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Wal-Mart Improves Life in Mexico

Source of graphic: online version of the WSJ article cited below.

(p. A1) JUCHITÁN, Mexico — For as long as anyone can remember, shopping for many items in this Zapotec Indian town meant lousy selection and high prices. Most families live on less than $4,000 a year. Little wonder that this provincial corner of Oaxaca, historically famous for keeping outsiders at bay, welcomed the arrival of Wal-Mart.

Back home in the U.S., Wal-Mart Stores Inc. is known not only for its relentless focus on low prices but also for its many critics, who assail it for everything from the wages it pays to its role in homogenizing American culture. But while its growth in the U.S. is slowing, Wal-Mart is striking gold south of the border, largely free from all the criticism. Like Wal-Mart fans in less affluent parts of America, most shoppers in developing countries are much more concerned about the cost of medicine and microwaves than the cultural incursions of a multinational corporation.

That fact is making Wal-Mart a dominant force in Latin America. Wal-Mart de México SAB, a publicly traded subsidiary, is not only the biggest private employer in Mexico — it’s the biggest single retailer in Latin America. Sales at Wal-Mex, as the Mexican unit is called, are forecast to rise 16% to $21 billion this year, representing a quarter of Wal-Mart’s foreign revenue. International revenue soared 30% to $77.1 billion, accounting for 22% of Wal-Mart’s sales, in the fiscal year ended Jan. 31. Wal-Mex profits are forecast to grow 20% to $1.3 billion this year.

. . .

(p. A14) In Mexico, Wal-Mart has been a counterweight to the powers that control commerce. One of the most closed economies in the world until the late 1980s, Mexico was dominated for decades by a handful of big grocers and retailers. All were members of a national retailing association called ANTAD, and cutthroat competition was taboo. At the local level, towns are still hostage to local bosses, known here as caciques, the Indian word for local strongmen who control politics and commerce.

. . .

In recent months, as rising prices for U.S. corn pushed up the price of Mexico’s corn tortilla, a staple for millions of poor, Wal-Mart could keep tortilla prices largely steady because of its long-term contracts with corn-flour suppliers. The crisis turned into free advertising for Wal-Mart, as new shoppers lined up for the cheaper tortillas.

Wal-Mart also overcame a Juchitán cacique, or local boss: Héctor Matus, a trained doctor who goes by La Garnacha, the name for a fried tortilla snack popular in town. Dr. Matus, 55, owns six pharmacies, stationery stores and general stores. He has also held an array of political posts, including Juchitán mayor and state health minister. As town mayor from 2002 to 2004, he says he blocked a national medical-testing chain from opening in town because it meant low-price competition to local businessmen doing blood work.

But Dr. Matus couldn’t persuade local and state officials to block Wal-Mart, and he is feeling the pinch. Sales are off 15% at his stores since Wal-Mart arrived, and he is now lowering prices in response. Even so, he’s still more expensive. A box of Losec stomach medicine costs 80 pesos ($7.30) at one of Dr. Matus’s stores, marked down from 86 pesos. The price at Wal-Mart is 77 pesos ($7.20).

Dr. Matus isn’t happy about the competition. "I could still kick them out of town, because I know how to mobilize people," he said, sitting in his living room surrounded by pictures of him with leading Mexican politicians dating back to the 1970s. Despite his bravado, town officials say Wal-Mart is staying. "The ones who have benefited the most [from Wal-Mart] are the poorest," says Feliciano Santiago, the deputy mayor. "I hope another one comes."

. . .

Gisela López, the 31-year-old head of billing at the Juchitán store, benefited from the retailer’s system of promoting from within. Raised by her uneducated, Zapotec-speaking grandparents, Ms. López earned a computer degree at Juchitán’s small technical college and then left for the booming northern city of Monterrey in search of opportunity.

Lacking connections, she couldn’t find the office job she dreamed about, and took a job at one of Wal-Mart’s stores. After three months, Ms. López made cashier supervisor, and later moved over to the billing department. When Wal-Mart opened a store in Juchitán, Ms. López jumped at the chance to move home — and was promoted to billing chief in the process.

