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Race to the bottom

In government regulation, a race to the bottom is said to occur when competition between nations (over investmentcapital, for example) leads to the progressive dismantling of regulatory standards. It may be used also in a more general sense of evolutionary trends gravitating to the lowest common denominator.

Inhaltsverzeichnis

1 Occurrence and limitations
2 Implications
3 Causes and responses
4 Corporate Law
5 Rhetoric
6 References
7 See also

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.

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.

However, this phenomenom lives mostly in the claims of the opponents of globalization. In reality, the standard in capitalist countries have been strengthened much more then weakened, also during the past few decades. Therefore, the implications listed below do seem to apply very modestly.

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 standardssuch as workers' compensation, or to raise taxationin order to fund social services and correct externalities(such as pollution and social degradation).

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.

Some economists believe, however, that "races to the bottom" can help ameliorate poverty, for if businesses can operate for less money, they can cut priceswhile maintaining their profit margins.

Causes and responses

The dismantling of tariffsand other trade barriers, facilitated by the rules set within the World Trade Organization, and encouraged (in the South) by US influence through the World Bankand the International Monetary Fund, may have removed an important constraint on races-to-the-bottom; without protected domestic industries, countries are more dependent on liquidinvestment capital. One solution to this problem is to employ international fora, such as the WTO itself, to set satisfactory environmental and labor rules at a global level. To date, however, the WTO has proved ineffective in addressing these problems.

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 tradesanctions to nations that permit the export of offensive goods, re-directing revenues raised from such tax or tariff to combating abuses.

Corporate Law

In the US legal academia, there is a longstanding debate whether US corporate lawis subject to a race to the bottom or a race to the top. Given that it has always been possible to incorporate in one state and do business primarily elsewhere, US states have rarely been able or willing to use corporate law to protect the interests of shareholders, creditors, employees and other corporate constituencies. From the "race" to attract incorporations, Delawarehas emerged as the winner, at least among publicly traded corporations. The corporate franchise taxaccounts for between 15 and 20 % of the state's budget. At the heart of the debate lies the question whether the US states' corporate law is desirable in its present state or not. The most important proponents of the "race to the top" perspective have been Henry Winter, Roberta Romano, Frank Easterbrookand Daniel Fischel. The "race to the bottom" perspective started with an article by William Caryin 1974 and has been developed further most importantly by Lucian Bebchuk. However, according to a recent critical appraisalby Mark Roe, the debate is misconceived, since Delaware's law has less been shaped by competition with other states, but by pressure from the federal level. The empirical evidence does not conclusively support any of the theories.

In Europe, regulatory competition has long been prevented by the real seat doctrineprevailing in private international lawof many EUand EEAmember 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 Justicehas forced member states to recognize companies chartered in other member states, which is likely to foster regulatory competition in European company law.

Rhetoric

The phrase race to the bottom is used sometimes in a pejorative context by those opposed to globalizationand 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-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." [1]

References

The Times business section, Monday 7th December 2003