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The Bolkestein Directive has reignited debate on the liberalization of Spain's retail trade

  The 15th century Grand Bazaar in Istanbul holds 55,000 square meters of stores and covers more than 58 streets. For some people it is the first large shopping mall in history. However, the image evoked by today's notion of a shopping mall is not that of a legendary marketplace in the heart of the city but of a modern commercial area on its outskirts. Now that the deadline for transposing the European Services Directive is approaching, the debate in Spain has intensified on the costs and benefits of liberalizing retail trade, a debate that tends to oppose this new generation of commercial areas to more urban and traditional small-format stores.

  In a market economy, the aim of regulation, not only that on retail trade but on any sector, is either to correct a market failure yielding a sub-optimum allocation of available resources, or to achieve non-economic goals, generally of a social or political nature. When this regulation manages to resolve a market failure, resources are allocated more efficiently. However, when regulatory intervention has non-economic aims, a certain loss of efficiency is justified by defending other priorities of general interest, such as preserving the environment or a more evenly balanced urban development. In both scenarios, regulation can improve welfare in its broadest and not exclusively economic sense.

  In retailing, regulation usually takes the form of technical or administrative barriers, either to new companies entering the market, by means of prior licensing to start up a business or moratoria on start-ups, or by limiting how established firms operate through regulation of business hours or sales periods. In the case of Spain, an additional hurdle comes from the complexity of the legal framework, the result of the particular organization of the territory and the distribution of powers among the central government, autonomous communities, and local authorities. Although it's true that trade restrictions in Spain have been gradually relaxed since the Retail Trade Act (Ley de Ordenación del Comercio Minorista) came into force in 1996, they still exceed the OECD average (see the diagram below). In this respect, those defending liberalization hope that the new Services Directive will encourage greater progress and lead the way to a more open and flexible commercial network in Spain.

  The Services Directive, otherwise known as the Bolkestein Directive, aims to eliminate barriers to the freedom of establishment, provision, and movement of services within the European Union, as well as to harmonize regulation of the tertiary sector across member states. Among the measures stipulated by the Directive regarding retail trade, it is worth noting the homogenization of regulations across territories and the elimination of any kind of establishment license, except when pursuing non-economic goals of general interest and providing such limitations are not discriminatory or disproportionate with regard to those objectives. In any case, the transposition of the Directive to the legal framework of each country lies in the hands of the member states and, in Spain, this will take the form of two new laws: the act on free access to service activities and on exercising this right, otherwise known as the «Ley Paraguas» (or «Umbrella Act»), which establishes the general framework of reference, and the Omnibus Act, which adapts several earlier laws to the former. The specific regulations for each sector will also be amended, including those governing retail trade.

  The bill to revise the Retail Trade Act was approved by the Council of Ministers in August but, despite following the Directive's general criteria, it has not avoided controversy. The roots of this controversy lie in the relative flexibility of the new bill and in the margin for interpretation given to the governments of autonomous communities which have, according to the 1996 Act, the last word in terms of retail trade taking place within their territory. Some bodies, including the Spanish Competition Authority and the Bank of Spain, have expressed certain unease, fearing that the new legislation does not open the door to competition as per the European Commission's aim, wasting a unique opportunity to move forward in an area where, in the opinion both of these bodies and of the Commission itself, there is still a lot to be done.

  The defense of retail liberalization is based on different arguments, but the cost incurred by inadequate legislation for economic agents in terms of efficiency and welfare is, in all certainty, a key factor. In regard to retail, it is estimated that the inefficient allocation of available resources, resulting from excessive or incorrect regulation, reduces the degree of competition, impedes efficiencies associated with economies of scale and dissuades innovation. This leads to lower productivity and higher margins for incumbent firms that, in turn, lead to higher prices, a loss in purchasing power for real wages and, ultimately, less consumer welfare and lower revenue for firms deterred from entering the market in question. Some people believe that this reasoning essentially explains the low growth in retail productivity in countries such as France and Spain (see the diagram below).

  On the other side of the debate, those who advocate retail trade regulation generally prioritize economic dimensions other than pure efficiency. The most usual arguments are: urban development criteria that defend a city model incorporating a dynamic commercial town center; protecting consumers with little mobility and the work-life balance of those employed in the sector. This kind of regulation tends to favor more urban, small-format retail stores rather than large-scale malls on city outskirts. The 1996 Act, for example, explicitly aims to protect small local retailers. On the other hand, certain restrictions to free trade are based on the existence of market failures, such as negative externalities of an environmental nature associated with certain commercial formats that require private transportation.

  Efficiency aside, those in favor of a more flexible retail sector also mention women in paid employment when they advocate the liberalization of store opening hours, another usual and controversial barrier to free commercial activity. This structural change in the modern Spanish labor market means that many families can only shop on their days off or outside working hours that, in many cases, do not coincide with store opening hours. However, this argument comes head to head against one of the reasons used to defend store opening hours restrictions: the negative impact of extending these hours on the work-life balance of those employed in retailing.

  In short, the discussion originated by the proposal to revise the Retail Act shows that the historical controversy concerning the liberalization of such a key sector for the economy has not abated. It is to be hoped that the definitive act and the final judgment by the European Commission regarding this legislation will help the different parties to find some common ground and to improve the status quo of society in general. Ultimately, retail trade is a service and, as such, its raison d'être is none other than service for the benefit of all those involved, be it in a legendary town marketplace, in a modern shopping mall on the city outskirts or in a small store in a classic town or modern city center.

  This box was prepared by Marta Noguer

  International Unit, "la Caixa" Research Department

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