Reducing the Race to the Bottom

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Table of Contents

Overview
Business Responsibility and Sustainability
Critical Review
Positive Aspects
Negative Aspects
Global Garment and Apparel Industry
Summary
References

Overview

This report will cover the topic of an economic phenomenon known as a race to the bottom which has become a critical issue in the midst of globalisation and modern labour practices. The principle implies the practice of countries or companies attempting to attract new investment by purposefully lowering production costs, most often through labour wages. It is most often seen in developing countries which seek to attract foreign direct investment, but at the cost of deregulation which violates ethical norms and human rights. The report will identify, define and establish an economic basis for a race to the bottom effect.

Furthermore, it will be critically analysed by identifying its origins and then highlighting its positive and negative aspects. Finally, a race to the bottom effect will be analysed through a practical lens in the garment industry, in the country of Bangladesh.

Business Responsibility and Sustainability

The recent financial crisis of 2008 and its extensive impact on the global economies has led the world to consider the economic aspects such as income inequality. The core of the policy debate is motivated by increasing disparity in wage inequality in OECD countries throughout recent decades and its causes. It has always been considered that job creation is attainable through wage moderation and economic growth can only be achieved through lower wage share. The viewpoint is reinforced by the globalisation context and national competition for higher profits and foreign direct investment is causing a “race to the bottom” (Kiefer & Rada, 2014).

As an economic term, a race to the bottom is essentially a competitive environment where companies and countries attempt to undercut their direct competitors by cutting costs of production. This comes at the expense of deregulation, low wages and poor quality of workplace safety standards. Instead of using honest and healthy competition methods in a capitalistic economy to attract investment and businesses, a race to the bottom phenomenon causes irrational competition which violates ethical and regulatory norms. As a result, it becomes unsustainable and can be economically destructive to involved parties (Olney, 2013).

Globalisation in its nature has been critiqued for causing a race to the bottom as evidence emerges that countries rapidly decrease labour and environmental standards as well as tax rates in order to attract foreign companies to invest in production. A race to the bottom phenomenon hinges on two predictions. Multinational corporations must choose to invest based on less problematic regulatory standards. Second, the implication that countries will undercut regulatory standards in order to appease and attract foreign investment. Anecdotal economic evidence demonstrates that there is a crucial correlation between foreign direct investment and labour standards (Olney, 2013).

Data implies that the anecdotal evidence is correct in practically every manner. Over the last quarter of a century, foreign direct investment has increased significantly. As an example, the U.S. direct investment as a percentage of GDP has risen in OECD countries from 4.3 per cent in 1985 to 14.5 per cent in 2007. Meanwhile, employment protection index in OECD nations decreased from 2.45 in 1985 to 2.04 in 2007 on average.

An examination of data also demonstrates that a race to the bottom phenomenon affects wages. Although wage share shocks must be taken into consideration, the hypothesis indicates that in-between-country wage shock linkages are present. Decreased salaries in one country are inherently associated with similar drops in other countries that are connected either geographically or competing for similar industries. This indicates that governments engage in a broad suppression of wages through the economic policy with the objective to stimulate production output and increase exports.

This is done by lower labour costs and wages, which are commonly the biggest expenses in any enterprise. These trends have been ongoing and evident throughout the world for several decades. Particular contributing policies to this phenomenon include tightening macroeconomic policies which focus on inflation targeting for its monetary strategy, the austerity approach for fiscal policy and overall employment protections and labour market regulations (Kiefer & Rada, 2014).

*Figure 1: A chart demonstrates how countries lower labour conditions in order to attract foreign direct investment (Davies & Vadlamannati, 2013).*

Critical Review

Before examining the impacts of a race to the bottom, it is important to explore its causes and origins. After World War II, various international economic organisations were created such as the World Bank and the International Monetary Fund (IMF) that were responsible for financing the rebuilding of Europe and help stabilise future economic relations and stability. To maintain these responsibilities, strict and heavily regulated Keynesian policies were used that focused on welfare and economic growth. While at first booming US businesses recognised the welfare cause, they soon began facing competition from emerging European and Asian markets. The first attempt at undercutting wages and remain competitive occurred when companies moved factories from the industrialised Northern United States to the rural South (Johnson, 2015).

The economic crises of the 1970s saw a shift away from Keynesian economics towards neoliberal deregulation. President Carter began the first deregulation policies for transportation and financial sectors, which are vital in supply chains. This trend of liberalisation and globalisation continued up to the 2008 financial crisis. While deregulation sparked economic growth globally, it did so at the price of increasing economic disparities, social inequalities and divisions of labour based on race and gender. Paradoxically, the poor and marginalised working class became central to the social order.

However, while they struggled to meet ends meet, their work carried the burden of powering social commercial institutions and increasing the quality of life for people in developed regions (Johnson, 2015). As output, income and employment have become more volatile in recent years, global economics took upon a dual nature, splitting into stagnant and dynamic sectors. Production and employment became structured into stagnant and dynamic industries that would then drive investment and causing a race to the bottom effect (Olney, 2013).

Positive Aspects

Globalisation and race to the bottom effect are intertwined and occur simultaneously, involving aspects of trade, capital flow and the labour movement as elements of globalised production and supply chains. The dismantling of trade barriers and increased competition significantly improves the aspects listed above. Production flourishes in these conditions and it no longer becomes necessary to manufacture goods in a specific location.

Components may come from various geographical areas and be assembled in a country of choice and then shipped globally for sale. This inherently helps develop industry in countries based on their conditions, available resources and competencies, while splitting the global value chain. For example, a positive factor for selecting locations for manufacturing with intensive labour is that labour-abundant countries can be chosen their surplus labour force be absorbed into the sector. In turn, this leads to economic and infrastructural growth, the rise in employment and wages and increased productivity in fast-growing sectors rather than local jobs or unemployment (Islam, 2015).

The negative association of a race to the bottom phenomenon are based on a narrow interpretation of business competition from a financial perspective of cost per unit. This static viewpoint does not match with long-term and strategic economic thinking. If only profit is considered, low-cost and unskilled labour resources cannot be used indefinitely. Eventually, the labour market and profit margins will tighten, forcing an economy to innovate in order to remain competitive.

Multinational corporations have tendencies to drive vital changes globally through sustainable economic growth, absorption of complex technologies and an introduction of best-practice management in poorer developing countries which would otherwise not have access to these benefits. Investing corporations maintain and apply a higher level of standards than the developing countries usually carry when carrying independent production. In fact, research demonstrates that the closure of trade borders and limiting competitiveness will most likely cause more issues with worker’s rights and environmental standards than currently, despite these aspects being blamed on a race to the bottom effect (Frankel, 2009).

Negative Aspects

The core concept of a race to the bottom indicates that countries virtually compete away any sort of social, labour, safety and environmental protections for a short-term and relative advantage. Nations competing for investment in this globalised state begin to relax labour standards, regulation enforcement of workers’ rights and proper employment conditions, all to lower labour costs. Research of over 135 countries over a period of 17 years has indicated several key and worrisome trends relating to a race to the bottom.

First, labour standards are associated with other countries. Therefore, if a country lowers its standards to compete, almost immediately nearby nations will follow. This is more evident in actual practices rather than legal frameworks. Developed nations with civil liberties follow higher standards and enforce the law (Davies & Vadlamannati, 2013).

When globalisation began to emerge as a trend in the 1980s, the labour-rights index dropped significantly, most likely due to competition for foreign direct investment. It formed the interdependence, which is ironically associated with international economic bodies. Membership in the World Trade Organisation which grants access for the country to major supply and order networks is directly associated with a drop in labour rights. A major problem is that countries do not compete through instituting unfair laws, but rather by not vigorously enforcing legal frameworks which are meant to protect workers (Davies & Vadlamannati, 2013). Investment directly overrules practical application of labour law.

A race towards the bottom approach is inherently unhealthy for the economy since artificially depressed wages, distort comparative advantages and causes lower purchasing power and, in turn, suboptimal consumption. This scenario leads to a decline in long-term general welfare and disparity (Cueto, 2017). Multinational companies consider not only low production costs, but also a growing level of solid purchasing power as China for example. When workers and the other population receive low wages and live in poverty, it is counterproductive to a long-term partnership.

Globalisation has led to the emergence of international economic bodies and trade agreements such as NAFTA and the TPP. When these agreements are made, deregulation comes into play, establishing the minimum requirements in environmental and labour frameworks. While this benefits corporate profits and inherently increases trade, regular people and workers usually suffer the most damage.

Policymakers and trade regulators in every country are entangled in corporate interests that often disrupt democratic processes such as checks and balances that would regulate agreements. Provisions in international trade agreements allow for firms to undermine regulations which cause long-term damage to the economy without any valuable investment in return (Stiglitz, 2014). Therefore, negative aspects of a race to the bottom approach disrupt political regulation and justice, which ultimately affects the rights of regular citizens, even in developed countries.

Global Garment and Apparel Industry

The global garment and apparel industry has significantly expanded and benefited from globalisation. The value of the market in this sector is estimated at 1.7 trillion USD. The industry employs between 60 and 75 million individuals worldwide, many in developing countries (Stotz & Kane, 2015). The globalised nature of the industry stretches supply and value chains across every continent. The industry has undergone a significant shift.

While in the 1970s, US, Japan and the EU countries were primary exporters, production has now moved to China, Cambodia, Bangladesh and Mexico. The garment production sector is considered vital and a stepping stone to poor and developing countries, where it employs large percentages of the population. However, the work goes on in shaded areas of the economy, otherwise known as the informal economy. The informal economy compromises as much as 35% of the global GDP (Stotz & Kane, 2015).

One of the key aspects of the garment production being in the shade is that they are not protected by legal and regulatory frameworks, leaving them to high levels of vulnerability and labour abuse. Key social issues facing garment workers include forced labour, lack of protection for females that compromise the majority of the labour workforce and instances of child labour. Other troublesome aspects include unreasonable working hours without proper compensation, unsafe working conditions, discrimination and the inability to enter collective bargaining. Many of the countries which are primary garment exporters lack sufficient regulation or choose to turn a blind eye to numerous violations by suppliers of major international brands.

Nevertheless, the market is beginning to shift according to consumer demands. A new trend of “fast fashion” which includes rapid delivery and commonly updated wardrobes is becoming incompatible with demand from developing countries of plain and lower quality clothing. It is estimated that an average consumer in an industrial nation spends approximately 1,700 USD annually on clothing and apparel, which has led to increased awareness amongst consumers about unethical practices of production and pressure on large brands to create change (Stotz & Kane, 2015).

One of the most prominent and tragic events that have demonstrated the abhorrent impact of deregulation and “race to the bottom” effects occurred in Bangladesh in a garment factory. In Spring of 2013, the building where the largely makeshift factory was located collapsed, killing more than 275 workers (Watts, 2013). Bangladesh is the fourth-largest exporter of clothing which accounts for 80% of all of the country’s export earnings (Worthy, 2012).

A wide variety of multinational clothing companies, including famous sports brands such as Nike, Adidas and Puma, outsource production to suppliers from Bangladesh. This occurs largely due to significantly lower production costs with low wages that help these companies to secure tremendous profit margins. However, more than three million Bangladesh workers often receive incomes lower than the living wage, even for the region.

Most of these employees work more than 60 hours a week, which violates Bangladeshi labour law of 48 hours per week. Child labour, exploitation of women in a culture that does not support them and constant abuse from factory managers are ongoing problems in Bangladesh factories. Workers lack any protection against unfair termination, do not have access to basic amenities and do not receive basic benefits such as healthcare or maternity leave (Worthy, 2012).

The violations of human rights go against the principles advocated by these major international brands, but few regular consumers realise the terrifying realities of clothing production in Bangladesh.

Going back to the tragedy at the Bangladesh factory, it exemplifies not only the dangerous working conditions, but an inherently broke system. Despite lauded political announcements by the country’s prime minister to find those at blame and fix the broken regulatory framework, little change has occurred. The blame could be aimed at practically every level of the organisation. The building was constructed without a proper permit and did not undergo proper inspection or upkeep. Even after cracks were found in the foundation, the owner forced work to continue. Major international outcry blamed Western clothing brands for turning a blind eye to these abuses.

The factory collapse was not the first incident, as only 6 months before, a fire broke out at a similar location, also without a safety certificate. Workers were forced to continue working since the alarm was thought to be malfunctioning, leading to 112 casualties. Despite general dissatisfaction, little can be done since more than 10% of those in the Bangladeshi Parliament, own garment businesses and more than 50% have some external link (Pasick, 2013). They offer political protection and overlook blatant violations of the law for the financial gains that Western corporations make from choosing Bangladesh for cheap production outsourcing. As a result, a race to the bottom effect is not only creating dangerous conditions but supporting a corrupt political system, while aiding the increasing population disparity.

Factory owners and textile tycoons in Bangladesh have increased their wealth, by attracting more orders from Western corporations due to artificially low workers’ wages. The lower the wages in comparison to the rest of the world, the more money comes in. This has given garment moguls significant power and protection in the country. There is even a special industrial police force which quickly stifles any dissension at the garment factories. While Western retailers hold a certain power, these individuals control significant assets. This allows factory owners to lower safety standards and break labour law. Bangladesh remains one of the few remaining countries with such cheap labour.

The country has continuously ranked last in global rankings for minimum wage amounts, which upkeeps its leadership role in garment exports, at one point reaching the only second behind China. The garment industry serves as Bangladesh’s main economic lifeline. To remain competitive is why the government stifles any activism and rise in wages that has affected other countries in the region and industry (Holt, 2013).

The situation around Bangladesh’s state of the workforce and garment industry is a primary symbol of all the effects of a race to the bottom, both purposeful and unintended. The situation in the rapidly growing garment and apparel industry demonstrates this trend. Particularly in Bangladesh, several tragedies have occurred resulting in deaths due to poor regulatory oversight. Wages are purposefully stifled at a superficially low amount. As a result, the country has become increasingly dependent on the industry and foreign companies keeping their production in Bangladesh to maintain economic survival.

Summary

In summary, a race to the bottom is an economic principle that indicates the irrational and unhealthy competition of developing countries to attract foreign direct investment by lowering production costs. This comes at the cost of heavy deregulation, lowered wages, poor labour conditions and a violation of ethical norms and commonly human rights. This phenomenon is strongly associated with globalisation and shift in the international economy to seek out cheap manufacturing in developing countries and then sell products at high margins in developed nations. National deregulation in many countries, as well as overall lower standards of international trade agreements, has allowed corporations to utilise it to their advantage.

A positive aspect of this phenomenon is that it has the potential to break down many trade barriers and provide investment in many regions which would lead to employment and higher wages than local businesses. Along with that, there will be improved access to innovative technology, managing methods and global supply chains. The negative aspect is that a race towards the bottom is unsustainable economically and unstable in the long-term. Furthermore, the forced deregulation causes significant abuse of workers’ rights in practically every aspect. It is evident that a race to the bottom effect is destructive to the involved parties and creates socio-economic disparities.

References

Cueto, J. C. (2017). Reducing the race to the bottom: A primer on a global floor for minimum wages. Investigación Económica, 76(300), 33–51. Web.

Davies, R. B., & Vadlamannati, K. C. (2013). A race to the bottom in labor standards? An empirical investigation. Journal of Development Economics, 103, 1–14. Web.

Frankel, J. (2009). Environmental effects of international trade. Web.

Holt, J. (2013). How textile kings weave a hold on Bangladesh as retailers reap the rewards. Financial Post. Web.

Islam, R. (2015). Globalization of production, work and human development: Is a race to the bottom inevitable? Web.

Johnson, C. C (2015). Race religion and resilience in the neoliberal age. New York, NY: Palgrave Macmillan.

Kiefer, D., & Rada, C. (2014). Profit maximising goes global: The race to the bottom. Cambridge Journal of Economics, 39(5), 1333-1350. Web.

Olney, W. W. (2013). A race to the bottom? Employment protection and foreign direct investment. Journal of International Economics, 91(2), 191–203. Web.

Pasick, A. (2013). The Bangladesh building collapse: This is what race-to-the-bottom global trade looks like. Yahoo Finance. Web.

Stiglitz, J. E. (2014). On the wrong side of globalization. The New York Times. Web.

Stotz, L., & Kane, G. (2015). Facts on the global garment industry. Web.

Watts, J. M. (2013). The Bangladesh building collapse: This is what race-to-the-bottom global trade looks like. Quartz. Web.

Worthy, M. (2012). Race to the bottom: Olympic sportswear companies’ exploitation of Bangladesh workers. Web.

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