What does Merriam-Webster mean by "being such in practice or effect"?

This is complicated because it involves how words work, how dictionaries work, and how M-W works.

Yes, that phrase all by itself is strange and difficult to parse (if at all). The entire (relevant definition is:

1a: of, relating to, or manifested in practice or action : not theoretical or ideal
   // _a practical question_
   // _for all practical purposes_
 b: _being such in practice or effect_ : VIRTUAL
   // _a practical failure_

As noted in a comment here, 'such' is a pronoun here that M-W uses often to refer to a previous definition, in this instance 1a. Even so, replacing the pronoun with its (simplified) referent, 'being of practice or action in practice or effect' being so tautologous almost washes away any meaning it had to start with. And frankly, the example doesn't help me distinguish the two submeanings.

So I have a very hard time trying to figure out what M-W means with this definition.

I'm no lexicographer so I can only explain what I think the primary meaning, 1a, of 'practical' is - it is opposed to abstract or thinking too far in advance, it means just getting things done now with what's available (as you can see this is not a good dictionary definition but I think it suffices for getting the idea across.

As to definition 1b, that it cites 'virtual' as a synonym is interesting because, well, let's look at M-W's definition there:

1: being such in essence or effect though not formally recognized or admitted
  // _a virtual dictator_
...
4: of, relating to, or being a hypothetical particle whose existence is inferred from indirect evidence
  // _virtual photons_

With my own prejudices about 'virtual', this seems quite at odds with the definition of 'practical'. It's not exactly an antonym, but seems correlated with those ideas.

However, abstract words can be a little bit mushy. I can attempt a possible hint as to why the individual lexicographer connected 'virtual' with 'practical'. Via semantic drifting of the adverbial forms, 'practically' and 'virtually' both have changed little by little over the years to converge to mean 'almost'.

The actor had appeared in so few films lately that they had become practically/virtually unknown.

Despite the same root, this doesn't make 'practical and 'virtual' synonymous though.

The such refers to the noun that practical modifies. The word such here cannot be referring to a previous definition, because in the definition of virtual, a very similar definition appears as the first definition of the word.

One definition of practical in Merriam-Webster is:

1 b: being such in practice or effect : VIRTUAL
a practical failure.

So, calling something a practical failure would mean that it was a failure in practice (although maybe it was a success in theory or in trial uses).

The same use of such appears in their definition of virtual:

1: being such in essence or effect though not formally recognized or admitted
a virtual dictator

So a virtual dictator is somebody who is effectively a dictator, even though they do not admit they are one.