"It’s a very different place to work, because you can succeed by your own effort," says Ms. López, whose $12,000-a-year salary now puts her in Mexico’s middle class.

Ms. López’s story of economic mobility is a rare one. Most of her childhood friends don’t have steady jobs, she said. The success stories are friends who inherited jobs from their parents at the state oil company’s big refinery in Salina Cruz, about an hour away.

For the full story, see:

JOHN LYONS. "SOUTHERN HOSPITALITY; In Mexico, Wal-Mart Is Defying Its Critics; Low Prices Boost Its Sales and Popularity In Developing Markets." The Wall Street Journal (Mon., March 5, 2007): A1 & A14.

(Note: ellipses added.)

Source of map and images: online version of the WSJ article cited above.

Preventing Creative Destruction Slows Economic Growth

Source of graphic: online version of the NYT article cited below.

It would be interesting to explore why the gap in growth rates was smaller last year than previously. Was it a statistical fluke? Or did the U.S. labor market become somewhat less flexible? Or maybe the job market in Europe and Japan became somewhat more flexible?

FOR more than a decade, many American economists have pointed to Europe and Japan as prima facie evidence that layoffs in the United States are a good thing. The economies in those countries were not nearly as robust as this country’s. And the reason? Too much job security in Europe and Japan, the economists said.

American employers, in sharp contrast, have operated with much more “flexibility.” Hiring and firing at will, they shift labor from where it is not needed to where it is needed. If Eastman Kodak is struggling to establish itself in digital photography, then Kodak downsizes and labor moves to industries and companies that are thriving — software, for example, or health care, or Wal-Mart Stores or Caterpillar.

This shuffling out of one job and into another shows up in the statistics as nearly full employment. Never mind that the shuffling does not work as efficiently as the description implies or that many of the laid-off workers find themselves earning less in their next jobs, an income roller coaster that is absent in Europe and Japan. A dynamic economy leaves no alternative, or so the reasoning goes among mainstream economists.

“Trying to prevent this creative destruction from happening is a recipe for less economic growth and less productivity,” said Barry Eichengreen, an international economist at the University of California, Berkeley.

For the full commentary, see:

LOUIS UCHITELLE. "ECONOMIC VIEW; Job Security, Too, May Have a Happy Medium." The New York Times, Section 3 (Sun., February 25, 2007): 5.

Real-Time Pricing Results in More Efficient Electricity Generation

Real-time electricity meters in a building in Central Park West behind resident Peter Funk, Jr. Source of photo: online version of the NYT article cited below.

The article excerpted below gets some of the story right. It should emphasize more that the main benefit from real-time pricing would be that it would reduce the peak load. Generation plants need to be built to handle peak-load. The last generating plants to go on line are the least efficient. if the need for such inefficient, peak-load, plants can be reduced, the costs of generating electricity can be enormously reduced.

There is talk of market competition in the states that have deregulated their electric utility industries. But it should be remembered that even where most deregulated, the result is a long way from a paradigmatic free market. The main point is hinted at in the article below. The ultimate suppliers of electricity to the home remain government-protected monopolies.

If we wanted a truly free market, maybe we should actually allow multple companies to connect to homes, the way we allow multiple television and internet companies to connect their cables to the home. Then some low-cost Wal-Mart of electricty would arise, and blow the stick-in-the-muds away.

(p A1) Ten times last year, Judi Kinch, a geologist, got e-mail messages telling her that the next afternoon any electricity used at her Chicago apartment would be particularly expensive because hot, steamy weather was increasing demand for power.

Each time, she and her husband would turn down the air-conditioners — sometimes shutting one of them off — and let the dinner dishes sit in the washer until prices fell back late at night.

Most people are not aware that electricity prices fluctuate widely throughout the day, let alone exactly how much they pay at the moment they flip a switch. But Ms. Kinch and her husband are among the 1,100 Chicago residents who belong to the Community Energy Cooperative, a pilot project to encourage energy conservation, and this puts them among the rare few who are able to save money by shifting their use of power.

Just as cellphone customers delay personal calls until they become free at night and on weekends, and just as millions of people fly at less popular times because air fares are lower, people who know the price of electricity at any given moment can cut back when prices are high and use more when prices are low. Partici-(p. A14)pants in the Community Energy Cooperative program, for example, can check a Web site that tells them, hour by hour, how much their electricity costs; they get e-mail alerts when the price is set to rise above 20 cents a kilowatt-hour.

