Race to the bottom

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A race to the bottom is a socio-economic concept that is argued to occur between countries as an outcome of regulatory competition. When competition becomes fierce between nations over a particular area of trade and production, countries are given increased incentive to dismantle currently existing regulatory standards.

A race to the bottom may also occur within a country (such as between states or counties), but this occurs much less frequently because the federal government has recourse to enact legislation slowing or halting the race before its effects become too pervasive.

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[edit] History

The concept of a regulatory "race to the bottom" emerged out of the late 19th and early 20th century experience with charter competition among US states to attract corporations to domicile in their jurisdiction. In 1890 New Jersey enacted a liberal corporation charter, which charged low fees for company registration and lower franchise taxes than other states. Delaware attempted to copy the law to attract companies to its own state. This competition ended when Woodrow Wilson as Governor tightened New Jersey's laws again through a series of seven statutes.

In academic literature the phenomenon of regulatory competition reducing standards overall was argued for by AA Berle and GC Means in The Modern Corporation and Private Property (1932) while the concept received formal recognition by the US Supreme Court in a decision of Justice Louis Brandeis in the 1933 case Ligget Co. v. Lee (288 U.S. 517, 558-559).[1][2][3] In the late 19th century Joint-stock company control was being liberated in Europe, where countries were engaged in competitive liberal legislation to allow local companies to compete. This liberalization reached Spain in 1869, Germany in 1870, Belgium in 1873, and Italy in 1883. The same effect was happening in the United States, when states were competing to attract firms to incorporate in their state—competition described by some at the time as "race to efficiency", and others, such as Justice Louis Brandeis, as the "race to the bottom".[2]

Schram explains that the term "race to the bottom":

“ ...has for some time served as an important metaphor to illustrate that the United States federal system--and every federal system for that matter--is vulnerable to interstate competition. The "race to the bottom" implies that the states compete with each other as each tries to underbid the others in lowering taxes, spending, regulation...so as to make itself more attractive to outside financial interests or unattractive to unwanted outsiders. It can be opposed to the alternative metaphor of "Laboratories of Democracy". The laboratory metaphor implies a more sanguine federalism in which [states] use their authority and discretion to develop innovative and creative solutions to common problems which can be then adopted by other states."[3] ”

In 1932 Brandeis also coined the term “Laboratories of Democracy” in the New State Ice Company v. Liebmann case (285 U.S. 262, 311). With these two opinions Brandeis helped develop what were to become controlling metaphors for thinking about the potential and pitfalls of federalism.[3]

[edit] Theory

[edit] Political Theory

Races to the bottom can be described in game theory by the prisoner's dilemma game. This is an exercise where the optimal outcome for the entire group of participants results from cooperation of the participants, but is put in danger by the fact that the optimal outcome for each individual is to not cooperate while the others do cooperate.

An economic example of racing to the bottom is tax competition between governments. Each government may benefit from higher tax revenues by having a high tax on corporate profits. However, governments can benefit individually with a lower corporate tax rate relative to the other governments in order to attract businesses away from the jurisdictions of other governments. This action would hurt all governments except the one that undercut the others. In order to maintain the equilibrium, each of the other governments would have to lower their corporate tax rates to match the "defector" (the government that first lowered the tax rate). The end result is that each government adopts a lower corporate tax rate and thus collects less revenue overall. The optimal option for all governments would be an agreement to maintain tax harmonization.

[edit] Occurrence and limitations

Occurrence of races to the bottom is mitigated by the costs of moving investment and production between countries, by persistence of comparative advantages (such as skilled workforces, infrastructure or proximity to natural resources), and by the presence of minimum standards, rules or conventions which prevent them.[citation needed]

Races to the bottom can also occur between the states or administrative regions within nations, which often seek to attract businesses and jobs on the basis of a favourable regulatory environment. The extent of such intra-national races is limited by the power and inclination of central national governments to act against them.

[edit] Implications

In general, however, these contests regularly work to undermine the ability of governments to enforce labor standards such as workers' compensation, or to raise taxation in order to fund social services and correct externalities (such as pollution and social degradation).[citation needed]

According to this theory, races to the bottom between sovereign states can also undermine democratic accountability, since the elected governments are no longer economically capable of passing legislation which enforces environmental or labour protections that are more stringent than those current in neighbouring countries.[citation needed]

[edit] Causes and responses

The dismantling of tariffs and other trade barriers, facilitated by the rules set within the World Trade Organization, and encouraged (in the global South) by United States influence through the World Bank and the International Monetary Fund, may have removed an important constraint on races-to-the-bottom. Without protected domestic industries, countries are more dependent on liquid investment capital. One solution to this problem is to employ international forums, such as the WTO, to set satisfactory environmental and labor rules at a global level.[citation needed]

Another suggested method for avoiding races to the bottom is moral purchasing on the part of consumers.

Another potential remedy is forbidding or applying heavy tax, tariff and trade sanctions to nations that permit the export of offensive goods, re-directing revenues raised from such tax or tariff to combating abuses. While conventional tariffs are designed to protect jobs in a particular industry or sector of the economy, standards-based tariffs are designed to protect country-wide standards such as labour standards and environmental standards. With standards-based tariffs, a product imported from a country with low labour and environmental standards will face a high tariff, while a product imported from a country with labour and environmental standards equal to or higher than the domestic standards will face no tariff. For producers, such tariffs remove the incentive to move a factory to the country with the lowest wage rates and most permissive pollution laws. For governments, such tariffs provide an incentive to raise their standards upwards, in order to gain entry into new export markets. For workers, such tariffs prevent the wage rate from falling down to the wage rate of the lowest country in the trading group. For consumers, such tariffs would undoubtedly raise prices since cheap imported goods from low-labour-standard countries would be replaced with expensive domestically produced goods.[citation needed]

[edit] Rhetoric

The phrase "race to the bottom" is used sometimes in a pejorative context by those opposed to globalisation and those supporting fair trade companies. An example: in response to reports that British supermarkets had cut the price of bananas, and by implication had squeezed revenues of banana-growing, developing nations, Alistair Smith, international co-coordinator of Banana Link, said "The British supermarkets are leading a race to the bottom. Jobs are being lost and producers are having to pay less attention to social and environmental agreements."[4]

[edit] See also

[edit] Notes

  1. ^ Kelly, John E. (2002). Industrial Relations: critical perspectives on business and management. UK: Routledge. ISBN 0-415-22986-3. p. 192
  2. ^ a b Meisel, Nicolas (2004). Governance Culture and Development: A Different Perspective on Corporate Governance. Organisation for Economic Co-operation and Development. ISBN 92-64-01727-5.  p. 41
  3. ^ a b c Schram, Sanford F. (2000). After Welfare: The Culture of Postindustrial Social Policy. NYU Press. ISBN 0-8147-9755-5.  p. 91
  4. ^ The Times Business Section, Monday 7th December 2003

[edit] References

Articles

[edit] External links

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