By Chris Becker

Rob Davies, Ebrahim Patel, and Tina Joemat-Petterson held a press conference yesterday morning wherein they explained their (i.e. the government’s) intention to appeal the Walmart/Massmart merger at the Competition Tribunal.

“The main risk to South Africa that the merger poses is an increase in imports by Walmart/Massmart causing a decline in local manufacturing and production, across a wide range of consumer products including agro-processing, the furniture industry, electronics, plastics and household goods as well as clothing and textiles,” reads the official Cabinet statement. Either Walmart/Massmart will out-muscle local producers and force them to drop their prices below their cost of production – causing them to close shop, or they will simply import everything they want to sell for less, also causing them to close shop. Or so the reasoning goes.

Is it not perhaps a little naïve to believe that the astute and successful businessmen currently in charge of the retail sector haven’t already considered importing cheaper goods as a potential strategy to beat competitors?  No investigations needed here, Ferial Haffajee. You can rest assured, this course of action has been pursued.  Business is not interested in issues of nationality, but in finding a combination of input- and output prices that will invite consumers to spend their hard-earned salaries on their wares. Businessmen are in business because they are able to provide people with things they need or want at the best available price. If current retailers don’t already find it profitable to procure mostly from abroad, it doesn’t mean Walmart/Massmart will.

If Walmart/Massmart was to import everything it wanted to sell as from tomorrow, it would need to outbid other buyers of those goods in other countries.  This will automatically push up the prices of these goods in external markets.  Soon before long, external market prices would rise to a level where it is once again profitable for Walmart/Massmart to buy locally produced goods.  Walmart is one of the biggest procurers of consumer goods in the world. They understand the impact they can have on prices in markets they operate in.  Furthermore, if Walmart were to push up the prices of goods it also sells in other markets, it would undermine its competitiveness in terms of pricing there.  Bullet, meet foot.

It is also worth pointing out that local prices could decline in order to incentivise Walmart/Massmart to continue buying locally produced products and not foreign-produced products.  What would prevent this?  Minimum wage laws, rigid labour markets, monetary policy that targets continuously rising prices, and high and rising taxation.  Absent these market impediments, there would not need to be widespread job losses as the central planners suggest, but rather lower nominal wages and higher productivity (more on nominal and real wages later.) By impeding Walmart’s ability to compete on equal terms, government is effectively masking the inefficiencies its failed interventionist policies are having on the competitiveness of local industry.

If the government actually got out of the way of local producers, they could even produce a much greater share of the products that Walmart markets globally.  By impeding the free market, the government prevents this from happening.

Ebrahim Patel had a “simple request” to Walmart: “please ensure your entry creates jobs. How hard is that?”  he asked.  Patel is here focussing on that which is seen.  He is hung up on the amount of people that will be directly employed by Walmart/Massmart or through the supply chain linkages in the local economy.  The unseen consequences of Walmart’s entry are much more significant than direct job creation.

Let’s take a scenario where Walmart enters the local market and undercuts competitors by a price margin of 10%.  Consumers would flock to their shops to buy their products, not caring whether they’re imported or produced locally.  What’s important to the consumer is that he saves money, as he can now afford 10% more goods on the same salary as before.  Resources are literally freed up that can be spent on other things.  Consumers could buy other goods that were unaffordable before, that may or may not be produced by locals. It would be as if the standard of living of the average South African magically increased.  Nominal wages would stay the same, but spending power would increase, resulting in a real increase of wages. Real wages always rise in a progressing economy.

Either way you cut it, consumers will be better off as a result of lower prices.  ‘Labour’, ‘capitalist’, ‘producer’, ‘manufacturer’, ‘public employee’, all are consumers at least once a day.  This is a fact that is more often than not overlooked. Why then, is the government so intent on ‘protecting’ producers and workers?

By raising the cost of entry to Walmart by forcing them to sit through hearings at the Competition Commission, charging them millions of Rands to contribute to a jobs fund, and by now appealing the merger in the Tribunal’s Appeals court, the government is effectively subsidising local industry already, at the expense of consumers.  For it to remain this way, government will need to keep throwing hurdles in front of Walmart while its competitors have a clear track to run the 100m dash.

The subsidy is going to be paid for by consumers, as Walmart is not able to lower costs as soon and to the same extent as they otherwise would’ve.  Who knows how many other productive and sustainable jobs could’ve been created had the private sector been left with more resources? I guess, sadly, we’ll never know.

Chris Becker is Market Strategist at ETM.  He joined ETM in 2010 having previously worked as an economist for an SA-based African sovereign risk analytics team.  He sits on ETM’s real-time desk overseeing SA, Turkish, Russian, and G4 markets, and is also a lead contributor and team member of ETM MACRO STRATEGY.  Chris speaks three languages: English, Afrikaans, and Austrian! Follow him on twitter.