THE RACE TO THE BOTTOM HYPOTHESIS:
AN EMPIRICAL AND THEORETICAL REVIEW
Daniel W. Drezner
The Fletcher School
Tufts University
December 2006
The prediction
The race-to-the-bottom (RTB) hypothesis has been a common public critique of
economic globalization. As David Vogel and Robert Kagan observe, “The political
influence of the ‘race to the bottom imagery has been considerable.”1 This approach
combines a positive theory of regulation with a strong normative disapproval of the
predicted outcome.2 This theory assumes that the pressure for convergence comes from
the mobility of trade and capital flows,3 and that the size of these flows overwhelms the
ability of the state to act contrary to market forces. In the past thirty years, capital has
become increasingly footloose, to the point where states cannot halt capital mobility even
1
David Vogel and Robert Kagan, eds., The Dynamics of Regulatory Change: How Globalization Affects
National Regulatory Policies (Berkeley: University of California Press, 2004), p. 2.
2
For accessible overviews of the argument, see Richard McKenzie and Dwight Lee, Quicksilver Capital
(New York: Free Press, 1991); Richard Falk, “State of Seige: Will Globalization Win Out?” International
Affairs 73 (January 1997): 123-136; Alan Tonelson, The Race to the Bottom (Boulder: Westview Press,
2000).
3
Though the RTB hypothesis focuses largely on capital flows, traded goods act as a proxy for more
efficient capital investments made in other countries.
2
if they tried.4 In such a world capital will seek the location where it can earn the highest
rate of return. High rates of corporate taxation, strict labor laws, or rigorous
environmental protection lower profit rates by raising the costs of production. Capital
will therefore engage in regulatory arbitrage, moving to (or importing from) countries
with the lowest regulatory standards. States, fearing a loss of their tax base, have no
choice but to lower regulatory standards in order to avoid capital flight.
History, scope and predictions
While some scholarly advocates for this approach still exist, its current
prominence is largely due to its long intellectual history and its recurrent popularity
among the commentariat. Scholars in the social sciences have been fretting about races
to the bottom for centuries. Adam Smith warned in The Wealth of Nations about limits to
the state’s power to tax mobile factors of production:
“The proprietor of stock is a citizen of the world, and is not necessarily
attached to any particular country. He would be apt to abandon the
country in which he was … assessed to a burdensome tax, and would
remove his stock to some other country where he could either carry on his
business or enjoy his fortune more at his ease. By removing his stock he
would put an end to all the industry which it had maintained in the country
which he left.”5
See John Goodman and Louis Pauly, “The Obsolescence of Capital Controls?” World Politics 46, No. 1
(1993), pp. 50-82; Sebastian Edwards, “How Effective are Capital Controls?” Journal of Economic
Perspectives 13, No. 1 (1999): 65-84.
5
Adam Smith, The Wealth of Nations, (New York: The Modern Library, 1937), p. 800. On other 18 th and
19th century fears about globalization, see Samir Amin, “The Challenge of Globalization,” Review of
International Political Economy 3, No. 3 (1996), pp. 216-259; Emma Rothschild, “Globalization and the
Return of History,” Foreign Policy No. 115 (1999): 106-116.
4
3
More recently, scholars across the social sciences have put forward variations of the RTB
hypothesis. Economists have extended this hypothesis in models of regional
policymaking in a federal state.6 Political scientists that focus on the structural
dependence of the state on capital have made similar arguments on the effect of
globalization on state policies, echoing Marxist theories of the state.7 Business school
professors have used a version of this hypothesis to explain why corporations with
mobile factors of production can ensure a friendly regulatory environment.8 Legal
scholars have also used this model to argue against decentralizing regulatory powers to
lower-level jurisdictions.9
Scholars that posit the race to the bottom usually marry the RTB hypothesis to a
pronounced normative disapproval of the outcome.10 Karl Polanyi offered the most
eloquent description of the effects of a race to the bottom. His thesis in The Great
Transformation was that once the market is permitted to organize some of society, the
inevitable result was a society operating as an adjunct to the market.11 He argued that
this inevitably leads to a race to the bottom: “To allow the market mechanism to be sole
director of the fate of human beings… would result in the demolition of society….
Charles Tiebout, “A Pure Theory of Local Expenditures,” Journal of Political Economy 64, No. 5 (1956),
pp. 416-424
7
Charles Lindblom, Politics and Markets (New York: Basic Books, 1977); Robert Bates and Da-Hsiang
Donald Lien, “A Note on Taxation, Development, and Representative Government,” Politics & Society 14,
No. 1 (1985), pp. 53-70; Adam Przeworski and Michael Wallerstein, “Structural Dependence of the State
on Capital,” American Political Science Review 82, No. 1 (1988), pp. 11-29; Wallerstein and Przeworski,
“Capital Taxation with Open Borders,” Review of International Political Economy 2, No. 3 (1995), pp.
425-445.
8
Dale Murphy, The Structure of Regulatory Competition: Corporations and Public Policies in a Global
Economy (New York: Oxford University Press, 2004).
9
William L. Cary, “Federalism and Corporate Law: Reflections upon Delaware,” Yale Law Journal 83,
No. 4 (1974), pp. 663-705.
