The Beast Unleashed

The Beast of Bentonville has snuck out and is now, at this very instance, clamping its mighty jaws around the whole of the earth. Wal-Mart started in the small town of Bentonville, Arkansas by Sam Walton, yet its blue, red and white cookie cutter stores are now seen on every continent but Africa and Antarctica – though that will change the moment real penguins decide they enjoy Coca Cola, as the commercials suggest. The number of stores in the United States is approaching four thousand while down South and across the pond the company owns and operates a total of two thousand three hundred and forty one stores with many more on their way. Of note, Wal-Mart has seven hundred and eighty six stores in Mexico, three hundred and fifteen in the United Kingdom, four hundred and forty two in Japan, and fifty six stores in China (International History). The numbers and the locals of Wal-Mart’s presence are growing. Wal-Mart’s expansion is the definition of globalization; breaking down borders, importing and exporting goods around the globe.

Globalization is defined as the free movement of capital, labor, and goods across national borders. Capital refers to the tools used to convert raw materials into products, like the automated machinery that Ford uses to convert steel into a moving vehicle. Globalization provides poor countries greater access to capital, causing wages to increase because one person produces more and requires greater compensation. Theory states that globalization will reduce global inequality (Easterly). Well, that is theory.

According to theory, Wal-Mart’s growing international presence creates a greater global flow of capital and more jobs and decreases inequality. This is shown empirically by GDP and income growth data in developing nations where Wal-Mart’s presence is growing. International macroeconomic data show that from 1996 to 2004 out of 150 countries with data only one country experienced a reduction in GDP on average: Zimbabwe (World Bank). Globalization has lead to GDP growth in almost every country in the world. Martin Wolf, an economist of the World Bank, shows in his book, “Why Globalization Works,” that between 1980 and 2000 average real incomes in China rose by 440% while that of the United States only rose by 60% (140-150). Wal-Mart’s growing presence in international markets and globalization decrease global inequality of wages by creating jobs and allowing more capital to flow between rich and poor nations.

Or does it? Close examination of the data tells us nothing about the effects of Wal-Mart and globalization on inequality. GDP around the globe and average real incomes may be growing, but the poor may still be just as poor compared to the rich – or more. Averages only depict one point in the distribution of income not the shape of the distribution. The average could remain statistically the same even if the difference between the top 10% and the bottom 10% of the wealth distribution may be three times as large.

According to data, globalization allows the winners to take it all. During this period of globalization, incomes of the poorest fifth of working families in the United States has dropped by 21 percent between 1979 and 1995 while the incomes of the richest fifth jumped by 30 percent. Globally, in 1960 20 percent of the world’s people in the richest countries had 30 times the income of the poorest 20 percent but by 1995, the richest 20 percent had 82 times as much income as the poorest 20 percent. Inequality has increased even though markets are more global than ever, markets that provide the Amazon access to Wall Street and corporate executives’ access to authentic jewelry and pottery straight from Africa. The theory of globalization makes more intuitive sense, but the evidence shows that globalization does not eliminate but actually exacerbates inequality.

An example given by Thomas Friedman in The Lexus and the Olive Tree will serve to explain this phenomenon. Massive globalization has occurred in the National Basketball Association over the past few decades. Today the NBA is seen in more than 190 countries in over 41 different languages. The globalization of the NBA has been accompanied by an explosion in players’ salaries with the most famous, Michael Jordan, leading the way. In 1997 Fortune magazine estimated his annual income at $80 million. Michael Jordan was and is an international superstar. The superstar effect is an economic phenomenon that explains the huge salaries of entertainers like Michael Jordan. He offers his product at an extremely low, unchanging cost to him, and as his international influence grows – with Mexicans, Australians and Chinese buying red jerseys with the number 23 – so does his paycheck. Yet sitting just 11 seats away from him on the same bench of the National Champions of 1997, wearing the same red jersey, playing the same game in the same league is Joe Kleine whose salary in 1997 was $272,250. Don’t strain too hard doing the subtraction, the difference is $79,727,750. This is the superstar effect. This huge inequality of wages is because Michael Jordan has a global market for his service and Joe Kleine does not (Friedman 251-254). The same is true for Wal-Mart. Wal-Mart is the Michael Jordan of the retail business. While the incomes of local retailers, whose influence is Joe-Kleine-esque, shrinks, Wal-Mart’s wallets are stuffed more and more with each additional box-store.

Think about this superstar effect logically. No longer do local retailers compete solely amongst one another but against the entire world. It does not matter now which local furniture retailer has the lowest price on the ideal couch because Chinese and European retailers are also involved. If a company gains an advantage, inevitably it will try to expand their share of the market. Market share expansion is magnified because an increase of 1 percent means an increase of one percent of over six billion consumers. The best companies with the lowest costs and highest quality will win in globalization, a phenomena that widens the rich-poor gap, because they take it all. Nothing is left for the small-time and the small-town. Wal-Mart is this superstar who is winning on the global playing field. It continues to eliminate the small-time competitors in small-town USA, lowering employment from 2 to 4 percent in each local, and they are eliminating puny international competitors as well (Neumark).

Evidence shows that the trend of globalization actually increases inequality among nations. Theory states that capital will flow to labor-rich nations causing their production and thereby their wages to increase. William Easterly, an economist from New York University argues this saying, empirically, theory is wrong – both labor and capital flow to the richest countries. The globalization of the economy has coincided with the migration of millions leaving the developing nations towards the wealthy ones. Nearly 4 million people migrated in the year 2000 to the richest countries of the world creating a “brain-drain” as an educated person is 3.4 times more likely to migrate than an uneducated one. Labor is not all that migrates to wealthy nations. In 1990 the richest 20 percent of the world received 92 percent of portfolio capital inflows, while the poorest 20 percent only received 0.1 percent. The same is true with private capital inflows and foreign direct investment; the rich get richer and the poor get poorer (Easterly 21-22). Wal-Mart is a microcosm of this phenomenon. Wal-Mart’s greeters and shelf-stockers do not gain much by Wal-Mart’s expansion. Each new store fills the wallets of Wal-Mart’s top executives in America more and more but destroys local businesses and lowers local payrolls by 2 to 5 percent (Neumark).

Wal-Mart and globalization are not leaving. Rather than ask “Should Wal-Mart expand or should globalization occur?” – those questions are old news – we should ask “What are the effects?” Wal-Mart’s growing international presences increases global inequality. Wal-Mart, retail superstar extraordinaire, mops the floors with the competition, taking all the prize money and leaving nothing. Their “Always Low Prices” eliminate competition and expand inequality. GDP may grow and on average real incomes may converge, but this does not imply that inequality has been reduced. Actually, since Wal-Mart and globalization, incomes of the top 20 percent of the world have expanded from 30 to 82 times that of the bottom 20 percent. Something went wrong with the theory. The Beast of Bentonville is loose and being spotted all over the world; watch out for his teeth.

“International History.” Wal-Mart; International Operations. 2006. 20 Feb 2006.

Neumark, David, Junfu Zhang and Stephen Ciccarella. “Report 122; How Wal-martAffects Local Jobs and Wages.” The Effects of Wal-Mart on Local Labor Markets. Nov 2005. 20 Mar 2006.

Easterly, William. “Globalization, Poverty and All That; Factor Endowment VersusProductivity Views.” NBER Globalization Workshop. 2005. New YorkUniversity. 19 Feb 2006.

Wolf, Martin. Why Globalization Works. London: Yale University Press, 2004.

Friedman, Thomas. The Lexus and The Olive Tree. New York: Farrar, Straus andGiroux, 1999.

The World Bank Group. 15 Mar 2006.