By TIOL News Service

NEW YORK, JAN 25, 2015: A study on long-term global growth prospects has focused on tax evasion in the retailing business and made a case for regulatory reforms to improve productivity and economic growth.

According to a study released by The McKinsey Global Institute (MGI) earlier this month, government regulation has a profound influence on retail-sector productivity, which can explain why large productivity differences remain. Regulation that allows the expansion of more productive modern supermarkets and convenience stores raises productivity because larger chains can profit from scale benefits in distribution, merchandising, and store operations. Regulation that restricts modernization can hold back productivity.

The study captioned ‘Global growth: Can productivity save the day in an aging world?' says: "Many countries have chosen to protect small-scale stores through barriers to foreign direct investment, zoning laws, or restrictions on the size of stores. Such regulatory barriers exist in India in the form of differential tax payments for larger chains, a ban on foreign direct investment in multi-brand retailing, taxes on the movement of goods across state borders (the Octroi tax), regulations enabling middlemen in the food-supply chain (APMC Act), and differential enforcement of labor laws. In Japan, laws limiting the entry of large supermarkets and providing incentives for small retailers to stay in business explain the high share of family retailers and low productivity. Similarly, in 1990s France, the introduction of more restrictive regulation over the size of retail outlets halted the sector's productivity growth."

Informality remains another major barrier to productivity in retail. Take the case of Brazil, where taxes and other social payment are very high by international standards. Total taxes paid as a percentage of GDP stood at 36 percent in Brazil in 2013 compared with 27 percent in Russia, 18 percent in China, and 7 percent in India. Because enforcement is weak, there is a strong economic case for companies to underreport their obligations or operate in the informal economy. MGI has estimated that an informal player in Brazil that underreports sales and employee costs by 30 percent thereby improves net margins more than twofold. And it is not just traditional corner stores that evade taxes and put larger, more productive players at a competitive disadvantage. A number of informal regional retail chains, in some cases, run very sophisticated software that enables them to keep double accounts to facilitate tax evasion. This slows productivity growth, as smaller, less productive establishments remain competitive and even gain share from modern ones.

The report is based on five sector case studies-agriculture, food processing, automotive, retail, and health care. These studies suggest that annual productivity growth to 2025 in the G19 and Nigeria could be as high as 4 percent, more than needed to counteract demographic trends. About three quarters of the potential comes from the broader adoption of existing best practices-"catch-up" productivity improvements. The remaining one-quarter-counting only what we can foresee-comes from technological, operational, and business innovations that go beyond today's best practices and "push the frontier" of the world's GDP potential.