Race to the bottom is a socio-economic phrase to describe either government deregulation
of the business environment or reduction in corporate tax rates, in
order to attract or retain economic activity in their jurisdictions.
While this phenomenon can happen between countries as a result of globalization and free trade, it also can occur within individual countries between their sub-jurisdictions (states, localities, cities). It may occur when competition increases between geographic areas over a particular sector of trade and production.
The effect and intent of these actions is to lower labor rates, cost of
business, or other factors (pensions, environmental protection and
other externalities) over which governments can exert control.
This deregulation lowers the cost of production for businesses.
Countries/localities with higher labor, environmental standards, or
taxes can lose business to countries/localities with less regulation,
which in turn makes them want to lower regulations in order to keep
firms' production in their jurisdiction, hence driving the race to the
lowest regulatory standards.
History and usage
The
concept of a regulatory "race to the bottom" emerged in the United
States during the late 1800s and early 1900s, when there was charter competition among states to attract corporations to base in their jurisdiction. Some, such as Justice Louis Brandeis, described the concept as the "race to the bottom" and others, as the "race to efficiency".
In the late 19th century, joint-stock company
control was being liberalised in Europe, where countries were engaged
in competitive liberal legislation to allow local companies to compete.
This liberalization reached Spain in 1869, Germany in 1870, Belgium in
1873, and Italy in 1883.
In 1890, New Jersey enacted a liberal corporation charter, which charged low fees for company registration and lower franchise taxes than other states. Delaware attempted to copy the law to attract companies to its own state. This competition ended when Governor Woodrow Wilson tightened New Jersey's laws through a series of seven statutes.
Brandeis's "race to the bottom" metaphor was updated in 1974 by William Cary, in an article in the Yale Law Journal, "Federalism and Corporate Law: Reflections Upon Delaware," in which Cary argued for the imposition of national standards for corporate governance.
Sanford F. Schram explained in 2000 that the term "race to the bottom":
...has for some time served as an
important metaphor to illustrate that the United States federal
system—and every federal system for that matter—is vulnerable to
interstate competition. The "race to the bottom" implies that the states
compete with each other as each tries to underbid the others in
lowering taxes, spending, regulation...so as to make itself more
attractive to outside financial interests or unattractive to unwanted
outsiders. It can be opposed to the alternative metaphor of "Laboratories of Democracy".
The laboratory metaphor implies a more sanguine federalism in which
[states] use their authority and discretion to develop innovative and
creative solutions to common problems which can be then adopted by other
states.
The term has been used to describe a similar type of competition between corporations. In 2003, in response to reports that British supermarkets had cut the price of bananas,
and by implication had squeezed revenues of banana-growing developing
nations, Alistair Smith, international co-coordinator of Banana Link,
said "The British supermarkets are leading a race to the bottom. Jobs
are being lost and producers are having to pay less attention to social
and environmental agreements."
Another example is the cruise industry,
with corporations headquartered in wealthy developed nations but which
registers its ships in countries with minimal environmental or labor
laws, and no corporate taxes.
The term has also been used in the context of a trend for some European states to seize refugees' assets.
The race to the bottom theory has raised questions about
standardizing labor and environmental regulations across nations. There
is a debate about if a race to the bottom is actually bad or even
possible, and if corporations or nation states should play a bigger role
in the regulatory process.
International Political Economy scholar Daniel Drezner (of Tufts University) has described the "race to the bottom" as a myth.
He argues that the thesis incorrectly assumes that states exclusively
responds to the preferences of capital (and not to other constituents,
such as voters), state regulations are sufficiently costly for producers
that they would be willing to re-locate elsewhere, and no state has an
economy large enough to give it a bargaining power advantage over global
capital. A 2022 study found no evidence that global trade competition led to a race to the bottom in labor standards.
A 2001 study by Geoffrey Garrett found that increases were
associated with higher government spending, but that the rate of
increase in government spending was slower in the countries with the
highest increases in trade. Garrett found that increases in capital
mobility had no significant impact on government spending.
His 1998 book argues against the notion that globalization has
undermined national autonomy. He also argues in the book that
"macroeconomic outcomes in the era of global markets have been as good
or better in strong left-labour regimes ('social democratic
corporatism') as in other industrial countries."
Torben Iversen and David Soskice have argued that social protection and markets go hand-in-hand, as the former resolves market failures. Iversen and Soskice similarly see democracy and capitalism as mutually supportive. Gøsta Esping-Andersen argues against convergence by pointing to presence of a variety of welfare state arrangements in capitalist states.
Scholars such as Paul Pierson, Neil Fligstein and Robert Gilpin have
argued that it is not globalization per se that has undermined the
welfare state, but rather purposeful actions by conservative governments
and interest groups that back them.Historical institutionalist scholarship by Pierson and Jacob Hacker has emphasized that once welfare states have been established, it is extremely difficult for governments to roll them back, although not impossible.
Nita Rudra has found evidence of a race-to-the-bottom in developing
countries, but not in developed countries; she argues that this is due
to the elevated bargaining power of labor in developed countries.
Studies covering earlier periods by David Cameron, Dani Rodrik and Peter Katzenstein have found that greater trade openness has been associated with increases in government social spending.
Layna Mosley
has argued that increases in capital mobility have not let to
convergence, except on a few narrow issues that investors care about. In
adjudicating default risk, inflation risk and currency risk, investors
use a large number of macroeconomic indicators, which means that
investors are unlikely to pressure governments to converge on policies. However, Jonathan Kirshner argues that the hyper mobility of capital has led to considerably monetary policy convergence.
Hegemonic stability theorists, such as Stephen Krasner, Robert
Gilpin, and Charles Kindleberger argued that globalization did not
reduce state power. To the contrary, they argued that trade levels would
decline if the state power of the hegemon declined.
On 1 July 2021, when 130 countries backed an OECD plan to set a global minimum corporate tax rate, U.S. Treasury Secretary Janet Yellen
called it a "historic day." She said, "For decades, the United States
has participated in a self-defeating international tax competition,
lowering our corporate tax rates only to watch other nations lower
theirs in response... The result was a global race to the bottom: Who
could lower their corporate rate further and faster?"