10
There are some exceptions. Libertarians and public choice theorists argue that “jurisdictional
competition” has welfare-enhancing and democracy-enhancing effects. See Viktor Vanberg,
“Globalization, Democracy, and Citizens’ Sovereignty: Can Competition Among Governments Enhance
Democracy?” Constitutional Political Economy 11 (Winter 2000): 87-112.
11
Karl Polanyi, The Great Transformation (Boston: Beacon Press, 1944), p. 57.
6
4
Nature would be reduced to its elements, neighborhoods and landscapes defiled, rivers
polluted, military safety jeopardized, the power to produce food and raw materials
destroyed.”12
During the current era of globalization, public intellectuals have been enthusiastic
promoters of the RTB hypothesis. Arthur Schlesinger, Jr., argued in the pages of Foreign
Affairs that, “the computer turns the un-trammeled market into a global juggernaut
crashing across frontiers, enfeebling national powers of taxation and regulation…
dragging down labor standards” and “denying nations the shaping of their own economic
destiny”. Alan Tonelson avers, “current globalization policies have plunged a great
majority of workers into a great worldwide race to the bottom, into a no-win scramble for
work and livelihoods with hundreds of millions of their already impoverished
counterparts across the globe”.13
Politicians, particularly in the developed world, have also embraced this belief. In
a recent example, U.S. Senators Byron Dorgan and Sherrod Brown argued in a
Washington Post op-ed that, “The new mobility of capital and technology, coupled with
the revolution in information technology, makes production of goods possible throughout
much of the world…. The result has been a global race to the bottom as corporations troll
the world for the cheapest labor, the fewest health, safety and environmental regulations,
and the governments most unfriendly to labor rights.” Implicitly or explicitly, this theory
12
Ibid, p. 73.
Arthur Schlesinger, Jr., “Has Democracy a Future?” Foreign Affairs, New York, September/October
1997, pp. 7-8, and Alan Tonelson, The Race to the Bottom (Boulder: Westview Press, 2000), p. 15. See
also Robert Kuttner, “Rules That Liberate,” The American Prospect, May 1997, and William Greider, “A
New Giant Sucking Sound,” The Nation, December 31, 2001. For why public intellectual prognostications
should not necessarily be taken at face value, see Richard Posner, Public Intellectuals: A Study of Decline
(Cambridge: Harvard University Press, 2001).
13
5
is at the root of most of the anti-globalization sentiment voiced in Seattle and
elsewhere.14
The specific predictions of the race-to-the-bottom hypothesis are clear and
concise. If globalization really does induce a race to the bottom in regulatory standards,
three trends should be observed. First, countries that are more open to trade and
investment should have fewer regulations affecting the costs of production. Once
barriers to trade and investment are lowered, nation-states must cope with the threat of
capital exit in response to burdensome regulations. Over time, more open economies
should have lax regulatory standards. Second, there should be a strong negative
correlation between inward capital flows and the rigor of a country’s regulatory
standards. The core of this hypothesis is that corporations, being profit maximizers, will
locate to areas where the costs of production are minimized. Since a stricter regulatory
standard presumably raises the costs of production, corporations will seek the lowest
possible standards in which to produce.15 Third, when one government lowers its
14
Jeffry Frieden, Global Capitalism: Its Fall and Rise in the Twentieth Century (New York: W.W.
Norton, 2006), pp. 466-468. For specific examples, see Lori Wallach and Michelle Sforza, Whose Trade
Organization? Corporate Globalization and the Erosion of Democracy (Washington: Public Citizen,
1999); Jerry Mander and Edward Goldsmith, eds., The Case Against The Global Economy (San Francisco:
Sierra Club Books, 1996); Robin Broad, ed., Global Backlash: Citizen Initiatives for a Just Economy (New
York: Rowan & Littlefield, 2002).
15
RTB predictions about the welfare state more generally are mixed. Scholars such as Dani Rodrik, Sven
Steinmo, and Peter Katzenstein point out that increased exposure to global markets should generate more
demands on the welfare apparatus, because of the distributional effects of globalization. This implies that
welfare expenditures should be positively correlated with globalization, which is what Rodrik finds.
However, RTB theorists point out that states are constrained from raising the revenue to finance these
demands due to a race to the bottom in the taxation of mobile factors of production, and the reluctance of
capital markets to extend credit to countries that run persistent budget deficits. This makes point
predictions difficult, since at different stages of this argument, state expenditures are increasing, then
budget deficits are increasing, and then welfare expenditures are declining. See Rodrik, Has Globalization
Gone Too Far?; Sven Steinmo, “The End of Redistribution? International Pressures and Domestic Tax
Policy Choices,” Challenge 37, No. 6 (1994), pp. 9-17; Peter Katzenstein, Small States in World Markets,
(Ithaca: Cornell University Press, 1985). Finally, Layna Mosley’s research suggests that capital markets
do not particularly care about welfare expenditures or taxation, because “the more micro-side a policy
indicator is, the less important it is to long-term interest rate levels.” Layna Mosley, “Room to Move:
6
regulatory standards to attract greater investment, other open economies will follow suit.
According to the RTB hypothesis, states have no choice but to lower their standards or
face the perils of capital exit.
The evidence
There are a number of regulatory arenas where the race to the bottom is
hypothesized to occur, but the bulk of the empirical work has focused on labor and
environmental regulations. Policy journals are replete with claims that globalization is
causing downward pressure on wages and a race to the bottom in labor and
environmental standards.16 The evidence strongly suggests that these assertions are flatly
wrong.
