Wal-Mart generates Essay
“Wal-Mart is one of the key forces that propelled global outsourcing — off-shoring of U. S. jobs — precisely because it controls so much of the purchasing power of the U. S. economy. ” – Gary Gereffi Duke University professor on global supply chains The growth and dominance of Wal-Mart over the years has indeed turned it into an economy all its own. There is no single corporation in the world that has as much impact as Wal-Mart has, save perhaps for oil corporations, on any single domestic or even international economy (Hicks 27).
The volume of sales which Wal-Mart generates is enough to keep the rest of the world happily employed and is also enough to keep the consumerist population of the United States happy in their spending habits (Hicks 27). Every single commodity manufacturer who is interested in surviving must be able to gain the good graces of Wal-Mart. The impact of Wal-Mart is such that it “has life-or-death decision over [almost] all the consumer goods industries that exist in the United States (Gereffi 2006).
” This virtually unbridled power of the life or death of consumer goods industries, however, presents the question of whether or not Wal-Mart is indeed
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Wal-Mart has become so powerful that any shift in its purchasing and production policies will certainly result in some imbalance on a certain economy in the world. An example of the power of Wal-Mart is the fact that because of the immense volume of sales that Wal-Mart generates it is able to dictate where goods are to be manufactured in the world despite the fact that it is not a producer but simply a retail-chain (Hausman, J. & Leibtag, E. 205).
For a retail chain to be able to dictate to suppliers where they are to produce their items in order to be able to sell to Wal-Mart at a lower cost means that the retail chain has either a huge stake in the ownership of the supplier or buys so much from the supplier that it is able to dictate the price that it is willing to buy at and by doing so dictate where such goods are to be produced (Hausman, J. & Leibtag, E. 205). Another impact that Wal-Mart has upon the economy of the United States is the boost that it provides by improving the productivity and efficiency of the domestic retail sector.
This effect has been shown in a study conducted by Global Insight (2005) that while Wal-Mart has been the cause for the drop in nominal wages, with wage rates dropping by nearly 2. 2 percent in 2004, it has also contributed to an overall reduction in consumer prices over the same time period, with a 3. 1 percent decline in consumer prices. This in effect translates to an increased level of disposable income for the consumers of 0. 9 percent (Global Insight 1). In dollars and cents, this 0.
9 percent increase in disposable income translates into nearly US$ 263 billion in added spending dollars or nearly US$ 895 per person (Global Insight 1). The impact of Wal-Mart is not only felt in the economy of the United States but it also felt on a global scale. Since much of the sourcing that Wal-Mart currently does is based on retail price advantages, Wal-Mart has been a great contributor to the movement of jobs to cheaper countries (Hausman, J. & Leibtag, E. 205).
Low-wage countries such as China and much of Asia have become ideal relocation centers for super retailers such as Wal-Mart. As such, this has created the effect of opening up the American market to non-domestic firms. Studies have shown that in the past five (5) years, Wal-Mart has more than doubled its imports from Asia (Hausman, J. & Leibtag, E. 205). It has purchased over US$ 12 billion in merchandise in 2002 alone and this figure has increased steadily over the years.
From an economic perspective, this has increased the total level of Chinese exports into the American economy by over 10 percent since 2002 (Hausman, J. & Leibtag, E. 205). This has also been cited for the inequitable balance of trade in favor of China. The size of Wal-Mart is such that it can do more than just cause ripples in a pond. In one of the world’s largest job markets, the Wal-Mart effect is that it can also lead to small business running into bankruptcy or adding to unemployment in the area.
One study shows that the mere entry of Wal-Mart into a local area had the effect of increasing the poverty rate among residents. Counties that had Wal-Mart stores in 1999 were found to have increased rates of poverty than other counties that had a lower number of Wal-Mart outlets or none at all (Basker 177). Between the years of 1987 and 1998, it was also shown that the areas where the Wal-Mart stores were placed immediately experienced higher poverty rates, increasing the average level for the area to 0.
204 as compared to those of other counties that only had 0. 099 (Basker 177). These studies show that while Wal-Mart has been shown to be good to the consumer by increasing the disposable income and by lowering the prices, the effect is not necessarily good. It can lead to increases in poverty and unemployment rates (Basker 177). The effect that this proves, however, is that wherever a Wal-Mart opens up or whatever policy it decides to implement, there will always be a Wal-Mart effect.
The impact that Wal-Mart has on the American economy is not as simple as looking at facts and figures, however, as the other social effects need to be considered. Therefore, in determining whether or not Wal-Mart is good for America, the basic economic principles of any market must be analyzed. Every market is governed by two basic forces, supply and demand. Wal-Mart is able to control both these forces because of the immense size that it has (Hicks 27). It controls supply by deciding what items it chooses to retail.
It also decides the demand for the item by pricing competitively (Hicks 27). In its early years, Wal-Mart provided jobs for most Americans because a majority of the goods supplied were produced in the United States (Nene 34). With globalization and the theory of a flat world, other countries have become more competitive industrially and have now taken those production jobs that were previously held by Americans. The outsourcing of consumer goods industries to other countries can be theorized to have been created by the Wal-Mart demand for cheaper products from their suppliers (Nene 34).
The problem with this scenario is that it creates unemployment for Americans who are the main buyers from Wal-Mart. In order to counteract this scenario, Wal-Mart must then reduce prices lower to meet the increasing lower income bracket of unemployed Americans who have lost their jobs because of the global production tilt to other countries (Nene 34). As this trend continues, it may be theorized that Wal-Mart will eventually strangle itself by driving the prices of goods down too much without protecting its major market which is the United States.
The status of Wal-Mart, therefore, as either a boon or a bane for the American economy solely depends on whether or not it is willing to protect its major market which is the United States. Wal-Mart not only determines which consumer goods industries are to survive but also which economies are to benefit. References: Basker, E. (2005). Job Creation or Destruction? Labor-Market Effects of Wal-Mart Expansion. The Review of Economics and Statistics, 87, 174-183 Global Insight. (2005). The Economic Impact of Wal-Mart. Business Planning Solutions Global Insight Advisory Services Division
Hausman, J. & Leibtag, E. (2005). Consumer Benefits from Increased Competition in Shopping Outlets: Measuring the Effect of Wal-Mart. Economic Research Service, U. S. Department of Agriculture. Hicks,M. (2005) “The Impact of Wal-Mart on Local Fiscal Health: Evidence from a Panel of Ohio Counties. ” Econ WPA Economics Working Papers. (Urban/Regional Archive No. 0511016) Nene, G. (2005). The Effect of Wal-Mart on the Economic Growth of Nebraska Counties. Master of Sciences Thesis, Agricultural Economics: University of Nebraska-Lincoln.