Environmental policy
The
race to the bottom has been a tactic widely used among states within
the United States of America. The race to the bottom in environmental
policy involves both scaling back policies already in place and passing
new policies that encourage less environmentally friendly behavior. Some
states use this as an economic development strategy, especially in
times of financial hardship. For example, in Wisconsin, Governor Scott
Walker decreased state environmental staff's capacity in order to
accelerate the approval time for a proposed development.
Pursuing a race to the bottom philosophy in environmental politics
allows states to foster economic growth, but has great consequences for
the environment of that state. Conversely, some states have begun to
pursue a race to the top
strategy, which stresses innovative environmental policies at the state
level, with the hopes that these policies will later be adopted by
other states. When a state pursues either a race to the bottom or a race to the top strategy, it speaks to its overall environmental agenda.
Races to the bottom pose a threat to the environment globally.
Thomas Oatley raises the example of toxic waste regulations. It is
expensive to treat chemical waste, so corporations wanting to keep
production costs low, may move to countries which do not require them to
treat their waste before dumping it. A more concrete example is the
hydroelectric dam industry in South America. Gerlak notes that country
and community desire for foreign investment in hydroelectric dams has
created a race to the bottom in environmental regulations. All dam
proposals go through an Environmental Impact Assessment
no matter which country or countries it will be implemented in. Each
country has a different way of conducting these assessments and
different standards the dams must meet for approval. The lack of
standard Environmental Impact Assessment standards has caused countries
to streamline their Environmental Impact Assessment processes in places
like Brazil. In some cases, countries require the assessment only after a
dam proposal has already been approved. Other countries allow private
developers from foreign firms or foreign nations, such as China to
submit the Environmental Impact Assessment, which has the potential to
omit certain environmental concerns in order to receive project approval
and casts doubt on the legitimacy of the Environmental Impact
Assessment process. If Environmental Impact Assessments are not done
right there is a risk of dams causing severe social and environmental
harm. Environmental Impact Assessments are not the only form of
government regulation and dams in South America are just one example of a
global trend in deregulation by states in order to bring in more
foreign direct investment.
Adjacent
advertisements in an 1885 newspaper for the makers of two competing ore
concentrators (machines that separate out valuable ores from undesired
minerals). The lower ad touts that their price is lower, and that their
machine's quality and efficiency was demonstrated to be higher, both of
which are general means of economic competition.
In economics, competition is a scenario where different economic firms are in contention to obtain goods that are limited by varying the elements of the marketing mix:
price, product, promotion and place. In classical economic thought,
competition causes commercial firms to develop new products, services
and technologies, which would give consumers greater selection and
better products. The greater the selection of a good is in the market,
the lower prices for the products typically are, compared to what the
price would be if there was no competition (monopoly) or little competition (oligopoly).
The level of competition that exists within the market is
dependent on a variety of factors both on the firm/ seller side; the
number of firms, barriers to entry, information, and availability/
accessibility of resources. The number of buyers within the market also
factors into competition with each buyer having a willingness to pay,
influencing overall demand for the product in the market.
Airlines competing for Europe-Japan passenger flight market: Swiss and SAS
Competitiveness pertains to the ability and performance of a firm, sub-sector or country to sell and supply goods and services in a given market,
in relation to the ability and performance of other firms, sub-sectors
or countries in the same market. It involves one company trying to
figure out how to take away market share
from another company. Competitiveness is derived from the Latin word
"competere", which refers to the rivalry that is found between entities
in markets and industries. It is used extensively in management
discourse concerning national and international economic performance
comparisons.
The extent of the competition present within a particular market
can be measured by; the number of rivals, their similarity of size, and
in particular the smaller the share of industry output possessed by the
largest firm, the more vigorous competition is likely to be.
History of economic thought on competition
Early
economic research focused on the difference between price and non-price
based competition, while modern economic theory has focused on the
many-seller limit of general equilibrium.
According to 19th century economist Antoine Augustin Cournot,
the definition of competition is the situation in which price does not
vary with quantity, or in which the demand curve facing the firm is
horizontal.
Firm competition
Empirical
observation confirms that resources (capital, labor, technology) and
talent tend to concentrate geographically (Easterly and Levine 2002).
This result reflects the fact that firms are embedded in inter-firm
relationships with networks of suppliers, buyers and even competitors
that help them to gain competitive advantages in the sale of its
products and services. While arms-length market relationships do provide
these benefits, at times there are externalities
that arise from linkages among firms in a geographic area or in a
specific industry (textiles, leather goods, silicon chips) that cannot
be captured or fostered by markets alone. The process of
"clusterization", the creation of "value chains", or "industrial
districts" are models that highlight the advantages of networks.
Within capitalisteconomic systems, the drive of enterprises is to maintain and improve their own competitiveness, this practically pertains to business sectors.
Perfect vs imperfect competition
Perfect competition
Neoclassical economic theory places importance in a theoretical market state, in which the firms and market are considered to be in perfect competition.
Perfect competition is said to exist when all criteria are met, which
is rarely (if ever) observed in the real world. These criteria include;
all firms contribute insignificantly to the market,
all firms sell an identical product, all firms are price takers, market
share has no influence on price, both buyers and sellers have complete
or "perfect" information, resources are perfectly mobile and firms can
enter or exit the market without cost. Under idealized perfect competition, there are many buyers and sellers within the market and prices reflect the overall supply and demand.
Another key feature of a perfectly competitive market is the variation
in products being sold by firms. The firms within a perfectly
competitive market are small, with no larger firms controlling a
significant proportion of market share. These firms sell almost identical products with minimal differences or in-cases perfect substitutes to another firm's product.
The idea of perfectly competitive markets draws in other
neoclassical theories of the buyer and seller. The buyer in a perfectly
competitive market have identical tastes and preferences with respect to
desired product features and characteristics (homogeneous within
industries) and also have perfect information on the goods such as
price, quality and production.
In this type of market, buyers are utility maximizers, in which they
are purchasing a product that maximizes their own individual utility
that they measure through their preferences. The firm, on the other
hand, is aiming to maximize profits acting under the assumption of the
criteria for perfect competition.
The firm in a perfectly competitive market will operate in two economic time horizons; the short-run and long-run.
In the short-run the firm adjusts its quantity produced according to
prices and costs. While in the long run the firm is adjusting its
methods of production to ensure they produce at a level where marginal
cost equals marginal revenue. In a perfectly competitive market, firms/producers earn zero economic profit in the long run. This is proved by Cournot's system.