If the RTB hypothesis is true for labor standards, one would expect to find
worsening standards in those countries most exposed to trade and foreign investment.
The effect should be especially pronounced in export processing zones (EPZs). These are
geographically bounded areas commonly established in less developed countries to attract
foreign investment. To invest in these areas, governments offer inducements such as
duty-free imports and exports, infrastructure investment, and reduced regulatory
interference. This could include exempting the EPZ from any labor and environmental
legislation. Naomi Klein argues that, “with seventy countries competing for the exportInternational Financial Markets and National Welfare States,” International Organization 54 (Autumn
2000), p. 760.
16
See, for example, Kathleen Newland, “Workers of the World, Now What?” Foreign Policy No. 114
(1999), pp. 52-65; Ethan Kapstein, “Workers and the World Economy,” Foreign Affairs 75, No. 3 (1996),
pp. 16-24.
7
processing-zone dollar, the incentives to lure investors are increasing and the wages and
standards are being held hostage to the threat of departure. The upshot is that entire
countries are being turned into industrial slums and low-wage ghettos, with no end in
sight.”17 If there is a race to the bottom, it should be most pronounced in EPZs.
There is little empirical evidence to support the race-to-the-bottom hypothesis.
Anecdotal examples can be given of corporations moving production to countries
because of cheap labor and, implicitly, lax labor standards.18 These observations
contrast, however, with other cases in which such standards are immaterial to the choice
of investment locale.19 A 1996 OECD report reviewing this issue concluded: “There is
no evidence that freedom-of-association rights worsened in any of the countries that
liberalized trade…. The strongest finding is that there is a positive correlation between
successfully sustained trade reforms and improvements in core standards.”20 A follow-up
report in 2000 came to the same conclusion.21
The data on export processing zones also fails to support the image of a race to
the bottom. Some countries – Pakistan, Bangladesh, Panama, and Zimbabwe – exempt
their EPZs from regulation covering core labor standards. However, contrary to the RTB
hypothesis, this failed to put pressure on other countries to relax labor standards in their
EPZs. Several countries, including the Dominican Republic and the Philippines, reversed
17
Naomi Klein, No Logo (London: Flamingo, 2000), p. 208. Quoted in Martin Wolf, Why Globalization
Works (New Haven: Yale University Press, 2004), p. 240.
18
See, for example, International Confederation of Free Trade Unions, “Behind the Wire: Anti-Union
repression in the export processing zones,” <http://www.icftu.org/english/tncs/etnexpzo.html>, accessed
January 26, 2000.
19
Debora Spar, “Attracting High Technology Investment: Intel's Costa Rican Plant,” FIAS Occasional
Paper No. 11, World Bank, Washington DC, April 1998.
20
Organization for Economic Cooperation and Development, Trade, Employment, and Labour Standards:
A Study of Core Workers’ Rights and International Trade (Paris, OECD, 1996).
21
International Trade and Core Labour Standards (Paris: OECD, 2000).
8
course in the mid-nineties, introducing labor standards in their EPZs when none
previously existed.22
Statistical tests support these assessments. The only studies to find a negative
correlation between ratification of core labor standards and export performance failed to
include any control variables.23 Dani Rodrik regressed textile exports (as a measure of
labor-intensive activity) against an array of labor and human rights standards, as well as
several control variables. He found that labor standards had no consistent effect on the
pattern of exports.24 Later studies have also demonstrated a weak to non-existent
correlation between labor standards and export patterns.25
There is no evidence that corporations direct their investment to countries that
have lower labor or environmental standards. The bivariate relationship between foreign
direct investment and labor standards is strongly positive, given that in the past decades
more than 90% of FDI occurs in OECD countries, which have the highest labor
standards.26 Multivariate tests show no correlation between foreign direct investment and
labor standards.27 An International Labor Organization report reveals no evidence that
22
Dorsati Madami, A Review of the Role and Impact of Export Processing Zones, Policy Research Working
Paper No. 2238 (Washington, DC: World Bank, 1999), p. 49.
23
Jai S. Mah, “Core Labor Standards and Export Performance in Developing Countries.” The World
Economy 20 (September 1997): 773-785.
24
Dani Rodrik, “Labor Standards in International Trade: Do They Matter and What Do We Do About
Them?” In Robert Z. Lawrence, Dani Rodrik and John Whalley, eds., Emerging Agenda for Global Trade
(Washington: Johns Hopkins University Press, 1996).
25
Cees Van Beers, “Labour Standards and Trade Flows of OECD Countries,” The World Economy 21, No.
1 (1998), pp. 57-73; Robert J. Flanagan, “Labor Standards and International Competitive Advantage,”
presented at The International Labor Standards Conference, Stanford University, Stanford, CA, May 2002.
For a summary of this literature, see Drusilla K. Brown, “International Trade and Core Labor Standards,”
Discussion Paper 2000-05, Department of Economics, Tufts University, Medford, MA, January 2000.
26
OECD, Trade, Employment, and Labour Standards; Paul Q. Hirst and Grahame Thompson,
Globalization in Question, second edition (Cambridge: Polity Press, 1999). See also David Vogel,
Trading Up (Cambridge: Harvard University Press, 1995).
