Automated reply to your question about globalisation

by Shihang

Arabic Knowledge@Wharton: So when companies like Wal-Mart bring their logistics ability to Africa, it actually could be a good thing for the poor people of Africa?

Cowen: It’s exactly what we need more of. Yes.

Arabic Knowledge@Wharton: Yet there’s a fear Wal-Mart will put the smaller stores out of business.

Cowen: Yes, they do so sometimes, but they do so by charging lower prices. It makes it more accessible and more reliable. It’s not just the pricing at any one point and time. It’s what happens in the very worst periods. Companies like Wal-Mart are very, very good at keeping up supply and being regular.

This is a pretty standard reply from economists when quizzed about the devastation of local industries by foreign businesses, but I wonder if anyone knows whether anyone has looked into it more. (Recommendations welcome.) Because while I do not doubt that Walmart is able to procure and ship things with great efficiency, I do wonder what the effects of the crowding out of local businesses are and whether the cost justifies lower prices. While the possible things to do in an economy are theoretically infinite, what is immediately available to people with little skill, low literacy and poor infrastructure is finite. So after Walmart has come in to do the retailing, Nike has wiped out the shoe weavers, HSBC comes and takes away the retail banking business etc., there is less room for local entrepreneurs, and hence, a lack of employment opportunities for the local population. I have read at least one history mentioning this as one of the reasons why the privatisation of Russia had such devastating impact in the 90s.

Economists have been using this line for ages, but governments still seem to distrust this advice, perhaps for good reason: employment and sustainable local industries are important to a state that wishes not to be utterly dependent on foreign companies with powerful relations overseas (the exertion of British pressure to protect British lenders from default in Iceland?). In other words, governments do not like simply being additions to a company’s resources: it wishes to be in some way prior to the merchant class.