Imperfect competition
Imperfectly competitive markets are the realistic markets that exist in the economy. Imperfect competition
exist when; buyers might not have the complete information on the
products sold, companies sell different products and services, set their
own individual prices, fight for market share and are often protected
by barriers to entry and exit, making it harder for new firms to
challenge them.
An important differentiation from perfect competition is, in markets
with imperfect competition, individual buyers and sellers have the
ability to influence prices and production.
Under these circumstances, markets move away from the theory of a
perfectly competitive market, as real market often do not meet the
assumptions of the theory and this inevitably leads to opportunities to
generate more profit, unlike in a perfect competition environment, where
firms earn zero economic profit in the long run. These markets are also defined by the presence of monopolies, oligopolies and externalities within the market.
The measure of competition in accordance to the theory of perfect
competition can be measured by either; the extent of influence of the
firm's output on price (the elasticity of demand), or the relative
excess of price over marginal cost.
Types of imperfect competition
Monopoly
Monopoly
is the opposite to perfect competition. Where perfect competition is
defined by many small firms competition for market share in the economy,
Monopolies are where one firm holds the entire market share. Instead of
industry or market defining the firms, monopolies are the single firm
that defines and dictates the entire market.
Monopolies exist where one of more of the criteria fail and make it
difficult for new firms to enter the market with minimal costs. Monopoly
companies use high barriers to entry to prevent and discourage other
firms from entering the market to ensure they continue to be the single
supplier within the market. A natural monopoly is a type of monopoly
that exists due to the high start-up costs or powerful economies of scale of conducting a business in a specific industry. These types of monopolies arise in industries that require unique raw materials, technology, or similar factors to operate. Monopolies can form through both fair and unfair business tactics. These tactics include; collusion, mergers, acquisitions, and hostile takeovers.
Collusion might involve two rival competitors conspiring together to
gain an unfair market advantage through coordinated price fixing or
increases. Natural monopolies
are formed through fair business practices where a firm takes advantage
of an industry's high barriers. The high barriers to entry are often
due to the significant amount of capital or cash needed to purchase
fixed assets, which are physical assets a company needs to operate.
Natural monopolies are able to continue to operate as they typically
can as they produce and sell at a lower cost to consumers than if there
was competition in the market. Monopolies in this case use the resources
efficiently in order to provide the product at a lower price. Similar
to competitive firms, monopolists produces a quantity at that marginal
revenue equals marginal cost. The difference here is that in a monopoly,
marginal revenue does not equal to price because as a sole supplier in
the market, monopolists have the freedom to set the price at which the
buyers are willing to pay for to achieve profit-maximizing quantity.
Oligopoly
Oligopolies
are another form of imperfect competition market structures. An
oligopoly is when a small number of firms collude, either explicitly or
tacitly, to restrict output and/or fix prices, in order to achieve above
normal market returns.
Oligopolies can be made up of two or more firms. Oligopoly is a market
structure that is highly concentrated. Competition is well defined
through the Cournot's model because, when there are infinite many firms
in the market, the excess of price over marginal cost will approach to
zero. A duopoly
is a special form of oligopoly where the market is made up of only two
firms. Only a few firms dominate, for example, major airline companies
like Delta and American Airlines operate with a few close competitors, but there are other smaller airlines that are competing in this industry as well.
Similar factors that allow monopolies to exist also facilitate the
formation of oligopolies. These include; high barriers to entry, legal
privilege; government outsourcing to a few companies to build public
infrastructure (e.g. railroads) and access to limited resources,
primarily seen with natural resources within a nation. Companies in an
oligopoly benefit from price-fixing,
setting prices collectively, or under the direction of one firm in the
bunch, rather than relying on free-market forces to do so. Oligopolies can form cartels
in order to restrict entry of new firms into the market and ensure they
hold market share. Governments usually heavily regulate markets that
are susceptible to oligopolies to ensure that consumers are not being
over charged and competition remains fair within that particular market.
Monopolistic competition
Monopolistic competition characterizes an industry in which many firms offer products or services that are similar, but not perfect substitutes. Barriers to entry
and exit in a monopolistic competitive industry are low, and the
decisions of any one firm do not directly affect those of its
competitors.
Monopolistic competition exists in-between monopoly and perfect
competition, as it combines elements of both market structures. Within
monopolistic competition market structures all firms have the same,
relatively low degree of market power; they are all price makers, rather
than price takers. In the long run, demand is highly elastic,
meaning that it is sensitive to price changes. In order to raise their
prices, firms must be able to differentiate their products from their
competitors in terms of quality, whether real or perceived. In the short
run, economic profit is positive, but it approaches zero in the long
run. Firms in monopolistic competition tend to advertise heavily because
different firms need to distinguish similar products than others. Examples of monopolistic competition include; restaurants, hair salons, clothing, and electronics.
The monopolistic competition market has a relatively large degree
of competition and a small degree of monopoly, which is closer to
perfect competition, and is much more realistic. It is common in retail,
handicraft, and printing industries in big cities. Generally speaking,
this market has the following characteristics.
1. There are many manufacturers in the market, and each
manufacturer must accept the market price to a certain extent, but each
manufacturer can exert a certain degree of influence on the market and
not fully accept the market price. In addition, manufacturers cannot
collude with each other to control the market. For consumers, the
situation is similar. The economic man in such a monopolistic
competitive market is the influencer of the market price.
2. Independence
Every economic person in the market thinks that they can act
independently of each other, independent of each other. A person's
decision has little impact on others and is not easy to detect, so it is
not necessary to consider other people's confrontational actions.
3. Product differences
The products of different manufacturers in the same industry are
different from each other, either because of quality difference, or
function difference, or insubstantial difference (such as difference in
impression caused by packaging, trademark, advertising, etc.), or
difference in sales conditions (such as geographical location,
Differences in service attitudes and methods cause consumers to be
willing to buy products from one company, but not from another). Product
differences are the root cause of manufacturers' monopoly, but because
the differences between products in the same industry are not so large
that products cannot be replaced at all, and a certain degree of mutual
substitutability allows manufacturers to compete with each other, so
mutual substitution is the source of manufacturer competition. . If you
want to accurately state the meaning of product differences, you can say
this: at the same price, if a buyer shows a special preference for a
certain manufacturer's products, it can be said that the manufacturer's
products are different from other manufacturers in the same industry.