27
Nathan Jensen, Nation-Sates and the Multinational Corporation: A Political Economy of Foreign Direct
Investment (Princeton, NJ: Princeton University Press, 2006); Dani Rodrik, “Globalization and Labor,” in
Richard Baldwin et al eds., Market Integration, Regionalism, and the Global Economy (Cambridge:
9
countries with strong trade union presence have suffered any loss of investment in their
EPZs.28 A World Bank survey notes a strong positive correlation between higher
occupational safety and health conditions and foreign investment in EPZs. In-depth
reviews of EPZs where labor standards are abused reveal that the problem is insufficient
access to the global economy. As EPZs attract a greater number of foreign investors,
labor conditions improve across the entire zone.29
The evidence is similarly weak when environmental conditions are analyzed.
Statistically, two categories of tests have been tried. The first type tries to determine if
environmental regulations adversely affects trade patterns. If this is true, it would
support one leg of the RTB hypothesis, that strict environmental standards weaken the
competitiveness of industry. The second type tests whether firms choose their investment
locations based upon environmental regulations.
The evidence on how environmental regulations affect competitiveness provides
no encouragement for the race-to-the-bottom hypothesis. A battery of studies testing
whether environmental regulations negatively affected economy-wide export
performance in the seventies and eighties conclude there is no correlation.30 Using more
recent data, only one study finds environmental regulations to have a statistically
Cambridge University Press, 1999); Hye Jee Cho, “Political Risk, Labor Standards and Foreign Direct
Investment.” Paper presented at UCLA’s CIBER Doctoral Reseach Seminar, Ventura, CA, June 2002.
28
International Labour Organization, Labour and social issues relating to export processing zones.
(Geneva: ILO, 1998).
29
Ana Teresa Romero, “Labour Standards and Exports Processing Zones: Situation and Pressures for
Change”, Development Policy Review 13 (1995): 247-276; Theodore Moran, Beyond Sweatshops: Foreign
Direct Investment and Globalization Developing Countries (Washington: Brookings Institution, 2002).
30
J.M. Dean, “Trade and the Environment: A Survey of Literature.” in Patrick Low, ed.., International
Trade and the Environment (Washington, DC: World Bank, 1992); Adam B. Jaffe, Steven R. Peterson,
Paul R. Portney, and Robert N. Stavins, “Environmental Regulation and the Competitiveness of U.S.
Manufacturing.” Journal of Economic Literature 33 (March 1995): 132-63.
10
significant effect on the pattern of exports of OECD countries.31 This result has not held
up to alternative specifications, however, suggesting it is not particularly robust.32
Analyses at the intra-industry level, which permit more precise testing of industries that
are heavy polluters, also fail to support the RTB hypothesis.33
Tests of investment decisions yield similar findings. Again, anecdotes exist of
countries – such as Ireland – purposefully lowering environmental standards in order to
attract dirty industries. However, there is no appreciable evidence that other countries
adopted this strategy in response to Ireland’s success.34 Looking at export processing
zones, a World Bank study concludes that EPZ environmental laws are roughly
consistent with host country legislation.35 Repeated statistical tests at the international
level fail to find robust support for the RTB dynamic in explaining investment
decisions.36
Cees van Beers and J.C.J.M. van der Bergh, “An Empirical Multi-country Analysis of the Impact of
Environmental Regulations on Foreign Trade Flows,” Kyklos 50 (February 1999): 29-46.
32
Mark N. Harris, László Kónya, and László Mátyás, “Modelling the Impact of Environmental Regulations
on Bilateral Trade Flows.” The World Economy 25 (March 2002): 387-405.
33
James Tobey, “The Impact of Domestic Environmental Policies on Patterns of World Trade.” Kyklos 43
(May 1990): 191-209; Ravi Ratnayake, “Do Stringent Environmental Regulations Reduce International
Competitiveness?” International Journal of the Economics of Business 5 (February 1998): 97-118.
34
H. Jeffrey Leonard, Pollution and the struggle for the world product: multinational corporations,
environment, and international comparative advantage (Cambridge: Cambridge University Press, 1988);
Candice Stevens, “Do Environmental Policies Affect Competitiveness?” OECD Observer No. 183 (1993),
pp. 22-25.
35
Madami, A Review of the Role and Impact of Export Processing Zones, p. 50. It should be noted,
however, that these countries are far from paragons of environmental protection.
36
Gunnar Eskeland, and Ann Harrison, “Moving to greener pastures? Multinationals and the
pollution-haven hypothesis,” World Bank Policy Research Working Paper No. 1744, March 1997; Raman
Letchumanan and Fumio Kodama, “Reconciling the conflict between the ‘pollution-haven’
hypothesis and an emerging trajectory of international technology transfer.” Research Policy, 29 (2000):
59-79; David Wheeler, “Racing to the Bottom? Foreign Investment and Air Quality in
31
Developing Countries.” Journal of Environment and Development 10 (September 2001)
225-245; Beata K. Smarzynska and Shang-Jin Wei, “Pollution Havens and Foreign
Direct Investment.” NBER Working Paper No.8465, September 2001; Josh Ederington,
Arik Levinson, and Jenny Menier, “Trade Liberalization and Pollution Havens,” NBER
Working Paper No. 10585, June 2004. For an exception, see Yuquing Xing and Charles Kolstad,
“Do Lax Environmental Regulations Attract Foreign Investment?” Envoronmental and Resource
Economics 21 (January 2002): 1-22.
