Narendra Modi and Arvind Kejriwal have one thing in common. Both have said "no" to majority foreign direct investment in retail markets. Modi's rationale is obvious : the BJP has always been the party of small traders, and so he is backing the aam bania over the aam admi. But why has the Aam Aadmi Party also given priority to traders and middlemen over consumers? Because, says Kejriwal, this will affect employment.
Really? Supermarkets have indeed killed small shops in rich countries like the US. But in fast-growing developing countries like China and Indonesia, supermarkets and small shops have flourished together. Why should India be any different?
India already has dozens of large Indian-owned retail chains. These are struggling to compete against small shops, and some have suffered big losses. Walmart lost hundreds of crores in its joint venture with the Mittals, without killing small shops. Why, then, raise the bogey of job losses?
Prosperity is created by rising productivity, which by definition means producing more from less labour and capital. Rising productivity surely causes some job losses, but creates jobs elsewhere.
To understand this fully, consider the following. To protect jobs, should we ban computers, which have displaced millions of clerical jobs? Why not ban cellphones which have killed the camera industry? Why not ban washing machines, which have hugely reduced jobs in washing? Why not abolish vacuum cleaners which substitute poor sweepers? Why not abolish luggage with wheels, which deprives coolies of jobs? Why not abolish tractors and harvest combines, which take jobs away from agricultural workers, the poorest of the poor? Why not abolish cars and motorcycles, which have displaced labour-intensive horse carts and bullock carts?
Answer: Indian workers were not better off in the old days without machines or tractors, they were much poorer. Why did job-killing machines and mega-companies create prosperity rather than poverty? Because their development steadily replaced low-wage jobs with higher-wage jobs, improving living standards.
All technological and managerial progress kills old jobs and creates new ones. To focus only the lost jobs is a recipe for staying poor, something demonstrated by the Luddites in the 19th century. The creation of textile machinery in Britain caused massive job losses in traditional handlooms. So, the Luddites smashed textile factories in an idealistic effort to protect jobs. They didn't realize that by stalling the industrial revolution — which ultimately raised living standards tenfold — they were actually keeping people poor.
Economist Joseph Schumpeter demonstrated that capitalism succeeds because of creative destruction. It constantly destroys old jobs and creates new ones. This constantly replaces lower-productivity jobs with higher-productivity jobs, and so the entire economy becomes more productive.
The US loses over three million jobs every month but creates another three million new ones, and this churning has made it the world's top economy. The US has safety nets for those who get displaced. India needs safety nets too. But it must also encourage every mechanism that improves productivity, seeing it as a blessing and not a curse.
Myopic idealists like the Luddites could only see the immediate job losses of technological change, not the huge productivity gains. Kejriwal needs to avoid Luddite illusions in banning any activity, including foreign-majority retail chains. These can succeed only by reducing prices for the aam admi. Can the AAP actually be against that?
Let us suppose that by cutting out middlemen and reaping some new technological gains, for eign-owned chains can reduce prices 20%. This will certainly mean some job losses in competing small shops. But it also means that consumers will have an additional 20% in their pockets, which they will spend on additional goods and services This will create a multitude of jobs in producing those additional goods and services. Rising pro ductivity is always a good thing.
To truly serve the aam admi, Kejriwal must encourage investment and competition of all sorts (including that from foreign companies). Fast eco nomic growth is by far the most important factor that raises living standards. This needs to be supplement ed by government provision of high-quality public goods including roads, schools, health clinics, safety nets and retraining facilities. India's biggest problem today is the lousy quality of public goods. This is what the AAP must focus on, not on Luddite illusions.
Modi is no Luddite. He knows what needs to be done, but chooses cynically to woo the aam bania in opposing FDI in retail. If he really listens to small shopkeepers, he will find that their biggest problem by far is lack of bank credit, not competition from hypermarkets. Why not focus on that?