If just a fraction of all Americans had this information and could adjust their power use accordingly, the savings would be huge. Consumers would save nearly $23 billion a year if they shifted just 7 percent of their usage during peak periods to less costly times, research at Carnegie Mellon University indicates. That is the equivalent of the entire nation getting a free month of power every year.

. . .

Under either the traditional system of utility regulation, with prices set by government, or in the competitive business now in half the states, companies that generate and distribute power have little or no incentive to supply customers with hourly meters, which can cut into their profits.

Meters that encourage people to reduce demand at peak hours will translate to less need for power plants — particularly ones that are only called into service during streaks of hot or cold weather.

In states where rates are still regulated, utilities earn a virtually guaranteed profit on their generating stations. Even if a power plant runs only one hour a year, the utility earns a healthy return on its cost.

In a competitive market, it is the spikes in demand that cause prices to soar for brief periods. Flattening out the peaks would be disastrous for some power plant owners, which could go bankrupt if the profit they get from peak prices were to ebb significantly.

. . .

The smart metering programs are not new, but their continued rarity speaks in part to the success of power-generating companies in protecting their profit models. Some utilities did install meters in a small number of homes as early as three decades ago, pushed by the environmental movement and a spike in energy prices.

For the full story, see:

DAVID CAY JOHNSTON. "Taking Control Of Electric Bill, Hour by Hour." The New York Times (Mon., January 8, 2007): A1 & A14.

(Note: ellipses added.)

Graph showing the range of variation in hourly electricity rates in different months. Source of graphic: online version of the NYT article cited above.

R&D Stats Better; But Still Omit a Lot of Innovation

GDPgrowthWithR&Dgraph.gif Source of graphic: online version of WSJ article cited below.

Note well Romer’s caveat below that, although we may be measuring better, we are still not measuring Schumpeterian innovations (such as the Wal-Mart innovations that are vastly increasing the efficiency of retailing).

That research and development makes an important contribution to U.S. economic growth has long been obvious. But in an important advance, the nation’s economic scorekeepers declared they can now measure that contribution and found that it is increasing.

. . .

Since the 1950s, economists have explained economic output as the result of measurable inputs. Any increase in output that can’t be explained by capital and labor is called "multifactor productivity" or "the Solow residual," after Robert Solow, the Nobel Prize-winning economist considered the father of modern growth theory.

From 1959 to 2002, this factor accounted for about 20% of U.S. growth. From 1995 to 2002, when productivity growth accelerated sharply, that grew to about 33%. Accounting for R&D would explain about one-fifth, by some measures, of the productivity mystery. It suggests companies have been investing more than the official data had previously shown — a good omen for future economic growth. "The slump in investment is not as drastic as people thought before they saw these figures," says Dale Jorgenson, professor of economics at Harvard University.

Mr. Jorgenson noted a lot of the multifactor productivity growth remains unexplained. "The great mystery of growth . . . is not eliminated."

Paul Romer, an economics professor at Stanford Business School, said the better the measurements of R&D become, the more economists and policy makers will realize other factors may be more important. "If you look at why we had rapid productivity growth in big-box retailing, there were lots of intangibles and ideas that . . . don’t get recorded as R&D."

For the full story, see:

GREG IP and MARK WHITEHOUSE. "Why Economists Track Firms’ R&D; Data on Knowledge Creation Point to an Increasing Role In Domestic Product Growth." Wall Street Journal (Fri., September 29, 2006): A2.

(Note: The slightly different online version of the title is: "Why Economists Track Firms’ R&D; Data on Knowledge Creation Point to an Increasing Role In Domestic Product Growth.")

(Note: ellipses in Jorgenson and Romer quotes, in original; ellipsis between paragraphs, added.)

Intel Chairman Says Health Care Inefficient

WASHINGTON (AP) – Intel Corp. Chairman Craig Barrett said Tuesday that U.S. jobs will continue to move offshore at a rapid pace unless corporate America forces the health care industry to adopt systems that will cut costs and improve efficiency.