11
Indeed, there is some support for the opposite hypothesis: greater exposure to
globalization leads to greater environmental protections. Nancy Birdsall and David
Wheeler, examining the bivariate relationship between trade openness and environmental
pollution in Latin America, conclude that the pollution-intensive industries were more
likely to be located in the most protectionist countries.37 This correlation could be a
function of the environmental Kuznets curve.38 If access to global markets leads to
greater economic development, and development leads to greater environmentally
protections, then globalization leads to a race to the top.39 Data on U.S. foreign direct
investment in developed and developing countries reveals that U.S. firms invested a
greater percentage of pollution-intensive industries in the countries with stricter
environmental standards.40 In a 1996 review essay, Arik Levinson concludes: “The
conclusions of both the international and domestic studies of industry location are that
environmental regulations do not deter investment to any statistically or economically
significant degree.”41 Reviewing the literature eight years later, Martin Wolf concurs:
Nancy Birdsall and David Wheeler, “Trade Policy and Industrial Pollution in Latin America: Where are
the Pollution Havens?” Journal of Environment and Development 2, No. 1 (1993), pp. 137-149.
38
Gene Grossman and Alan Krueger, “Economic Growth and the Environment,” NBER Working Paper
#4634, February 1994; Thomas Selden and Daqing Song, “Environmental Quality and Development: Is
there a Kuznets Curve for Air Pollution Emissions?” Journal of Environmental Economics and
Management 27 (September 1994): 147-162.
39
Vogel, Trading Up; Daniel T. Griswold, “Trade, Labor, and the Environment.” Trade Policy Analysis
No. 15, Cato Institute, Washington, DC, August 2001. This phenomenon will be discussed more in the
next chapter.
40
Repetto, Jobs, Competitiveness and Environmental Regulation; C. Leigh Anderson and Robert Kagan,
“Adversarial Legalism and Transaction Costs: The Industrial Flight Hypothesis Revisited,” International
Review of Law and Economics 20 (January 2000): 1-19.
41
Arik Levinson, “Environmental Regulations and Industry Location: International and Domestic
Evidence,” in Jagdish Bhagwati and Robert Hudec, eds., Fair Trade and Harmonization: Prerequisites for
Free Trade? (Cambridge: MIT Press, 1996). The evidence at the U.S. domestic level is more mixed than
Levinson acknowledges. Levinson finds that strict regulations minimally deter investment. Increases in
regulation by one standard deviation leads to, at most, a 1.8% decline in investment. However, a more
recent analysis at the county level, however, does generate support for the RTB hypothesis. See Arik
Levinson, “Environmental regulations and manufacturers’ location choices,” Journal of Public Economics
62, No.1 (1996), pp. 5-29; Randy Becker and Vernon Henderson, “Effects of Air Quality Regulation on
Polluting Industries.” Journal of Political Economy 108 (April 2000): 379-421.
37
12
“The great bulk of foreign direct investment continues to go to countries with high labour
costs and strong regulatory regimes, not least on the environment.”42
There have been three empirical responses to the lack of supporting evidence for
the RTB hypothesis. One claim is that the RTB effect may not be economy-wide but
nevertheless occurs in specific sectors. For example, the strongest evidence for the race
to the bottom comes from looking at the case of shipping standards.43 Most shipping
firms reregistered their ships in countries such as Liberia and Panama that established
“flags of convenience,” with lax inspection regimes and poor labor safeguards.44
However, the story does not end there. First, OECD countries refused to lower their
regulatory standards for shipping, preventing a true race to the bottom. Second, for
regulatory issues of concern – preventing oil spills, protecting dolphins, and improving
labor rights on the high seas – countries that house flags of convenience have been
increasing their standards over the past decade in response to pressure from the
developed world.45
The second empirical response is to argue that even if there is no race to the
bottom per se, globalization has generated forms of “competition-in-laxity” or
“regulatory chill.”46 This line of argument posits that in a counterfactual world with less
globalization, there would be greater regulatory stringency for a given issue area.
However, even proponents of this view acknowledge that the empirical barriers to
42
Wolf, Why Globalization Works, p. 233.
Elizabeth DeSombre, Flagging Standards: Environmental, Safety, and Labor Regulations at Sea
(Cambridge: MIT Press, 2006); Murphy, The Structure of Regulatory Competition, chapter two.
44
William Langewiesche, The Outlaw Sea: A World of Freedom, Chaos, and Crime (New York: North
Point Press, 2004).
45
DeSombre, Flagging Standards; Ronald Mitchell, “Regime Design Matters: Intentional Oil Pollution
and Treaty Compliance.” International Organization 48 (Summer 1994): 425-458.
46
Murphy, The Structure of Regulatory Competition, p. 7.
43
13
demonstrating this type of RTB phenomenon are formidable. As Dale Murphy points
out, the evidence for phenomena such as regulatory chill are “elusive.”47
The third empirical response is to suggest that even if the conditions for a race to
the bottom have not existed in the past, they will exist in the future. For example, both
mainstream economists and management theorists have posited that the explosion of
offshoring and global sourcing is one harbinger of the disintegration of production
necessary for races to the bottom to take place.48 Simply put, this thesis is impossible to
falsify until the future is now. However, it is worth observing that the very management
consultants who have hyped the offshoring phenomenon have also concluded that the
transition to a truly global labor market – and the extent of global labor arbitrage – will
be gradual.49
These empirical objections hint at the possibility that economic globalization has
cast a slight pall on the upwards ratchet of regulatory stringency in the developed world.