Products are different.
4. Easy in and out
It is easier for manufacturers to enter and exit an industry. This is
similar to perfect competition. The scale of the manufacturer is not
very large, the capital required is not too much, and the barriers to
entering and exiting an industry are relatively easy.
5. Can form product groups
Multiple product groups can be formed within the industry, that is,
manufacturers producing similar commodities in the industry can form
groups. The products of these groups are more different, and the
products within the group are less different.
Dominant firms
In
several highly concentrated industries, a dominant firm serves a
majority of the market. Dominant firms have a market share of 50% to
over 90%, with no close rival. Similar to a monopoly market, it uses
high entry barrier to prevent other firms from entering the market and
competing with them. They have the ability to control pricing, to set
systematic discriminatory prices, to influence innovation, and (usually)
to earn rates of return well above the competitive rate of return.
This is similar to a monopoly, however there are other smaller firms
present within the market that make up competition and restrict the
ability of the dominant firm to control the entire market and choose
their own prices. As there are other smaller firms present in the
market, dominant firms must be careful not to raise prices too high as
it will induce customers to begin to buy from firms in the fringe of
small competitors.
Effective competition
Effective competition
is said to exist when there are four firms with market share below 40%
and flexible pricing. Low entry barriers, little collusion, and low
profit rates.
The main goal of effective competition is to give competing firms the
incentive to discover more efficient forms of production and to find out
what consumers want so they are able to have specific areas to focus
on.
Competitive equilibrium
Competitive equilibrium
is a concept in which profit-maximizing producers and
utility-maximizing consumers in competitive markets with freely
determined prices arrive at an equilibrium price. At this equilibrium
price, the quantity supplied is equal to the quantity demanded.
This implies that a fair deal has been reached between supplier and
buyer, in-which all suppliers have been matched with a buyer that is
willing to purchase the exact quantity the supplier is looking to sell
and therefore, the market is in equilibrium.
The competitive equilibrium has many applications for predicting
both the price and total quality in a particular market. It can also be
used to estimate the quantity consumed from each individual and the
total output of each firm within a market. Furthermore, through the idea
of a competitive equilibrium, particular government policies or events
can be evaluated and decide whether they move the market towards or away
from the competitive equilibrium.
Role in market success
Competition is generally accepted as an essential component of markets, and results from scarcity—there
is never enough to satisfy all conceivable human wants—and occurs "when
people strive to meet the criteria that are being used to determine who
gets what." In offering goods for exchange, buyers competitively bid
to purchase specific quantities of specific goods which are available,
or might be available if sellers were to choose to offer such goods.
Similarly, sellers bid against other sellers in offering goods on the
market, competing for the attention and exchange resources of buyers.
The competitive process in a market economy exerts a sort of
pressure that tends to move resources to where they are most needed, and
to where they can be used most efficiently for the economy as a whole.
For the competitive process to work however, it is "important that
prices accurately signal costs and benefits." Where externalities occur, or monopolistic or oligopolistic conditions persist, or for the provision of certain goods such as public goods, the pressure of the competitive process is reduced.
In any given market, the power structure will either be in favor of sellers or in favor of buyers. The former case is known as a seller's market; the latter is known as a buyer's market or consumer sovereignty. In either case, the disadvantaged group is known as price-takers and the advantaged group known as price-setters.
Price takers must accept the prevailing price and sell their goods at
the market price whereas price setters are able to influence market
price and enjoy pricing power.
Competition has been shown to be a significant predictor of productivity growth within nation states. Competition bolsters product differentiation
as businesses try to innovate and entice consumers to gain a higher
market share and increase profit. It helps in improving the processes
and productivity
as businesses strive to perform better than competitors with limited
resources. The Australian economy thrives on competition as it keeps the
prices in check.
Historical views
In his 1776 The Wealth of Nations, Adam Smith described it as the exercise of allocating productive resources to their most highly valued uses and encouraging efficiency, an explanation that quickly found support among liberal economists opposing the monopolistic practices of mercantilism, the dominant economic philosophy of the time. Smith and other classical economists before Cournot
were referring to price and non-price rivalry among producers to sell
their goods on best terms by bidding of buyers, not necessarily to a
large number of sellers nor to a market in final equilibrium.
Later microeconomic theory distinguished between perfect competition and imperfect competition, concluding that perfect competition is Pareto efficient while imperfect competition is not. Conversely, by Edgeworth's limit theorem, the addition of more firms to an imperfect market will cause the market to tend towards Pareto efficiency. Pareto efficiency, named after the Italian economist and political scientist Vilfredo Pareto
(1848-1923), is an economic state where resources cannot be reallocated
to make one individual better off without making at least one
individual worse off. It implies that resources are allocated in the
most economically efficient manner, however, it does not imply equality
or fairness.
Appearance in real markets
Real
markets are never perfect. Economists who believe that perfect
competition is a useful approximation to real markets classify markets
as ranging from close-to-perfect to very imperfect. Examples of
close-to-perfect markets typically include share and foreign exchange
markets while the real estate market is typically an example of a very
imperfect market. In such markets, the theory of the second best
proves that, even if one optimality condition in an economic model
cannot be satisfied, the next-best solution can be achieved by changing
other variables away from otherwise-optimal values.
Time variation
Within
competitive markets, markets are often defined by their sub-sectors,
such as the "short term" / "long term", "seasonal" / "summer", or
"broad" / "remainder" market. For example, in otherwise competitive
market economies, a large majority of the commercial exchanges may be
competitively determined by long-term contracts and therefore long-term
clearing prices. In such a scenario, a "remainder market" is one where
prices are determined by the small part of the market that deals with
the availability of goods not cleared via long term transactions. For
example, in the sugar industry,
about 94-95% of the market clearing price is determined by long-term
supply and purchase contracts. The balance of the market (and world
sugar prices) are determined by the ad hoc demand for the
remainder; quoted prices in the "remainder market" can be significantly
higher or lower than the long-term market clearing price.
Similarly, in the US real estate housing market, appraisal prices can
be determined by both short-term or long-term characteristics, depending
on short-term supply and demand factors. This can result in large price
variations for a property at one location.
Anti-competitive pressures and practices
Competition requires the existing of multiple firms, so it duplicates fixed costs.
