Wal-Mart and social capital.

Economists increasingly recognize that markets exist within social and cultural contexts, and that these contexts affect how resources are allocated to competing ends. The social economics literature views individuals as both affected by and affecting the environment in which they live (e.g., Barrett 2005; Durlauf and Young 2001). Contributors to this literature recognize that utility and happiness are relative concepts that depend on levels achieved by peers (Layard 2005), and acknowledge that both utility and happiness can increase with levels of social interaction (Kahneman and Krueger 2006). Further, "because social organization is typically characterized by multiple equilibria, small changes in economic conditions can lead to dramatic changes in the behavior of and membership in [social] groups and networks" (Barrett 2005, p. 10).

A far-reaching economic change is the recent rise of big-box retailing, led by Wal-Mart Corp. (Fishman 2006). While the chain's adverse impact on morn-and-pop type retail outlets has been well-documented (Stone 1997; Irvin and Clark 2006), the second-round effects of such store closings on local social capital or civic capacity have not been studied. For example, economic developers lament the fact that community civic capacity declines when locally-owned banks go out of business or are taken over by national corporations. Yet systematic evaluation of this phenomenon has remained elusive, because of the difficulty of measuring local social capital.

Advances in the consistent measurement of county-level social capital (Rupasingha, Goetz, and Freshwater 2006) now make it possible to examine rigorously the impact of big-box chains on the civic capacity of all rural and urban US counties. Previous studies have implemented the concept using trust, social norms or networks, following Putnam's (2001) seminal work, Bowling Alone. These studies use cross-country comparisons based on individual-level data (the World Value Surveys, Knack and Keefer 1997), state-level data in the U.S., (the General Social Survey, Glaeser, Laibson, and Sacerdote 2002) or data collected in individual-level surveys in specific contexts (Narayan and Pritchett 1999).

In this article, we identify for the first time the independent effect of Wal-Mart stores on changes in social capital at the U.S. countylevel during the 1990s decade. We propose a conceptual model of the processes leading to changes in social capital and hypothesize that big-box corporations, in which innovative business processes and management functions are handled out of centralized headquarters, or outsourced to Asia, depress social capital stocks in local communities. This compounds the adverse effects of losing local philanthropic capacity, reinvestment of surpluses (rents) and community-specific knowledge or capital.

Questions surrounding social capital are hardly trivial for economists. That social capital stocks matter for economic growth and poverty reduction is documented in an expanding literature (Knack and Keefer 1997; Rupasingha, Goetz, and Freshwater 2002; Rupasingha and Goetz 2003; Goetz and Swaminathan 2006; see also, however, Schmid 2003), although definitional and measurement issues remain. Skinner and Staiger (2005) argue that social capital stocks may explain state-level differences in the adoption of tractors and hybrid corn. This explanation contradicts Griliches (1957) argument that profitability and incentives alone matter in technology adoption.

We find that social capital stocks were lower both in communities in which new Wal-Mart stores were built and in communities that already had a Wal-Mart store at the beginning of the 1990s decade. This finding adds an important new dimension to the analysis of community-wide impacts of the chain, and one more externality that needs to be considered when weighing its benefits.

Conceptual Framework

The most visible and direct impact of Wal-Mart is usually the disappearance of small, locally-owned mom-and-pop type stores (Stone 1997). In fact, Wal-Mart's current PR campaign focuses on helping small local businesses--even those with which it ostensibly competes. Although new retail activity may emerge in the vicinity of a Wal-Mart, benefiting from the additional traffic generated, the balance of evidence suggests a net loss in the types of home-grown stores that have long existed in the community. Embedded in these stores and their owners are important social relationships, norms and trust that were built up over time. Sociologists refer to these storeowners as part of the local leadership class (Tolbert, Lyson, and Irwin 1998). Recognizing the possibility of negative social capital, we propose that on net these leaders not only have the best public interest of the community in mind, but that they also understand the interpersonal dynamics of its members and their various networks. Thus, they can head off conflict and know how to get individuals to cooperate when a local problem requires group action.

Virtually all of the research on Wal-Mart to date focuses on existing morn-and-pop retailers, ignoring the elaborate but less visible supporting industry within communities that serves these retailers. This industry includes firms in the legal, accounting, transportation, warehousing, logistics, financial, publishing and advertising sectors that work closely with the retailers. In particular, local lawyers, accountants and bankers provide essential support services for the morn-and-pop stores, and these individuals typically are community leaders. With the arrival of Wal-Mart, and the attendant reduction in the demand for their services, they leave the community to pursue opportunities elsewhere. In the process, the social capital they embody is destroyed, and their entrepreneurial skills and other forms of location-specific human capital are forever lost to the community.

Local stores may commission the design and creation of flyers for insertion into local newspapers and they may take out ads. Wal-Mart does not follow this practice. With local advertising revenues drying up, compounding the effect of the Internet, local newspapers become unprofitable, eliminating a source of livelihood for local opinion leaders. Wholesaling jobs, often higher-paying than retail jobs, disappear as local stores no longer require services of local wholesalers, and local transport, logistics, and storage firms. Thus, a reverse multiplier works its way through the community.

Social interaction among local entrepreneurs represents an important venue for sustaining and enhancing embedded social capital. As shoppers drive to the outskirts where Wal-Mart is located to buy goods and services, downtown stores close and local coffee shops see their customer base dry up. Opportunities for dialogue and interaction among local citizens are reduced. Likewise, local entrepreneurs may have fewer opportunities to sell innovative new products. Wal-Mart in fact has created a lottery for entrepreneurs. Those who succeed and get their products onto the stores' shelves hit the jackpot, at least in the short-term, until the chain imposes its annual price cutting discipline (Fishman 2006). Others are cut out of the market as they are unable to garner shelf space because local stores have disappeared.

Wal-Mart does not employ the services of these local firms that form the backbone of local social capital. Instead, the chain's enormous efficiency lies in its ability to concentrate back office and supporting functions in one place, Bentonville, AR, as well as in off-shoring them to China or India. Given the global reach of Wal-Mart's supply chain, not doing so would be irrational.

Model and Data

Our primary dependent variable is the county-level measure of social capital developed in Rupasingha, Goetz, and Freshwater (2006). We estimate five additional regressions with these dependent variables: number of associations per 10,000 residents; voter turnout in the 2000 presidential election; number of tax exempt nonprofit organizations per 10,000; and participation in the decennial Census in 2000. The latter variable captures a sense of belonging to the nation, whereas the former represents both local and national allegiance, depending on how important local as opposed to national issues are in bringing voters to the polls. Following Tolbert, Lyson, and Irwin (1998), we also use church adherence to measure local civic engagement. Table 1 provides definitions and summary statistics.

Our statistical equations are based on a model of household utility maximization that includes income as a measure of the opportunity cost of time facing decisionmakers. This model is derived in detail in Rupasingha, Goetz, and Freshwater (2006). The model predicts a different response to the civic task of filling out a Census form (which can be done in the convenience of the home and then mailed in, and which occurs only once every decade) and visiting a polling station every two years, for example.

Regressors include, with expected signs in parentheses, educational attainment (+), ethnic diversity (-), inequality (-), female labor force participation (+), rural (+)/urban