Even if one were to faithfully accept this possibility, however, there is no compelling
evidence to support the assertion that globalization leads to a race to the bottom in
regulatory standards. The few statistical studies that support the RTB hypothesis are not
robust. Even in the sectors where a few states lower their standards as a gambit to attract
47
Ibid.
Alan Blinder, “Offshoring: The Next Industrial Revolution?” Foreign Affairs 85 (March/April 2006):
113-128; David J. Levy, “Offshoring in the New Global Political Economy,” Journal of Management
Studies 42 (May 2005): 685-693; Stephen S. Cohen and J. Bradford DeLong, “Shaken and Stirred,” The
Atlantic Monthly 295 (January/February 2005): 112-117; Richard Freeman, “What Really Ails Europe
(And America): The Doubling of the Global Workforce,” The Globalist, May 2005, accessed at
http://www.theglobalist.com/StoryId.aspx?StoryId=4542.
49
McKinsey Global Institute, The Emerging Global Labor Market, June 2005. Accessed at
http://www.mckinsey.com/mgi/publications/emerginggloballabormarket/Part1/Index.asp. See also Diana
Farrell and Andrew Grant, “China’s Looming Talent Shortage,” The McKinsey Quarterly 2005, no. 4; Gary
Gereffi et al, “Framing the Engineering Outsourcing Debate,” Duke University, December 2005.
48
14
capital, other governments did not feel compelled to follow their lead. The race to the
bottom is a dog that does not bark.
It is theoretically possible that a race to the bottom could occur at certain
junctures for some parts of the global economy, in sectors where capital does not rely on
specialized assets or skilled workers. The evidence to date, however, suggests it remains
a theoretical possibility rather than a harbinger of the future. If anything, the reverse
appears to be true. Without the recent wave of globalization, for example, the
exploitation of workers by firms would have been much greater in many parts of the
globe.50
The theoretical flaws
The race to the bottom hypothesis makes several strong assumptions about the
political economy of the nation-state in a world of perfect capital mobility.51 First, it
assumes that corporations will always prefer lower regulatory standards. Second, it
presumes that state regulations impose enough of a burden on producers to affect the
location of production, regardless of differences in labor productivity. Third, it assumes
that the state responds exclusively to the preferences of mobile capital and not to other
constituencies such as voting blocs, bureaucracies, or interest groups. Finally, it assumes
50
Jagdish Bhagwati, In Defense of Globalization (New York: Oxford University Press, 2004); Wolf, Why
Globalization Works; Eric Edmonds and Nina Pavcnik, “Child Labor in the Global Economy,” Journal of
Economic Perspectives 19 (Spring 2005): 199-220.
51
These are best summarized in Miles Kahler, “Modeling Races to the Bottom,” paper presented at the
1998 meeting of the American Political Science Association, Boston, MA. See also Hirst and Thompson,
Globalization in Question, chapter one.
15
that no state has an economy large enough to endow it with market power vis-à-vis global
capital. If this were the case, such a state would be able to set regulatory standards that
raise the costs of investment above the market rate, yet still lure capital because of the
potential profits from locating production in a large market.
There are reasons to questioning all of these assumptions. Corporate preferences
are more nuanced than a simple preference for abject deregulation. Firms will naturally
push for stringent regulations to protect corporate assets. For example, U.S.
multinationals – especially entertainment, computer, pharmaceutical, and chemical
companies – strongly supported the establishment of an intellectual property rights
regime within the WTO. Why was there strong corporate support for a significant
ratcheting up of global standards in this issue area? U.S. firms faced a loss of profits
from third world firms producing unlicensed knock-offs of patented merchandise.52
Multinational firms can also gain a comparative advantage from rigorous
standards, or at least reduce the comparative advantage of competing firms. Corporations
that are used to operating in strict regulatory environments have fewer adjustments to
make if other countries ratchet up their regulatory standards. This gives them a cost
advantage over domestic firms in host countries that raise their standards, providing the
opportunity to expand market share and profits.53 Ronie Garcia-Johnson observed this
behavior in her examination of U.S. chemical firms in Brazil and Mexico.54 Elizabeth
DeSombre shows that although multinational firms may oppose increased regulation in
52
John Braithwaite and Peter Drahos, Global Business Regulation (Cambridge: Cambridge University
Press, 1999), p. 203-4; Susan Sell, Power and Ideas: North-South Politics of Intellectual Property and
Antitrust (Albany: SUNY Press, 1995), p. 130-137; Sell, Private Power, Public Law: The Globalization of
Intellectual Property Rights (New York: Cambridge University Press, 2003).
53
Michael Porter and Claas van der Linde, “Toward a New Conception of the EnvironmentCompetitiveness Relationship.” Journal of Economic Perspectives 9 (Autumn 1995): 97-118.
54
Ronie Garcia-Johnson, Exporting Environmentalism: U.S. Multinational Chemical Corporations in
Brazil and Mexico (Cambridge: MIT Press, 2000).