In a small number of goods and services, the resulting cost structure
means that producing enough firms to effect competition may itself be
inefficient. These situations are known as natural monopolies and are usually publicly provided or tightly regulated.
The printing equipment company American Type Founders explicitly states in its 1923 manual that its goal is to 'discourage unhealthy competition' in the printing industry.
International competition also differentially affects sectors of national economies. In order to protect political supporters, governments may introduce protectionist measures such as tariffs to reduce competition.
Global Competitiveness Index (2008–2009): competition is an important determinant for the well-being of states in an international trade environment.
Economic competition between countries (nations, states) as a
political-economic concept emerged in trade and policy discussions in
the last decades of the 20th century. Competition theory posits that
while protectionist measures may provide short-term remedies to economic
problems caused by imports, firms and nations must adapt their
production processes in the long term to produce the best products at
the lowest price. In this way, even without protectionism,
their manufactured goods are able to compete successfully against
foreign products both in domestic markets and in foreign markets.
Competition emphasizes the use of comparative advantage
to decrease trade deficits by exporting larger quantities of goods that
a particular nation excels at producing, while simultaneously importing
minimal amounts of goods that are relatively difficult or expensive to
manufacture. Commercial policy
can be used to establish unilaterally and multilaterally negotiated
rule of law agreements protecting fair and open global markets. While
commercial policy is important to the economic success of nations,
competitiveness embodies the need to address all aspects affecting the
production of goods that will be successful in the global market,
including but not limited to managerial decision making, labor, capital,
and transportation costs, reinvestment decisions, the acquisition and
availability of human capital, export promotion and financing, and
increasing labor productivity.
Competition results from a comprehensive policy that both
maintains a favorable global trading environment for producers and
domestically encourages firms to work for lower production costs while
increasing the quality of output so that they are able to capitalize on
favorable trading environments.
These incentives include export promotion efforts and export
financing—including financing programs that allow small and medium-sized
companies to finance the capital costs of exporting goods.
In addition, trading on the global scale increases the robustness of
American industry by preparing firms to deal with unexpected changes in
the domestic and global economic environments, as well as changes within
the industry caused by accelerated technological advancements According
to economist Michael Porter, "A nation's competitiveness depends on the capacity of its industry to innovate and upgrade."
History of competition
Advocates
for policies that focus on increasing competition argue that enacting
only protectionist measures can cause atrophy of domestic industry by
insulating them from global forces. They further argue that
protectionism is often a temporary fix to larger, underlying problems:
the declining efficiency and quality of domestic manufacturing. American
competition advocacy began to gain significant traction in Washington
policy debates in the late 1970s and early 1980s as a result of
increasing pressure on the United States Congress to introduce and pass
legislation increasing tariffs and quotas in several large
import-sensitive industries. High level trade officials, including
commissioners at the U.S. International Trade Commission,
pointed out the gaps in legislative and legal mechanisms in place to
resolve issues of import competition and relief. They advocated policies
for the adjustment of American industries and workers impacted by globalization and not simple reliance on protection.
1980s
As global trade expanded after the early 1980s recession,
some American industries, such as the steel and automobile sectors,
which had long thrived in a large domestic market, were increasingly
exposed to foreign competition. Specialization, lower wages, and lower
energy costs allowed developing nations entering the global market to
export high quantities of low cost goods to the United States.
Simultaneously, domestic anti-inflationary measures (e.g. higher
interest rates set by the Federal Reserve) led to a 65% increase in the
exchange value of the US dollar in the early 1980s. The stronger dollar
acted in effect as an equal percent tax on American exports and equal
percent subsidy on foreign imports.
American producers, particularly manufacturers, struggled to compete
both overseas and in the US marketplace, prompting calls for new
legislation to protect domestic industries.
In addition, the recession of 1979-82 did not exhibit the traits of a
typical recessionary cycle of imports, where imports temporarily decline
during a downturn and return to normal during recovery. Due to the
high dollar exchange rate, importers still found a favorable market in
the United States despite the recession. As a result, imports continued
to increase in the recessionary period and further increased in the
recovery period, leading to an all-time high trade deficit and import
penetration rate. The high dollar exchange rate in combination with high
interest rates also created an influx of foreign capital flows to the
United States and decreased investment opportunities for American
businesses and individuals.
The manufacturing sector was most heavily impacted by the high
dollar value. In 1984, the manufacturing sector faced import penetration
rates of 25%.
The "super dollar" resulted in unusually high imports of manufactured
goods at suppressed prices. The U.S. steel industry faced a combination
of challenges from increasing technology, a sudden collapse of markets
due to high interest rates, the displacement of large integrated
producers, increasingly uncompetitive cost structure due to increasing
wages and reliance on expensive raw materials, and increasing government
regulations around environmental costs and taxes. Added to these
pressures was the import injury inflicted by low cost, sometimes more
efficient foreign producers, whose prices were further suppressed in the
American market by the high dollar.
The Trade and Tariff Act of 1984 developed new provisions for adjustment assistance,
or assistance for industries that are damaged by a combination of
imports and a changing industry environment. It maintained that as a
requirement for receiving relief, the steel industry would be required
to implement measures to overcome other factors and adjust to a changing
market. The act built on the provisions of the Trade Act of 1974
and worked to expand, rather than limit, world trade as a means to
improve the American economy. Not only did this act give the President
greater authority in giving protections to the steel industry, it also
granted the President the authority to liberalize trade with developing
economies through Free Trade Agreements (FTAs) while extending the Generalized System of Preferences. The Act also made significant updates to the remedies and processes for settling domestic trade disputes.
The injury caused by imports strengthened by the high dollar
value resulted in job loss in the manufacturing sector, lower living
standards, which put pressure on Congress and the Reagan Administration
to implement protectionist measures. At the same time, these conditions
catalyzed a broader debate around the measures necessary to develop
domestic resources and to advance US competition. These measures include
increasing investment in innovative technology, development of human
capital through worker education and training, and reducing costs of
energy and other production inputs. Competitiveness is an effort to
examine all the forces needed to build up the strength of a nation's
industries to compete with imports.
