as most economists say, a little competition is good. On the other hand, the worry is that a company like Walmart may owe some of their success to its power and ability to drive down prices. Because they can buy things out and if that’s the case then they will use that power to have Chinese goods displace Indian goods. The real harm will not be to the retail sector. That is not the real problem. The harm will be to the Indian supply chain going into the retail sector. The other concern is that Walmart has succeeded in expanding its business by adopting abusive labour relations.

“India has a large, talented entrepreneurial class, and lots of savings and wealth. Why should it need foreign entrepreneurs in any sector?”

Is that the experience of other countries where it has a presence?

That is the experience of other countries. It is a business practice that you don’t want to import to your country. Bribery in Mexico, free-riding on healthcare, a policy against unionisation, discrimination against women—a whole range of accusations, some of which have been proved and others that remain accusations but are hard to win in courts. Why would you want to import such business practices into India? Many economists see the breakdown in social contract as one of the reasons for inequality. There is also a worry that Walmart will break down the social contract in India that is already frail.

So how does one go about it?

The other reply to these concerns is for India to have legislations to ensure these problems don’t happen. You should have good protection from large multinationals.

Does President Obama have a shot at being re-elected?

I think he has a good chance. I think he has been more successful than what his critics say but far less successful than the expectations when he was elected in 2008. The reality is, if the Republicans do well in Congress then it will be a more defensive (move) to prevent things from getting worse. But also not allowing changes that’ll make the economy work.

“Corruption scandals have a resonance as people know the power of money. Money begets money and it begets via the political process.”

When you look at India what are the areas of concerns?

One of the things would be the huge inequality which is still there. It is very serious and it cannot be ignored. The existence of extreme wealth and extreme poverty, they are worse than many other countries.

Do you see the government intervening to tame the market?

I don’t see it that much...when you have so much of economic inequality, there is always the fear that political power will corrupt the government. A lot of the corruption scandals have a resonance because people understand the power of money. They know money begets money and it begets through the political process. It may be difficult to ascertain what happened in the coal block allocations. But these are people’s assets which have surely not been sold in efficient, transparent auctions that could raise the most money for the well-being of everyone in society. And that has a real resonance in a society that already has such inequality.

No Walmart, Please

By Justice Rajindar Sachar (retd)

17 December, 2011
The Tribune, India

Govt’s claim is questionable

If the combined Opposition had sat down for weeks to find an issue to embarrass the UPA government and make it a laughing stock before the whole country, they could not have thought of a better issue than the free gift presented to it initially by the government by insisting that it had decided irrevocably to allow the entry of multi-brand retail super stores like Walmart and then within a few days, with a whimper, withdrawing the proposal.

As it is, even initially this decision defied logic in view of the Punjab and UP elections and known strong views against it of the BJP and the Left. Many states had all the time opposed the entry of Walmart which would affect the lives of millions in the country.

Retail business in India is estimated to be of the order of $ 400 billion, but the share of the corporate sector is only 5 per cent. There are 50 million retailers in India, including hawkers and pavement sellers. This comes to one retailer serving eight Indians. In China, it is one for 100 Chinese. Food is 63 per cent of the retail trade, according to information given by FICCI.

The claim by the government that Walmart intrusion will not result in the closure of small retailers is a deliberate mis-statement. A study done by IOWA State University, US, has shown that in the first decade after Walmart arrived in IOWA the state lost 555 grocery stores, 298 hardware stores, 293 building supply stores, 161 variety stores, 158 women apparels stores and 153 shoe stores, 116 drug stores and 111 men and boys apparels stores. Why would it be different in India with a lesser capacity for resilience by small traders.

The fact is that during 15 years of Walmart entering the market, 31 super market chains sought bankruptcy. Of the 1.6 million employees of Walmart, only 1.2 per cent make a living above the poverty level. The Bureau of Labour Statistics, US, is on record with its conclusion that Walmart’s prices are not lower.

In Thailand, supermarkets led to a 14 per cent reduction in the share of ‘mom and pop’ stores within four years of FDI permission. In India, 33-60 per cent of the traditional fruit and vegetable retailers reported a 15-30 per cent decline in footfalls, a 10-30 per cent fall in sales and a 20-30 per cent decline in incomes across Bangalore, Ahmedabad and Chandigarh, the largest impact being in Bangalore, which is one of the most supermarket-penetrated cities in India.

The average size of the Walmart stores in the US is about 10,800 sq feet employing only 225 people. In that view, is not the government’s claim of an increase in employment unbelievable? The government’s attempt is to soften the blow by emphasising that Walmart is being allowed only 51 per cent in investment up to $100 million. Prima facie, the argument may seem attractive. But is the Walmart management so stupid that when its present turnover of retail is $ 400 billion it would settle for such a small gain? No, obviously, Walmart is proceeding on the maxim of the camel being allowed to put its head inside a tent and the occupant finding thereafter that he is being driven out of it by the camel occupying the whole of the tent space. One may substitute Walmart for the camel to understand the danger to our millions of retailers.

The tongue-in-cheek argument by the government that allowing Walmart to set up its business in India would lead to a fall in prices and an increase in employment is unproven. A 2004 report of a committee of the US House of Representatives concluded that “Walmart’s success has meant downward pressures on wages and benefits, rampant violations of basic workers’ rights and threats to the standard of living in communities across the country.” By what logic does the government say that in India the effect will be the opposite? The only explanation could be that it is a deliberate mis-statement to help multinationals.

Similar anti-consumer effects have happened by the working of another supermarket enterprise, Tesco of Britain.

A study carried out by Sunday Times shows that Tesco has almost total control of the food market of 108 of Britain’s coastal areas — 7.4 per cent of the country. The super stores like Walmart and Tesco have a compulsion to move out of England and the US because their markets are saturated. These companies are looking for countries with a larger population and low supermarket presence, according to David Hogues, Professor of Agri-Business at the Centre for Food Chain Research at Imperial College, London. They have got nowhere else to go and their home markets are already full. Similarly, a professor of Michigan State University has pointed out that retail revolution causes serious risks for developing country farmers who traditionally supply to the local street market.

In Thailand, Tesco controls more than half the Thai market. Though Tesco, when it moved into Thailand, promised to employ local people but it is openly being accused of indulging in unfair trading practices. The claim that these supermarket dealers will buy local products is belied because in a case filed against Tesco in July 2002 the court found it charging slotting fees to carry manufacturers’ products, charging entry fee of suppliers. In Bangkok, grocery stores’ sales declined by more than half since Tesco opened a store only four years ago.

In Malaysia, seeing the damage done by Tesco since January 2004, a freeze on the building of any new supermarket was imposed in three major cities and this when Tesco had only gone to Malaysia in 2002.

It is worth noting that 92 per cent of everything Walmart sells comes from Chinese-owned companies. The Indian market is already flooded with Chinese goods which are capturing the market with cheap offers, and traders are already crying foul because of the deplorable labour practices adopted by China. Can, in all fairness, the Indian government still persist in keeping the retail market open to foreign enterprises and thus endangering the earnings and occupations of millions of our countrymen and women?

The writer is a former Chief Justice of the High Court of Delhi