"Every job that can be moved out of the United States will be moved out . . . because of health care costs," which averaged more than $6,000 per person in 2004, Barrett said at a conference sponsored by eHealth Initiative, a nonprofit coalition of health information technology interest groups.

. . .

Barrett was joined on-stage by Wal-Mart Stores Inc. Executive VP Linda Dillman. Barrett said the health care industry could learn from the efficiency of the retail giant, which tracks every item in inventory.

For the full story, see:

"Health care waste costs jobs, says Intel chief." Omaha World-Herald (Wednesday, September 27, 2006): 3D.

(Note: ellipsis in the Barrett quote, in original; ellipsis between paragraphs, added.)

Wal-Mart Really Does Benefit Consumers by Lowering Prices

Scholarly studies show Wal-Mart’s price reductions to be sizable. Economist Emek Basker of the University of Missouri found long-term reductions of 7 to 13 percent on items such as toothpaste, shampoo and detergent. Other companies are forced to reduce their prices. On food, Wal-Mart produces consumer savings that average 20 percent, estimate Jerry Hausman of the Massachusetts Institute of Technology and Ephraim Leibtag of the Agriculture Department.

All told, these cuts have significantly raised living standards. How much is unclear. A study by the economic consulting firm Global Insight found that from 1985 to 2004, Wal-Mart’s expansion lowered the consumer price index by a cumulative 3.1 percent from what it would have been. That produced savings of $263 billion in 2004, equal to $2,329 for each U.S. household. Because Wal-Mart financed this study, its results have been criticized as too high. But even if price savings are only half as much ($132 billion and $1,165 per household), they’d dwarf the benefits of all but the biggest government programs.

For the full commentary, see:

Robert J. Samuelson. "Wal-Mart as Red Herring." The Washington Post (Wednesday, August 30, 2006): A19.

Daley Shows Chicago is Still the “City of the Outstuck Neck”

I think it was the poet Gwendolyn Brooks who once described Chicago as the "city of the out-stuck neck." Chicago’s current Mayor Daley did himself and the city proud recently when he had the guts to stick his neck out by vetoing the proposed Chicago minimum wage. He deserves a salute from Chicago’s consumers and poor. Democrat Daley is the mayor of the out-stuck neck.

Chicago Mayor Richard M. Daley used the first veto of his 17-year tenure to reject a living-wage ordinance aimed at forcing big retailers to pay wages of $10 an hour and health benefits equivalent to $3 an hour by 2010.

The veto is important to Wal-Mart Stores Inc., which plans to open its first store in Chicago late this month in the economically depressed 37th ward.

. . .

In vetoing the ordinance, Mayor Daley cited a potential loss of jobs. In recent weeks, several big retailers had written to his office to oppose the ordinance. "I understand and share a desire to ensure that everyone who works in the city of Chicago earns a decent wage," the mayor wrote to the aldermen yesterday. "But I do not believe that this ordinance, well intentioned as it may be, would achieve that end. Rather, I believe that it would drive jobs and business from our city."

For the full story, see:

KRIS HUDSON. "Chicago’s Daley Vetoes Bill Aimed At Big Retailers." Wall Street Journal (Thurs., September 12, 2006): A4.

(Note: I can’t find the exact source of the out-stuck neck quote, but one reference on the web is: http://starbulletin.com/97/05/22/sports/fitzgerald.html )

Big Business Is Often Bashed, But Is Not Always Bad

(p. 4) BUSINESS bashing by politicians in America has a long history, including rhetoric far more inflammatory than the denunciations being directed at Wal-Mart this year by some Democrats, who sometimes sound as if they are running against the company instead of another politician.

. . .

The company may not appreciate the honor, but its place in the political debate reflects its revolutionary effect on the American economy.

Put simply, the big winners as the economy changes have often been scary to many, particularly those with a stake in the old economic order being torn asunder.

“Twice as many Americans shop at Wal-Mart over the course of a year than voted in the last presidential election,” said H. Lee Scott Jr., the company’s chief executive, in a speech to the National Governors Association in February.