In 1988, the Omnibus Foreign Trade and Competitiveness Act
was passed. The Act's underlying goal was to bolster America's ability
to compete in the world marketplace. It incorporated language on the
need to address sources of American competition and to add new
provisions for imposing import protection. The Act took into account
U.S. import and export policy and proposed to provide industries more
effective import relief and new tools to pry open foreign markets for
American business. Section 201 of the Trade Act of 1974
had provided for investigations into industries that had been
substantially damaged by imports. These investigations, conducted by the
USITC, resulted in a series of recommendations to the President to
implement protection for each industry. Protection was only offered to
industries where it was found that imports were the most important cause
of injury over other sources of injury.
Section 301 of the Omnibus Foreign Trade and Competitiveness Act
of 1988 contained provisions for the United States to ensure fair trade
by responding to violations of trade agreements and unreasonable or
unjustifiable trade-hindering activities by foreign governments. A
sub-provision of Section 301 focused on ensuring intellectual property
rights by identifying countries that deny protection and enforcement of
these rights, and subjecting them to investigations under the broader
Section 301 provisions.
Expanding U.S. access to foreign markets and shielding domestic markets
reflected an increased interest in the broader concept of competition
for American producers. The Omnibus amendment, originally introduced by Rep. Dick Gephardt, was signed into effect by President Reagan in 1988 and renewed by President Bill Clinton in 1994 and 1999.990s
While
competition policy began to gain traction in the 1980s, in the 1990s it
became a concrete consideration in policy making, culminating in President Clinton's
economic and trade agendas. The Omnibus Foreign Trade and
Competitiveness Policy expired in 1991; Clinton renewed it in 1994,
representing a renewal of focus on a competitiveness-based trade policy.
According to the Competitiveness Policy Council Sub-council on
Trade Policy, published in 1993, the main recommendation for the
incoming Clinton Administration was to make all aspects of competition a
national priority. This recommendation involved many objectives,
including using trade policy to create open and fair global markets for
US exporters through free trade agreements and macroeconomic policy
coordination, creating and executing a comprehensive domestic growth
strategy between government agencies, promoting an "export mentality",
removing export disincentives, and undertaking export financing and
promotion efforts.
The Trade Sub-council also made recommendations to incorporate
competition policy into trade policy for maximum effectiveness, stating
"trade policy alone cannot ensure US competitiveness". Rather, the
sub-council asserted trade policy must be part of an overall strategy
demonstrating a commitment at all policy levels to guarantee our future
economic prosperity.
The Sub-council argued that even if there were open markets and
domestic incentives to export, US producers would still not succeed if
their goods could not compete against foreign products both globally and
domestically.
In 1994, the General Agreement on Tariffs and Trade (GATT) became the World Trade Organization
(WTO), formally creating a platform to settle unfair trade practice
disputes and a global judiciary system to address violations and enforce
trade agreements. Creation of the WTO strengthened the international
dispute settlement system that had operated in the preceding
multilateral GATT mechanism. That year, 1994, also saw the installment
of the North American Free Trade Agreement (NAFTA), which opened markets across the United States, Canada, and Mexico.
In recent years, the concept of competition has emerged as a new
paradigm in economic development. Competition captures the awareness of
both the limitations and challenges posed by global competition, at a
time when effective government action is constrained by budgetary
constraints and the private sector faces significant barriers to
competing in domestic and international markets. The Global Competitiveness Report of the World Economic Forum defines competitiveness as "the set of institutions, policies, and factors that determine the level of productivity of a country".
The term is also used to refer in a broader sense to the economic
competition of countries, regions or cities. Recently, countries are
increasingly looking at their competition on global markets. Ireland (1997), Saudi Arabia (2000), Greece (2003), Croatia (2004), Bahrain (2005), the Philippines (2006), Guyana, the Dominican Republic and Spain (2011)
are just some examples of countries that have advisory bodies or
special government agencies that tackle competition issues. Even regions
or cities, such as Dubai or the Basque Country(Spain), are considering the establishment of such a body.
The institutional model applied in the case of National Competitiveness Programs
(NCP) varies from country to country, however, there are some common
features. The leadership structure of NCPs relies on strong support from
the highest level of political authority. High-level support provides
credibility with the appropriate actors in the private sector. Usually,
the council or governing body will have a designated public sector
leader (president, vice-president or minister) and a co-president drawn
from the private sector. Notwithstanding the public sector's role in
strategy formulation, oversight, and implementation, national
competition programs should have strong, dynamic leadership from the
private sector at all levels – national, local and firm. From the
outset, the program must provide a clear diagnostic of the problems
facing the economy and a compelling vision that appeals to a broad set
of actors who are willing to seek change and implement an
outward-oriented growth strategy. Finally, most programs share a common
view on the importance of networks of firms or "clusters" as an
organizing principal for collective action. Based on a bottom-up
approach, programs that support the association among private business
leadership, civil society organizations, public institutions and
political leadership can better identify barriers to competition develop
joint-decisions on strategic policies and investments; and yield better
results in implementation.
National competition is said to be particularly important for small open economies, which rely on trade, and typically foreign direct investment, to provide the scale necessary for productivity increases to drive increases in living standards. The Irish National Competitiveness Council uses a Competitiveness Pyramid structure to simplify the factors that affect national competition. It distinguishes in particular between policy inputs in relation to the business environment, the physical infrastructure and the knowledge infrastructure and the essential conditions
of competitiveness that good policy inputs create, including business
performance metrics, productivity, labour supply and prices/costs for
business.
Competition is important for any economy that must rely on
international trade to balance import of energy and raw materials. The
European Union (EU) has enshrined industrial research and technological
development (R&D) in her Treaty in order to become more competitive.
In 2009, €12 billion of the EU budget
(totalling €133.8 billion) will go on projects to boost Europe's
competition. The way for the EU to face competition is to invest in
education, research, innovation and technological infrastructures.
The International Economic Development Council (IEDC) in Washington, D.C. published the "Innovation Agenda: A Policy
Statement on American Competitiveness". This paper summarizes the ideas
expressed at the 2007 IEDC Federal Forum and provides policy
recommendations for both economic developers and federal policy makers
that aim to ensure America remains globally competitive in light of
current domestic and international challenges.
Scholarly analyses of national competition have largely been qualitatively descriptive. Systematic efforts by academics to define meaningfully and to quantitatively analyze national competitiveness have been made, with the determinants of national competitiveness econometrically modeled.
