Race-to-the-Bottom Hypothesis

The race-to-the-bottom is a critique offered by those opposed to what they view as “corporate led” economic globalization. The central argument is that as capital is able to move more freely across national borders, states will be forced to compete for needed capital investment by lowering legal standards that infringe upon profitability such as environmental regulations and worker safety protections. Since states are forced to compete against one another in order to create a more business-friendly economic environment, each will seek to lower its standards below their competitors, thus setting off a downward spiral of weaker and weaker standards.

The race-to-the-bottom hypothesis gained prominence in the early 1990s as critics on the left analyzed the global implications of the rise of neoliberal policy, an economic policy approach that favors free market functioning and opposes most state intervention in economic activity. Up to the 1980s, Keynesianism was the dominant ideological basis for economic policy in the United States and in much of the industrialized world. Keynesian economic policy called for an active role for the state in managing the macro-economy and addressing certain social needs. Under President Ronald Reagan in the United States and Prime Minister Margaret Thatcher in Britain, the neo-liberal ideology of economic theorists such as Milton Friedman was embraced and used as a basis to shape economic policy. From this perspective, free market processes are most effective for generating wealth, which trickles down, thus benefiting everyone, including the poor. Government intervention in market processes through regulation and taxation are thought to undermine the optimal functioning of the capitalist system. Big business tended to support these conservative leaders and sought to benefit from neo-liberal policies.

During this time international economic institutions such as the International Monetary Fund and the World Bank were used to impose neo-liberal programs on less developed nations that were dependent on aid and in need of foreign investment. The General Agreement on Tariffs and Trade (later the World Trade Organization) was used as a means to eliminate taxes on imported goods and to reduce domestic regulations that impeded international trade and investment.

It was in this context that critics argued that private capital gained even greater power to influence state policy and that this influence would result in a global “race to the bottom” in terms of environmental standards, wages, workplace regulations and other social welfare policies. Given the private control of resources inherent to capitalist economies, [Page 1460]citizens who do not own capital are always in need of private investment to provide the jobs and income necessary for survival. Democratic mechanisms can be used to impose restrictions on capital for the sake of the social good, and employers and investors are likely to concede to these restrictions only if it is necessary in order to market their goods to that population. But if investors and employers are able to easily relocate outside of that state in order to avoid those restrictions, and if they face no additional penalty to import their goods for sale to the domestic market, then they have an incentive to relocate where regulations are less restrictive.

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