16
their home country, once such regulations are enacted these firms will often switch their
position on global regulatory standards. These “bootleggers” want all producers to face
the same regulatory constraints internationally as they do domestically, in order to ensure
a level playing field in the global market.55 Developing countries often resist the
enhancement of regulatory standards not to attract foreign capital but to protect domestic
industries, be it automobiles in Indonesia or timber in Canada.56
Multinational corporations could also prefer more stringent regulatory standards if
strict standards are more consistent with a firm’s corporate culture. Economists, political
scientists, and organizational scholars provide numerous motivations for multinational
corporations to develop a strong corporate culture.57 One reason is that, as firms try to
develop globally identifiable brands, they will be sensitive to any regulatory violations
anywhere that could tarnish the brand image.58 Statistical tests show that multinational
firms that establish single global standards for their production processes have higher
market capitalization than firms with disparate national standards.59 Anecdotal evidence
suggests that this is how the CEO’s of multinational corporations think of their
55
Elizabeth DeSombre, Domestic Sources of International Environmental Policy: Industry,
Environmentalists, and U.S. Power (Cambridge: MIT Press, 2000).
56
See Graham, Fighting the Wrong Enemy, p. 143-44 on Indonesia, and Greg Mastel, “A New Chance to
Kill Lumber Subsidies,” National Post, December 15, 2000, on Canada.
57
For the economic motivations, see David Kreps, “Corporate Culture and Economic Theory,” in James
Alt and Kenneth Shepsle, eds., Perspectives on Positive Political Economy (New York: Cambridge
University Press, 1990). For the political origins, see Paul Doremus, William Keller, Louis Pauly, and
Simon Reich, The Myth of the Global Corporation (Princeton: Princeton University Press, 1998). For the
organizational take, see Herbert Simon, Administrative Behavior, Third Edition (New York: Free Press,
1976).
58
The Economist, “Brands: Who’s Wearing the Trousers?” September 8, 2001; Deborah Spar, “The
Spotlight and the Bottom Line,” Foreign Affairs 77 (March/April 1998).
59
Glen Dowell, Stuart Hart, and Bernard Yeung, “Do Corporate Standards Create or Destroy Value?”
Management Science 46 (August 2000): 1059-1074.
17
management style.60 A strong corporate culture will make firms reluctant to have
different national units of a firm adhere to different sets of mores.
There are numerous examples of corporate culture and concern about brand image
affecting business preferences over regulatory standards. By the late nineties, more than
80 multinational enterprises had established social codes of conduct, with an
overwhelming majority of these codes apply to all of a firm’s units and sub-contractors.61
PepsiCo pulled its business out of Myanmar in 1997 because it did not want to be linked
to that country’s repressive regime. General Electric was at the forefront in supporting
the OECD Anti-Bribery Convention because it was uncomfortable with some units of the
firm operating under a different set of ethical standards.62 In the case of environmental
regulation, Aseem Prakash shows how corporate culture explains why some firms exceed
mandated regulatory standards in the United States.63
This vulnerability of multinational corporations to activist pressure leads to a
central irony. Anti globalization activists can shine a powerful spotlight on retrograde
firms that violate core labor standards. Because these groups are successful at exposing
occasional abuses, their claim that globalization leads to systematic abuses is wrong.
For example, the chairman of the German insurance firm Allianz wrote in a Financial Times op-ed: “At
Allianz, the head office sees its role as defining the group’s regulatory framework, setting group strategy
and financial objectives. How to service local markets, however, is left up to our local subsidiaries. They
know their markets much better than the central office in Munich.” Henning Schulte-Noell, “Europe Must
Clarify It’s Goals,” Financial Times, 2 June 2002.
61
Ans Kolk, Rob van Tulder and Carlijn Welters, “International Codes of Conduct and Corporate Social
Responsibility: Can Transnational Corporations Regulate Themselves?” Transnational Corporations, Vol.
8, April 1999, pp. 143-80. For a critique of such codes, as well as the corporate social responsibility
movement more generally, see Aaron Chatterji and Siona Listokin, “Corporate Social Irresponsibility,”
Democracy: A Journal of Ideas 3 (Winter 2007): 52-63.
62
Kenneth Abbott and Duncan Snidal, “Values and Interests: Rational Choice and the Use of International
Legalization to Fight Corruption,” Paper prepared for a Conference on “Rational Choice and International
Law,” University of Chicago Law School, April 27-28, 2001.
63
Aseem Prakash, Greening the Firm: The Politics of Corporate Environmentalism (Cambridge:
Cambridge University Press, 2000).
60
18
The race to the bottom hypothesis also assumes that states respond only to the
preferences of owners of capital. This assumption has a long tradition in political
science, stretching back to The Communist Manifesto and including extensive writings in
comparative politics about the structural dependence of the state on capital.64 There are
several ways to vitiate this assumption, however. First, even relatively simple formal
models of multiple governments trying to attract investment in a world of mobile capital
do not produce race to the bottom effects. Ronald Rogowski shows that in a world of
mobile capital, states that start out unfriendly to investment become even more hostile in
a borderless economy.65 Second, the assumption ignores the effects of democratic
political institutions upon state responses to globalization. There is evidence that
democracies respond to globalization by increasing resources for consumer, labor, and
environmental protection.66 Furthermore, political institutions can insulate state decisionmaking from changes in the economic environment.67
The final assumption that all states are price takers vis-à-vis capital holds true for
a majority of states in the international system. It does not necessarily hold for the great
64
See Charles Lindblom, Politics and Markets (New York: Basic Books, 1977); Robert Bates and DaHsiang Donald Lien, “A Note on Taxation, Development, and Representative Government,” Politics &
Society 14, No. 1 (1985), pp. 53-70; Adam Przeworski and Michael Wallerstein, “Structural Dependence of
the State on Capital,” American Political Science Review 82, No. 1 (1988), pp. 11-29; Wallerstein and
Przeworski, “Capital Taxation with Open Borders,” Review of International Political Economy 2, No. 3
(1995), pp. 425-445.); Daniel W. Drezner, “Globalizers of the World, Unite!” The Washington Quarterly
21 (Winter 1998): 209-225.