A US government sponsored program under the Reagan administration called Project Socrates,
was initiated to, 1) determine why US competition was declining, 2)
create a solution to restore US competition. The Socrates Team headed by
Michael Sekora, a physicist, built an all-source intelligence system to
research all competition of mankind from the beginning of time. The
research resulted in ten findings which served as the framework for the
"Socrates Competitive Strategy System". Among the ten finding on
competition was that 'the source of all competitive advantage is the
ability to access and utilize technology to satisfy one or more customer
needs better than competitors, where technology is defined as any use
of science to achieve a function".
Role of infrastructure investments
Some development economists believe that a sizable part of Western Europe has now fallen behind the most dynamic amongst Asia's emerging nations,
notably because the latter adopted policies more propitious to
long-term investments: "Successful countries such as Singapore,
Indonesia and South Korea still remember the harsh adjustment mechanisms
imposed abruptly upon them by the IMF and World Bank during the
1997–1998 'Asian Crisis' […] What they have achieved in the past 10
years is all the more remarkable: they have quietly abandoned the "Washington consensus" [the dominant Neoclassical perspective] by investing massively in infrastructure projects […] this pragmatic approach proved to be very successful."
The relative advancement of a nation's transportation
infrastructure can be measured using indices such as the (Modified) Rail
Transportation Infrastructure Index (M-RTI or simply 'RTI') combining
cost-efficiency and average speed metrics
Trade competition
While
competition is understood at a macro-scale, as a measure of a country's
advantage or disadvantage in selling its products in international
markets. Trade competition can be defined as the ability of a firm, industry, city, state or country, to export more in value added terms than it imports.
Using a simple concept to measure heights that firms can climb may help improve execution of strategies.
International competition can be measured on several criteria but few
are as flexible and versatile to be applied across levels as Trade
Competitiveness Index (TCI).
Trade Competitiveness Index (TCI)
TCI can be formulated as ratio of forex (FX) balance to total forex as given in equation below. It can be used as a proxy to determine health of foreign trade, The ratio goes from −1 to +1; higher ratio being indicative of higher international trade competitiveness.
In order to identify exceptional firms, trends in TCI can be assessed
longitudinally for each company and country. The simple concept of
trade competitiveness index (TCI) can be a powerful tool for setting
targets, detecting patterns and can also help with diagnosing causes
across levels. Used judiciously in conjunction with the volume of exports, TCI can give quick views of trends, benchmarks and potential.
Though there is found to be a positive correlation between the profits and forex
earnings, we cannot blindly conclude the increase in the profits is due
to the increase in the forex earnings. The TCI is an effective
criteria, but need to be complemented with other criteria to have better
inferences.
Excessive competition
Excessive competition is a competition that
supply is excessive to demand chronically, and it harm the producer on the interest.
Excessive competition is also caused when supply of goods or services
which should be sold immediately is greater than demand. So on labor market, the labor will be left always into the excessive competition.
Criticism
Critiques of perfect competition
Economists
do not all agree to the practicability of perfect competition. There is
debate surrounding how relevant it is to real world markets and whether
it should be a market structure that should be used as a benchmark.
Neoclassical economists believe that perfect competition creates a
perfect market structure, with the best possible economic outcomes for
both consumers and society. In general, they do not claim that this
model is representative of the real world. Neoclassical economists argue
that perfect competition can be useful, and most of their analysis
stems from its principles.
Economists that are critical of the neoclassical reliance on
perfect competition in their economic analysis believe that the
assumptions built into the model are so unrealistic that the model
cannot produce any meaningful insights. The second line of critic to
perfect competition is the argument that it is not even a desirable
theoretical outcome.
These economists believe that the criteria and outcomes of perfect
competition do not achieve an efficient equilibrium in the market and
other market structures are better used as a benchmark within the
economy.
Critique about national competition
Krugman
(1994) points to the ways in which calls for greater national
competition frequently mask intellectual confusion arguing that, in the
context of countries, productivity
is what matters and "the world's leading nations are not, to any
important degree, in economic competition with each other." Krugman
warns that thinking in terms of competition could lead to wasteful
spending, protectionism, trade wars, and bad policy.
As Krugman puts it in his crisp, aggressive style "So if you hear
someone say something along the lines of 'America needs higher
productivity so that it can compete in today's global economy', never
mind who he is, or how plausible he sounds. He might as well be wearing a
flashing neon sign that reads: 'I don't know what I'm talking about'."
If the concept of national competition has any substantive
meaning it must reside in the factors about a nation that facilitates
productivity and alongside criticism of nebulous and erroneous
conceptions of national competition systematic and rigorous attempts
like Thompson's need to be elaborated.
Utopian socialism is the term often used to describe the first current of modern socialism and socialist thought as exemplified by the work of Henri de Saint-Simon, Charles Fourier, Étienne Cabet, and Robert Owen. Utopian socialism is often described as the presentation of visions and
outlines for imaginary or futuristic ideal societies, with positive
ideals being the main reason for moving society in such a direction.
Later socialists and critics of utopian socialism viewed utopian
socialism as not being grounded in actual material conditions of
existing society. These visions of ideal societies competed with revolutionary and social democratic movements.
The term utopian socialism is most often applied to those socialists who lived in the first quarter of the 19th century by later socialists as a pejorative in order to dismiss their ideas as fanciful and unrealistic. A similar school of thought that emerged in the early 20th century which makes the case for socialism on moral grounds is ethical socialism.
Those anarchists and Marxists who dismissed utopian socialism did so because utopian socialists generally did not believe any form of class struggle or social revolution
was necessary for socialism to emerge. Utopian socialists believed that
people of all classes could voluntarily adopt their plan for society if
it was presented convincingly.
Cooperative socialism could be established among like-minded people in
small communities that would demonstrate the feasibility of their plan
for the broader society. Because of this tendency, utopian socialism was also related to classical radicalism, a left-wing liberal ideology.
