NationMaster - Encyclopedia: Race to the bottom

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In government regulation, a race to the bottom is a theoretical phenomenon which occurs when competition between nations or states (over investment capital, for example) leads to the progressive dismantling of regulatory standards. This theory states that this reduction of regulation, welfare, taxes, and trade barriers will increase poverty, and drive the poor to the few remaining areas that retain protections. In the end this theory argues that this will force the last remaining states to drop their protections in order to survive. Image File history File links Information_icon. ... Image File history File links Unbalanced_scales. ... Government regulation involves the use of the law, mandated by the state, to produce outcomes which might not otherwise occur, prevent outcomes which might otherwise occur, produce or prevent outcomes in different places to what might otherwise occur, or produce or prevent outcomes in different timescales than would otherwise occur. ... Invest redirects here. ...

Currently available data does suggest that jobs and capital flow more frequently to states with lower protections, but does not support the notion that these states suffer increased poverty or income inequality. Data also supports the notion that states retaining high protections sustain or increase their poverty in comparison to states reducing the regulatory framework and trade barriers but does not support the argument that this increase in poverty is due to mass immigration of poor. Current data suggests that the mass poor migrate more frequently to the more open states where jobs are more readily available.

1 History
2 Occurrence and limitations
3 Implications
4 Causes and responses
5 Corporate Law
6 Rhetoric
7 Counter-argument
8 Notes
9 See also
10 Further reading

History

The term "Race to the bottom" was coined by US Supreme Court 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. Countries 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 US, when states were competing to attract firms to incorporate in their state--competition described by some of the time as "race to efficency", and others, such as Justice Louis Brandeis, as the "race to the bottom". ^[2] The Supreme Court Building, Washington, D.C. The Supreme Court Building, Washington, D.C., (large image) The Supreme Court of the United States, located in Washington, D.C., is the highest court (see supreme court) in the United States; that is, it has ultimate judicial authority within the United States... Louis Dembitz Brandeis (November 13, 1856 â€“ October 5, 1941) was an American litigator, Supreme Court Justice, advocate of privacy, and developer of the Brandeis Brief. ... A joint stock company is a special kind of partnership. ... Louis Dembitz Brandeis (November 13, 1856 â€“ October 5, 1941) was an American litigator, Supreme Court Justice, advocate of privacy, and developer of the Brandeis Brief. ...

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] Image File history File links Cquote1. ... Image File history File links Cquote2. ...

Occurrence and limitations

The 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. In economics, the theory of comparative advantage (sometimes known as Ricardos Law) explains why it can be beneficial for two parties (countries, regions, individuals and so on) to trade, even though one of them may be able to produce every item more cheaply than the other. ...

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.

In practice, races to the bottom appear to be rarer than some critics of globalisation have feared. States are often willing to maintain regulatory regimes even if they lose certain investment or industries as a result. Globalization is a term used to describe the changes in societies and the world economy that are the result of dramatically increased trade and cultural exchange. ...

Implications

In its early stages, a race to the bottom can be of immediate benefit to all parties, in situations where laws are genuinely and inefficiently burdensome.

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). Workers compensation systems (workers comp or compo) exist to protect employees who have incurred work-related injuries. ... This article should belong in one or more categories. ...

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. Accountability is a concept in ethics with several meanings. ...

Some economists believe, however, that "races to the bottom" can help ameliorate poverty, for if businesses can operate for less money, they can cut prices while maintaining their profit margins. A boy from an East Cipinang trash dump slum in Jakarta, Indonesia shows his find. ... In economics and business, the price is the assigned numerical monetary value of a good, service or asset. ... Profit margin is a measure of profitability. ...

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 US 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 fora, such as the WTO, to set satisfactory environmental and labor rules at a global level. A tariff is a tax on foreign goods. ... The World Trade Organization (WTO, French: Organisation mondiale du commerce, Spanish: OrganizaciÃ³n Mundial del Comercio, German: Welthandelsorganisation) is an international, multilateral organization, which sets the rules for the global trading system and resolves disputes between its member states; all of whom are signatories to its approximately 30 agreements. ... For the Jamaican reggae band, see Third World (band). ... Logo of the World Bank The International Bank for Reconstruction and Development (IBRD, in Romance languages: BIRD), better known as the World Bank, is an international organization whose original mission was to finance the reconstruction of nations devastated by WWII. Now, its mission has expanded to fight poverty by means... The International Monetary Fund (IMF) is an international organization that oversees the global financial system by observing exchange rates and balance of payments, as well as offering financial and technical assistance when requested. ... Market liquidity is a business or economics term that refers to the ability to quickly buy or sell a particular item without causing a significant movement in the price. ...

Another suggested method for avoiding races to the bottom is moral purchasing. Moral purchasing can influence decisions at the level of individual buyers, or it can involve 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. Ethical consumerism is the practice of boycotting products which a consumer believes to be associated with unnecessary exploitation or other unethical behaviour. ... The tax, tariff and trade laws of a political region, state or trade bloc determine which forms of consumption and production tend to be encouraged or discouraged. ...