Wal-Mart’s success reflects its ability to charge less for a wide range of goods. That arguably has reduced inflation and made the economy more efficient. It has introduced innovations in managing inventory and shipping goods.

. . .

But the fact that Wal-Mart has more shoppers than any politician has voters shows that many of those workers — and many people higher on the income scale — find its prices irresistible. That group no doubt includes some of the company’s critics.

Previous business targets of politicians have similarly been both popular and reviled. The railroads enabled much of America to prosper, but to many people in the late 19th century they were viewed as villains.

They upset old economic relationships by making it possible to ship goods over much longer distances, thus introducing competition for local businesses and farms.

For the full commentary, see:

FLOYD NORRIS. "THE NATION; Swiping at Industry From Atop the Stump." The New York Times, Section 4 (Sun., August 20, 2006): 4.

(Note: ellipses added.)

Illinois protesters bashing Wal-Mart during the summer of 2006. Source of photo: online version of the NYT article cited above.

Prices Can Be Lower When Few Firms in Industry

Alex Tabarrok. Source of image: http://www.gmu.edu/centers/publicchoice/faculty.html

Price gouging can work only if firms have monopoly power — so if gouging is the explanation for higher premiums, we would expect to see higher premiums in states with less competition. My student, Amanda Agan, and I tested this hypothesis in a study released two days ago by the Manhattan Institute. Contrary to the gouging hypothesis, we found that a 10% increase in industry concentration reduces premiums by $2,200. The result makes sense if we remember that, to increase market share, firms don’t raise prices but rather lower them. Wal-Mart has grown into the nation’s dominant retailer by lowering prices, not raising them.

For the full commentary, see:

ALEX TABARROK. "Rule of Law; Price Gouging Is Bad Medicine." The Wall Street Journal (Sat., May 20, 2006): A9.

Welch: Importance of Taking and Spreading Best Employee Ideas

Sam Walton may have been the grand master of absorbing good ideas of others and then spreading the ideas across the company. Another master was Jack Welch:

(p. 383) Getting every employee’s mind into the game is a huge part of what the CEO job is all about. Taking everyone’s best ideas and transferring them to others is the secret. There’s nothing more important. I tried to be a sponge, absorbing and questioning every good idea. The first step is being open to the best of what everyone , everywhere, has to offer. The second is transferring that learning across the organization.

Source:

Welch, Jack. Jack: Straight from the Gut. New York: Warner Business Books, 2001.

See also pp. 197-198 for Welch’s description of the specifics of how Wal-Mart got this job done.

For even more details, see: Walton, Sam. Made in America: Doubleday, 1992.

Wal-Mart Is Front-line Soldier in Real War on Poverty

BALTIMORE — In Big Labor’s war against Wal-Mart, "collateral damage" — in the form of lost jobs and income for the poor — is starting to add up. Of course, since the unions and their legislative allies claim that their motive is to liberate people from exploitation by Wal-Mart, these unintended effects are often ignored.

Here in Maryland, however, that’s getting hard to do. The consequences of our legislature’s override of Republican Gov. Robert Ehrlich’s veto of their "Fair Share Health Care Act" on Jan. 12 will be tragic for some of the state’s neediest residents. The law will force companies that employ over 10,000 to spend at least 8% of their payroll on health care or kick any shortfall into a special state fund. Wal-Mart would be the only employer in the state to be affected.

Almost surely, therefore, the company will pull the plug on plans to build a distribution center that would have employed 800 in Somerset County, on Maryland’s picturesque Eastern Shore. As a Wal-Mart spokesman has put it, "you have to take a step back and call into question how business-friendly is a state like Maryland when they pass a bill that . . . takes a swipe at one company that provides 15,000 jobs."

. . .

. . . , legislators should be mindful that companies like Wal-Mart are not the enemy but rather front-line soldiers in a real war on poverty. The profit motive leads them to seek out areas where there is much idle labor and put it to work. Where they are prevented or discouraged from doing so, the alternative job prospect is rarely a cushy spot in the bureaucracy. Rather, it is continued idleness and hardship.

For the full commentary, see:

STEVE H. HANKE and STEPHEN J.K. WALTERS. "Cross Country; Hard Line State." The Wall Street Journal (Thurs., January 26, 2006): A11.