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The many faces of retail politics

Research done by the OXIRM team in emerging markets (namely India) suggests that regulatory factors often temper the retail growth potential in these markets. The introduction and, more importantly, the implementation of regulatory reforms is far more complex and reliant primarily on the political governance structure in these economies.  In the sphere of retail modernisation and development, the issue is primarily around protecting traditional retailers while encouraging retail development using foreign investments. Lessons from developed markets suggest that at its inception retail modernisation was seen as a ‘social problem’ in these markets.  The confrontations in these markets (cases from the US for example) arose from the assumption that the invasion of highly rationalised global capital would hurt the local economies and local communities (Halebsky, 2004). Similar issues plagued the emerging markets (Malaysia, Thailand, Indonesia, India, China, Brazil, South Africa) but in most cases, barring India, the retail sector was liberalised and reformed with the influx of foreign capital and restructuring of regulations to enable co-existence of traditional and modern retailing. Unlike in developed markets where, over the years, traditional retailers have become a minority, in the emerging markets a dual retail structure seems to be more prevalent. This is partially to do with the consumer culture in these emerging markets, which continues to patronise traditional retailing for all the advantages it bestows compared to modern retailing. More importantly though, public policy around retailing is seeking to address the inherent conflicts in the retail system (modern retailing vs poor infrastructure, convenience of shopping in open markets vs hygienic shopping, economies of scale vs time costs of bureaucracy/licensing/administration) and thereby creating regulations which create opportunities for traditional and modern retailers to survive

In seeking to address the inherent contradictions in the retail system, regulators devise policies which enable the co-existence and sustenance of otherwise contradictory formats and business models. These regulations are not just limited to regulations around foreign direct investment, but regulations pertaining to the smoother functioning of the retail industry as a whole, with a view to making it more professional and structured. OXIRM research highlights that emerging markets often struggle to rectify the inherent inefficiencies in these regulations and bureaucratic and administrative costs hamper their development (Economic Freedom of the World: 2012 Annual Report). So the potential efficiencies to be had from foreign direct investment are tempered due to other systemic inefficiencies in the regulatory institutions.

A more pertinent point in the case of emerging markets, especially vis a vis retail modernisation and regulations is to do with the politics around retailing. Retail modernisation has been and continues to be a very politically sensitive issue debated in most emerging markets (Reardon and Hopkins, 2006). While the economic rationale of liberalising the sector to rescue failing markets has triggered retail modernisation in some emerging markets like Thailand, Malaysia and India, regulators have found themselves in a quandary over the future of traditional retailers in their countries. Economic rationale has demanded liberalisation, political rationale has demanded caution. Regulators have had to make a choice between the pursuit of credit claiming from retail sector liberalisation or blame-avoidance from the possible demise of traditional retailing. Whether development actually provides tangible benefits becomes relatively unimportant in such cases; what gains predominance is whether the use of policies provides politicians with something they can claim credit for (Wolman and Spitzley, 1996). This is quite different from the nature of retail politics in developed markets where the primary objections to retail modernisation stemmed from concerns around urban planning issues, local community development issues, environmental issues and employment issues for local people.

On the contrary, in emerging markets like India, the debate on FDI was and continues to be driven by the agenda of state level politicians and also reflects the challenges of initiating reforms in an increasingly fragmented multi -party democracy like India. As summarised by Kapur (2007):

“The process of economic reforms in has been strongly shaped by two singular  transformations in Indian politics: Political instability (as measured by the frequency of  turnover of governments) and political fragmentation (as measured by the effective number of  parties and the vote share of the largest party). The result has been coalition governments with  frequent turnover both at the centre and state levels…coalitions find it more difficult to  implement coherent economic policies and more energy is dissipated in managing the  coalition itself, appeasing factions and partners, than in actually governing.”

The current retail liberalisation debate has also fallen victim to similar coalition politics resulting in what has been termed ‘policy paralysis’ in India. Moreover, as observed by Kapur (2007), the Indian state is better at activities distant from its citizens than those where it must interact with citizens directly, e.g. public services such as sanitation, public transportation, rural services and utilities. This is especially attributable to the inefficiencies at the level of sub-national governments. Retail is a people’s business and affects the masses; according to Akbar (2012) it is ‘a multifaceted industry held together by a people-centric axis’. The rise of powerful special interest groups like the middle men in the supply chain (Middlemen are a core constituency of the opposing BJP party in India – Livemint, 2012) are a prime reason for the retail policy paralysis in India.

At best therefore, in emerging markets the politics of retailing have given rise to a new convention of competition which has sustained the contradictory yet competitive co-existence of multiple retail formats. This has been seen in emerging markets including Malaysia, Thailand and Indonesia. The nature of consumer behaviour rooted in traditions and customs has also sustained the dual model of retailing in emerging markets.

References:

Akbar, M.J. (2012) ‘Enter, the foreign middleman’ The Times of India/Blogs, December 9th 2012
Economic Freedom of the World: 2012 Annual Report. Available at:  http://www.freetheworld.com/2012/EFW2012-complete.pdf

Halebsky, S. (2012) ‘Superstores and the Politics of Retail Development’ City and Community 3:2,  June 2004

Kapur, D. (2007) ‘Political economy of reform in India: Ideas, Interests and Institutions’ Unpublished  conference paper prepared for conference on Rule and reform in the Giants: China and India  compared. Harvard University, Cambridge, MA Nov 30-Dec 1(2007)

Livemint (2012) ‘A country of Middlemen’ December 9th 2012 Available  from  http://www.livemint.com/Opinion/JdtQbDqoSV4Fk0IwQKKAFK/A-country-for– middlemen.html

Reardon, T. And Hopkins, R. (2006) ‘The supermarket revolution in developing countries: Policies to  address emerging tensions among supermarkets, suppliers and traditional retailers’ The  European Journal of Development Research, 18 (4, December) pp.522-545

Wolman, H. and Spitzley, D. (1996) ‘The politics of local economic development’ Economic  Development Quarterly, 1996 10:115

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