65
Ronald Rogowski, “Globalization Without Governance: Implications of Tiebout Models in a World of
Mobile Factors.” Presented at the 2000 annual meeting of the American Political Science Association,
Washington DC, September 2000.
66
Dani Rodrik, Has Globalization Gone Too Far? (Washington: Institute for International Economics,
1997).
67
Peter Katzenstein, Small States in World Markets (Ithaca: Cornell University Press, 1985); Geoffrey
Garrett and Peter Lange, “Internationalization, Institutions, and Political Change,” in Robert Keohane and
Helen Milner, eds., Internationalization and Domestic Change (Cambridge: Cambridge University Press,
1996); Scott Basinger and Mark Hallerberg, “Remodeling the Competition for Capital: How Domestic
Politics Erases the Race-to-the-Bottom,” presented at the 2000 annual meeting of the American Political
Science Association, Washington, DC.
19
powers, however. Consumption has gone global along with production; multinational
firms base their investment decisions not just on likely production costs, but also on
access to sizable markets. States with large internal markets can use access to those
markets as a lever over multinational corporations. This is particularly true after foreign
direct investment has taken place. Firms with specific assets in the host country face
large losses if they choose not to comply with that state’s regulatory standards. In states
with large export markets, key suppliers, or production platforms, firms are more likely to
make regulatory concessions than other states. The economic sanctions literature
confirms these suppositions. George Shambaugh shows that foreign firms are far more
likely to comply with the extraterritorial application of U.S. laws when they rely on the
U.S. as a significant export market.68 This holds true even if the firm’s home government
opposes the sanctions.
The desire to locate production in sizeable markets shows up in the data on
American FDI. A 1996 survey by the U.S. Department of Commerce found that more
than sixty percent of the production of U.S. corporate affiliates in developing countries is
sold locally in the host country markets; less than twenty percent is exported back to the
United States. In Mexico, which provides an ideal platform for re-exporting to the United
States, only 28 percent of production by U.S. affiliates is exported to the United States;
more than two-thirds is marketed in Mexico.69 The great fear of the race-to-the-bottom
crowd—that multinational corporations locate production facilities in developing
countries, extract local resources, and then re-export back to the developed world – has
68
George Shambaugh, States, Firms, and Power (Albany: SUNY Press, 1999).
Raymond J. Mataloni Jr., and Mahnaz Fahim-Nader, “Operations of U.S. Multinational Companies,” at <
http://www.bea.doc.gov/bea/ai/1296iid/maintext.htm>, accessed July 31, 2000. Tonelson challenges this
data in The Race to the Bottom, chapter 5.
69
20
not materialized. In fact, that type of activity characterizes less than ten percent of total
U.S. investment abroad.70
Conclusion
It is impossible to state definitively that there will be no race to the bottom in the
future. However, there is little evidence to support the allegation that a race to the bottom
is currently taking place with regard to labor or environmental standards.71 The research
arms of multiple international organizations – the OECD, ILO, and the World Bank, to
name three – have conducted studies investigating the claims that trade liberalization
reduces regulatory standards, and found no support for the proposition. Academic
analyses have come to the same conclusion. Indeed, if anything, there appears to be a
positive relationship between trade flows, foreign direct investment, and effective
regulation.
Ibid. See also Daniel W. Drezner, “Bottom Feeders.” Foreign Policy 121 (November/December 2000):
64-70.
71
This does not mean that globalization does not exert a downward effect on wages. Indeed, neoclassical
trade theory would predict this effect. Its magnitude, however, remains an open question. In 1998 the
President’s Council on Economic Advisors concluded that trade was responsible for at most 10-15 percent
of the increase in wage inequality during the 1980s (Economic Report of the President Washington, DC:
U.S. Government Printing Office, 1998, p. 241). Robert Lawrence and Matthew Slaughter go further,
pointing out that when alternative explanations – such as technological innovation and investments in
education – are factored into the equation, trade is found to have “nothing to do with the slow increase in
average compensation.” Robert Z. Lawrence and Matthew Slaughter, “International Trade and American
Wages in the 1980s: Giant Sucking Sound or Small Hiccup?” Brookings Papers on Economic Activity,
No. 2, 1993, p. 165. See also Paul Krugman and Robert Z. Lawrence, “Trade, Jobs and Wages,” Scientific
American, April 1994, p. 22-27; Matthew J. Slaughter and Philip Swagel, “The Effect of Globalization on
Wages in the Advanced Economies,” IMF Working Paper, April 1997.
70
It is worth observing that wage effects alone cannot explain FDI patterns in the past decade or two.
Excluding the advanced industrialized states, more than 55 percent of foreign direct investment in 1998
went to five middle-income countries – Brazil, China, Indonesia, Mexico and Singapore. The 48 least
developed countries, which should be a magnet for firms interested in low wages, attracted less than 1
percent on all FDI. See International Trade and Core Labour Standards, p. 35.