RTBreview - THE RACE TO THE BOTTOM HYPOTHESIS AN EMPIRICAL...

This preview shows page 1 - 3 out of 20 pages.

THE RACE TO THE BOTTOM HYPOTHESIS: AN EMPIRICAL AND THEORETICAL REVIEWDaniel W. DreznerThe Fletcher SchoolTufts UniversityDecember 2006The predictionThe 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.”1This approach combines a positive theory of regulation with a strong normative disapproval of the predicted outcome.2This theory assumes that the pressure for convergence comes from the mobility of trade and capital flows,3and 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 evenif they tried.4In such a world capital will seek the location where it can earn the highest 1David Vogel and Robert Kagan, eds., The Dynamics of Regulatory Change: How Globalization Affects National Regulatory Policies(Berkeley: University of California Press, 2004), p. 2. 2For 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 Affairs73 (January 1997): 123-136; Alan Tonelson, The Race to the Bottom(Boulder: Westview Press, 2000). 3Though the RTB hypothesis focuses largely on capital flows, traded goods act as a proxy for more efficient capital investments made in other countries. 4See John Goodman and Louis Pauly, “The Obsolescence of Capital Controls?” World Politics46, No. 1 (1993), pp. 50-82; Sebastian Edwards, “How Effective are Capital Controls?” Journal of Economic Perspectives13, No. 1 (1999): 65-84.
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 predictionsWhile 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 tothe state’s power to tax mobile factors of production: “The proprietor of stock is a citizen of the world, and is not necessarilyattached to any particular country. He would be apt to abandon thecountry in which he was … assessed to a burdensome tax, and wouldremove his stock to some other country where he could either carry on hisbusiness or enjoy his fortune more at his ease. By removing his stock he

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture