Race to the bottom in the name of being competitive

April 24, 2012 by
Filed under: Uncategorized 

Here are a couple of ideas how to help our struggling economy by introducing more competition. One option is to remove legal requirements for paid annual leave. This would make people work more days thus increasing the GDP. Also, if we lifted a ban on child labour, we would have an increase of supply of cheap labour, which would make our economy more cost-effective and more competitive in the global market.

competing in the global economy creates some sort of race to the bottom where rooting out harmful forms of competition becomes very difficult

Now, as a couple of you may have already guessed, I am not being serious. What I am trying to show by these examples is that we intuitively accept that competition is bad in some areas and good in others. I think we need a wider debate around the idea that competing in the global economy creates some sort of race to the bottom where rooting out harmful forms of competition becomes very difficult.

Labour standards

Of course, child labour and harsh working conditions may not be politically acceptable anymore in most Western countries but it is the norm in a number of developing countries. In fact, this makes them more competitive by keeping labour costs down. If a government in some developing country tries to improve labour standards, capital starts leaving in search of ‘freer markets’.

Environment

Even though many of us love environment, what we probably love even more is having a job that pays our bills. Many of us would probably be supportive of environmental laws but we are worried that this would make us less competitive. If you as a government are voluntary taxing your companies on carbon and most other countries don’t, you are pushing your own companies out of work. This creates a need for a global agreement on most environmental questions but experience shows getting more than 200 countries to agree on things is usually next to impossible.

Taxation

Effective tax rate in high incomes countries has decreased from 34% in 1985 to 24.5% in 2005

Economist Jeffrey Sachs argues that global competition by making states compete for capital has led to governments continuously lowering taxes in order to be more attractive for investors. Effective tax rate in high incomes countries has decreased from 34% in 1985 to 24.5% in 2005(1). This may sound like a good thing to many of us but it also means that there is less money for long-term investment in infrastructure and public institutions. National debt levels have also ballooned since 1985 and current austerity measures are one consequence of such global pressure to keep taxes low. The existence of tax havens worldwide is an extension of the same problem.

Cambridge University’s economist Ha-Joon Chang argues that reduction of welfare state also makes economies less dynamic because workers become less willing to go into new and risky industries if there is no cushion provided by the state(2).

Slipping control over national economies

Another really worrying aspect of globalization is that it significantly reduces the extent to which we are in control of our national economies and our jobs. If you live a country where most of the trade is within its own boundaries and a recession hits, you can ask your government to stimulate the economy. In such case most of the money spent by the government keeps circulating within the economy adding more demand and jobs. Nowadays, when much of the trade is international, if the British government stimulates its economy, a large share of the pounds spent go on buying gadgets made in China, clothing sown in India and food produced in The Commonwealth. These pounds usually are not lost since they stimulate other economies. However, some of these countries may already be close to overheating and may find this stimulation harmful. Also, this also means that effective fiscal stimulation must be coordinated with a huge number of counties, which makes it extremely difficult.

What really worries me is that to a degree we are trapped in the system of global competition. If we tried to shift back to being more closed economies again, countries would stop buying as much from each other thus leaving millions out of work. This would push the global economy into a recession or maybe even a depression. Because of the same reasons protectionary protectionist measures during the Great Depression made the crisis even worse.

More balanced view on staying competitive 

we need to be more critical, examining where competition starts hurting us rather than helping us

Now, I am not arguing all against globalization. Global trade has lifted hundreds of millions out of poverty and allows me to get great gadgets from eBay! What I am arguing is that while acknowledging benefits of globalization and competition we need to be more critical, examining where competition starts hurting us rather than helping us.

The example of banning child labour shows how harmful competition can be. In fact, if children compete in labour market within a country, at least you have a central government to put a ban on it. Now we have created an unwieldy global system with no global authority to put a ban on various unhealthy forms of competition, such existence of tax havens, and poor labour and environmental standards. Thus, in many ways, the race to the bottom continues while problems such as climate change keep accelerating.

 

References:

  1. Sachs, Jeffrey (2011). The Price of Civilization, p. 99
  2. Chang, Ha-Joon (2010). 23 Things They Don’t Tell You about Capitalism, p. 221

 

 



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