How Supermarkets Can End Poverty
Lee on Aug 01 2008 at 3:52 am | Filed under: Developmental economics, Economics, Foreign affairs, Lee's Page
Namibian supermarket selection (photo: Olivier Peyre)
One of great inequities in the modern world is that in relative terms, food in poor and starving countries often costs far more than in the wealthy developed world. That’s because industrial countries tend to be dominated by large supermarket chains, which can achieve enormous economies of scale in volume sales, and thus are able to offer dramatically cheaper food prices to consumers.
The difference between the benefits of traditional and supermarket retail food sales can be staggering even within the same country. In an unevenly developed country such as India, which is divided between urban chain supermarkets and rural traditional markets, the cost of vegetables is 33% cheaper in the city than for the rural poor dependent on small local stores.
This has larger economic implications than is generally acknowledged, as food purchases consume a far larger share of national wealth in the developing world. In poor countries such as Nepal, food spending can account for as much as 50% of consumption expenditure in middle income households, compared to 15% in the United States. Thereby a cruel kind of trap is created through high food prices, which precludes consumer spending on goods and services that command higher wages than agriculture can provide.
Thus, if you were able somehow to reduce the cost of food in the developing world, and thereby the share of consumer income it eats, you could free up large reservoirs of capital to the benefit of the broader economy’s development.
Fortunately something like that has been happening. A massive and largely unnoticed retail revolution has been underway in the developing countries of Africa, Asia, and Latin America since the early 1990s, where chain supermarkets have been multiplying rapidly and will soon become the dominant form of consumer food purchasing in many countries for the first time.
A new study by Thomas Reardon and Ashok Gulati for the International Food Policy Research Institute probing this very revolution, uncovers some fascinating insights about the causes and consequences. Most notable is the effect that the liberalization of retail foreign direct investment has had on financing supermarket development. The same liberalization which is so opposed by nationalist, self-proclaimed defenders of the poor such as Hugo Chavez (who is also fittingly a fierce opponent of supermarkets).
Most interestingly, Reardon and Gulati find that in agricultural economies, reducing the share of wealth expended on food is actually not a negative development for farmers:
When farmers enter supermarket channels, they tend to earn from 20 to 50 percent more in net terms. Among tomato farmers in Indonesia, for example, net profit (including the value of own labor as imputed cost) is 33-39 percent higher among supermarket channel participants than among participants in traditional markets. Farm labor also gains. But supplying supermarket chains requires farmers to make more up-front investments and meet greater demands for quality, consistency, and volume compared with marketing to traditional markets.
(The Supermarket Revolution in Developing Countries via Private Sector Development Blog)
Interestingly, the report dwells (sympathetically) on the plight of small traditional retailers which are unable to compete with the large chain stores. An argument you may recognize from our own political discourse. In the context of a developing country however, the differences are much starker and the advantages to the population of the chain retailer all the more obvious.
In that context one can even justifiably invert the conventional complaint against the large retailer we hear in this country, and suggest that it is the small-business local market which is the genuine thief of the community, suppressing rising living standards, and accumulating unnecessary profits at the expense of the poor. Now that would be an unwelcome idea to submit.
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