As pointed out in the introduction, scores of sophisticated analyses reveal that the race to the bottom is not a concern in developed countries. Does this imply that fears of a race to the bottom in the developing world are also misplaced? A full answer to this question must begin with an account of why globalization might affect rich and poor countries differently. That is, are there compelling reasons to expect a different outcome in developing countries from what has occurred in their more developed counterparts?

I argue that it is domestic institutional differences between developed and developing countries, especially those involving labor, that give rise to different policy reactions to international market expansion. In the current economic environment, the ability of labor market institutions in the developing nations to negotiate compromises effectively (or not) between government, labor, and business is the chief factor creating these differences. Unlike the advanced industrialized nations, where labor tends to be more organized and institutions more broad-based, the fragmented character of LDC labor organizations makes it near-impossible for them to negotiate with one voice, and the differing agendas give governments under pressure from international markets the leeway to reduce benefits. Thus, without mobilized and coordinated labor market institutions, RTB pressures prevail, and retrenchment in social spending will take place.

This chapter attempts to unravel how and why the effects of globalization in the developing world are mediated by domestic institutions linked to labor.