Chapter 34: Problem 29

What is the "race to the bottom" scenario?

Short Answer

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The "race to the bottom" scenario refers to a situation where competition among countries, states, or jurisdictions leads them to lower their regulatory standards, taxation rates, or wages in order to attract investment or businesses. This often results in negative social and environmental consequences, such as lower wages, poorer working conditions, and increased pollution. Cooperative agreements and harmonized standards can help prevent this race and maintain fair competition while protecting social welfare and the environment.

Step by step solution

Definition of "Race to the Bottom"

The "race to the bottom" is a term used in economics and politics to describe a scenario where competition among countries, states, or other jurisdictions leads them to lower their regulatory standards, taxation rates, or wages to attract investment or businesses, often with negative consequences for social and environmental well-being.

Competitive Pressure

When jurisdictions (countries, states, etc.) are competing to attract investments or businesses to their areas, they often engage in lowering their standards or regulations to make it more attractive for businesses to move into their territory. This can include reducing their corporate tax rates, lowering labor costs, or easing environmental regulations.

Negative Social and Environmental Consequences

As a result of this competition, businesses often pressure governments to further lower their standards, resulting in a "race" towards the bottom. This can lead to negative consequences such as lower wages, poorer working conditions, and increased environmental pollution. The loss of social welfare and the degradation of the environment are the key consequences of this race.

Examples of "Race to the Bottom"

An example of this scenario can be seen in the competition between countries to attract corporations by lowering their tax rates. This can lead to a loss of tax revenue, forcing governments to cut back on essential services and social welfare programs. Another example includes countries competing for manufacturing jobs by relaxing labor laws and environmental standards, potentially leading to exploitation of workers and environmental degradation.

Remedies

In order to avoid the negative consequences of a "race to the bottom," countries or jurisdictions can engage in cooperative agreements to establish common minimum regulatory standards or to harmonize their taxation systems. This would create an more equal playing field and encourage fair competition while protecting social welfare and the environment.