Development
The term utopian socialism was introduced by Karl Marx in "For a Ruthless Criticism of Everything" in 1843 and then developed in The Communist Manifesto in 1848.[citation needed]
The term was used by later socialist thinkers to describe early
socialist or quasi-socialist intellectuals who created hypothetical
visions of egalitarian, communal, meritocratic, or other notions of perfect societies without considering how these societies could be created or sustained.[citation needed]
In The Poverty of Philosophy, Marx criticized the economic and philosophical arguments of Proudhon set forth in The System of Economic Contradictions, or The Philosophy of Poverty. Marx accused Proudhon of wanting to rise above the bourgeoisie. In the history of Marx's thought and Marxism,
this work is pivotal in the distinction between the concepts of utopian
socialism and what Marx and the Marxists claimed as scientific
socialism. Although utopian socialists shared few political, social, or
economic perspectives, Marx and Engels argued that they shared certain
intellectual characteristics. In The Communist Manifesto, Marx and Friedrich Engels wrote:
The
undeveloped state of the class struggle, as well as their own
surroundings, causes Socialists of this kind to consider themselves far
superior to all class antagonisms. They want to improve the condition of
every member of society, even that of the most favored. Hence, they
habitually appeal to society at large, without distinction of class;
nay, by preference, to the ruling class. For how can people, when once
they understand their system, fail to see it in the best possible plan
of the best possible state of society? Hence, they reject all political,
and especially all revolutionary, action; they wish to attain their
ends by peaceful means, and endeavor, by small experiments, necessarily
doomed to failure, and by the force of example, to pave the way for the
new social Gospel.
Marx and Engels associated utopian
socialism with communitarian socialism which similarly sees the
establishment of small intentional communities as both a strategy for
achieving and the final form of a socialist society.[8] Marx and Engels used the term scientific socialism
to describe the type of socialism they saw themselves developing.
According to Engels, socialism was not "an accidental discovery of this
or that ingenious brain, but the necessary outcome of the struggle
between two historically developed classes, namely the proletariat and
the bourgeoisie. Its task was no longer to manufacture a system of
society as perfect as possible, but to examine the historical-economic
succession of events from which these classes and their antagonism had
of necessity sprung, and to discover in the economic conditions thus
created the means of ending the conflict". Critics have argued that
utopian socialists who established experimental communities were in fact
trying to apply the scientific method to human social organization and were therefore not utopian. On the basis of Karl Popper's definition of science as "the practice of experimentation, of hypothesis and test", Joshua Muravchik
argued that "Owen and Fourier and their followers were the real
'scientific socialists.' They hit upon the idea of socialism, and they
tested it by attempting to form socialist communities". By contrast,
Muravchik further argued that Marx made untestable predictions about the
future and that Marx's view that socialism would be created by
impersonal historical forces may lead one to conclude that it is
unnecessary to strive for socialism because it will happen anyway.
Social unrest between the employee and employer in a society
results from the growth of productive forces such as technology and
natural resources are the main causes of social and economic
development.
These productive forces require a mode of production, or an economic
system, that's based around private property rights and institutions
that determine the wage for labor. Additionally, the capitalist rulers control the modes of production.
This ideological economic structure allows the bourgeoises to undermine
the worker's sensibility of their place in society, being that the
bourgeoises rule the society in their own interests. These rulers of
society exploit the relationship between labor and capital, allowing for
them to maximize their profit.
To Marx and Engels, the profiteering through the exploitation of
workers is the core issue of capitalism, explaining their beliefs for
the oppression of the working class. Capitalism will reach a certain
stage, one of which it cannot progress society forward, resulting in the
seeding of socialism.
As a socialist, Marx theorized the internal failures of capitalism. He
described how the tensions between the productive forces and the modes
of production would lead to the downfall of capitalism through a social
revolution.
Leading the revolution would be the proletariat, being that the
preeminence of the bourgeoise would end. Marx's vision of his society
established that there would be no classes, freedom of mankind, and the
opportunity of self-interested labor to rid any alienation. In Marx's view, the socialist society would better the lives of the working class by introducing equality for all.
Since the mid-19th century, Engels overtook utopian socialism in
terms of intellectual development and number of adherents. At one time
almost half the population of the world lived under regimes that claimed
to be Marxist. Currents such as Owenism and Fourierism
attracted the interest of numerous later authors but failed to compete
with the now dominant Marxist and Anarchist schools on a political
level. It has been noted that they exerted a significant influence on
the emergence of new religious movements such as spiritualism and occultism.
Utopian socialists were seen as wanting to expand the principles
of the French revolution in order to create a more rational society.
Despite being labeled as utopian by later socialists, their aims were
not always utopian and their values often included rigid support for the
scientific method and the creation of a society based upon scientific
understanding.
In literature and in practice
Utopian socialist pamphlet of Swiss social medical doctor Rudolf Sutermeister (1802–1868)
Edward Bellamy (1850–1898) published Looking Backward
in 1888, a utopian romance novel about a future socialist society. In
Bellamy's utopia, property was held in common and money replaced with a
system of equal credit for all. Valid for a year and non-transferable
between individuals, credit expenditure was to be tracked via
"credit-cards" (which bear no resemblance to modern credit cards which
are tools of debt-finance). Labour was compulsory from age 21 to 40 and
organised via various departments of an Industrial Army to which most
citizens belonged. Working hours were to be cut drastically due to
technological advances (including organisational). People were expected
to be motivated by a Religion of Solidarity and criminal behavior was
treated as a form of mental illness or "atavism". The book ranked as
second or third best seller of its time (after Uncle Tom's Cabin and Ben Hur). In 1897, Bellamy published a sequel entitled Equality as a reply to his critics and which lacked the Industrial Army and other authoritarian aspects.
William Morris (1834–1896) published News from Nowhere in 1890, partly as a response to Bellamy's Looking Backward,
which he equated with the socialism of Fabians such as Sydney Webb.
Morris' vision of the future socialist society was centred around his
concept of useful work as opposed to useless toil and the redemption of
human labour. Morris believed that all work should be artistic, in the
sense that the worker should find it both pleasurable and an outlet for
creativity. Morris' conception of labour thus bears strong resemblance
to Fourier's, while Bellamy's (the reduction of labour) is more akin to
that of Saint-Simon or in aspects Marx.
Many participants in the historical kibbutz movement in Israel were motivated by utopian socialist ideas. Augustin Souchy
(1892–1984) spent most of his life investigating and participating in
many kinds of socialist communities. Souchy wrote about his experiences
in his autobiography Beware! Anarchist! Behavioral psychologist B. F. Skinner (1904–1990) published Walden Two in 1948. The Twin Oaks Community was originally based on his ideas. Ursula K. Le Guin (1929-2018) wrote about an impoverished anarchist society in her book The Dispossessed,
published in 1974, in which the anarchists agree to leave their home
planet and colonize a barely habitable moon in order to avoid a bloody
revolution.