Standards-based tariffs represent another way to halt a race to the bottom. 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 (this is the price of protecting domestic labour and environmental standards).

Note that since standards-based tariffs only restrain exports from poorer countries to wealthier countries, global implementation would result in free trade between the world's wealthiest countries. Also note that such tariffs would result in free trade between newly-developing countries that had similar labour and environmental standards.

Corporate Law

In the US legal academia, corporate law is conventionally said to be the product of a "race" among states to attract incorporations by making their corporate laws attractive to those who choose where to incorporate. Given that it has long been possible to incorporate in one state while doing business primarily in other states, US states have rarely been able or willing to use law tied to where a firm is incorporated to regulate or constrain corporations or those who run them. (However, US states have long regulated corporations with other laws (e.g., environmental laws, employment laws) that are not tied to where a firm is incorporated, but are based on where a firm does business.)

From the "race" to attract incorporations, Delaware has emerged as the winner, at least among publicly traded corporations. The corporate franchise tax accounts for between 15 and 20 % of the state's budget. Official language(s) None Capital Dover Largest city Wilmington Area Ranked 49th - Total 2,491 sq mi (6,452 kmÂ²) - Width 30 miles (48 km) - Length 100 miles (161 km) - % water 21. ... Franchise tax is a tax charged by some US states to corporations formed in those states based on the number of shares they issue or, in some cases, the amount of their assets. ...

There is a longstanding debate whether US corporate law is subject to a race to the bottom or a race to the top. At the heart of the debate lies the question whether the US states' corporate laws are desirable in their present state or not. Important proponents of the "race to the top" perspective have been Henry Winter, Roberta Romano, Frank Easterbrook and Daniel Fischel. The "race to the bottom" perspective started with an article by William Cary in 1974 and has been developed further most importantly by Harvard Law School Professor Lucian Bebchuk. However, according to a critical appraisal by Harvard Law School Professor Mark Roe, the debate is misconceived, since Delaware's law has been shaped less by competition with other states than by pressure from the federal level. The empirical evidence does not conclusively support any of the theories. Corporations law or corporate law is the law concerning the creation and regulation of corporations. ... The race to the top is self-evidently the opposite of the race to the bottom. ... Henry Winter is football correspondent of the Daily Telegraph, who also writes a column for Four Four Two magazine. ... Frank Hoover Easterbrook (born 1948) is Chief Judge of the United States Court of Appeals for the Seventh Circuit. ... Harvard Law School (HLS) is one of the professional graduate schools of Harvard University. ... Harvard Law School (HLS) is one of the professional graduate schools of Harvard University. ...

In Europe, regulatory competition has long been prevented by the real seat doctrine prevailing in private international law of many EU and EEA member countries, which essentially required companies to be incorporated in the state where their main office was located. However, in a series of cases between 1999 and 2003 (Centros, Überseering, Inspire Art), the European Court of Justice has forced member states to recognize companies chartered in other member states, which is likely to foster regulatory competition in European company law. Private International Law, International Private Law, or Conflict of Laws is that branch of law regulating all lawsuits involving a foreign law element where a difference in result will occur depending on which laws are applied as the lex causae. ... The abbreviation EEA stands for more than one thing. ... The European Court of Justice (ECJ) is formally known as the Court of Justice of the European Communities, i. ...

Rhetoric

The phrase race to the bottom is used sometimes in a pejorative context by those opposed to globalization and those supporting "fair trade" companies. To meet Wikipedias quality standards, this article or section may require cleanup. ... Certified Fairtrade quinoa producers in Ecuador. ...

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-ordinator 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] The references in this article would be clearer with a different and/or consistent style of citation, footnoting or external linking. ...

Counter-argument

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Please see the discussion on the talk page.

Contrary to "race to the bottom advocates" nations lowering trade barriers and abandoning or reducing the regulatory framework have experienced job growth, GDP growth, increases in income equality, increase in GDP per capita, a higher standard of living, lower infant mortality rates, higher literacy rates, greater income equality between genders, lower poverty rates, lower unemployment, shorter lasting periods of poverty for the states most poor, cheaper prices on goods and services, and higher quality goods and services. Far from a race to the bottom lowering trade barriers and regulatory restrictions appears to be a “Stairway to Heaven.“ See, "In Defense of Global Capitalism" by Johan Norberg. Image File history File links Unbalanced_scales. ...

Notes

^ Kelly, John E. (2002). Industrial Relations: critical perspectives on business and management. UK: Routledge. ISBN 0415229863.p. 192
^ ^a ^b Meisel, Nicolas. Governance Culture and Development: A Different Perspective on Corporate Governance. Organisation for Economic Co-operation and Development. ISBN 9264017275. p. 41
^ ^a ^b ^c Schram, Sanford F. (2000). After Welfare: The Culture of Postindustrial Social Policy. NYU Press. ISBN 0814797555. p. 91
^ The Times business section, Monday 7th December 2003

The Times is a national newspaper published daily in the United Kingdom since 1785, and under its current name since 1788. ...

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