The Race to the Bottom Hypothesis applied to Spatial Planning in the Swiss cantons

List of contents

1. Introduction

2. Race to the Bottom Hypothesis
2.1. What does the race to the bottom hypothesis say?
2.2 Factors influencing the probability of a race to the bottom
2.3. Remedies for a race to the bottom
2.4. Linguistic ambiguity

3. Evidence from Switzerland
3.1. Defining bottom for land use policy
3.2. Presenting the evidence
a) Characteristics of secondary residences
b) Correlation between share of secondary residences and income
c) Characteristics of land use policy
d) Reducing cantonal expenditures for land use policy
e) Tax policy
f) Mobility of capital and labour
g) Share of cantonal GDP of the secondary residence sector
h) Relative influence of pro-secondary residence lobby groups

4. Conclusion

5. List of references

6. Appendix

List of figures

Figure 1: Share of secondary residences per Swiss canton

Figure 2: Map of communities with a share of secondary residences higher than 20 %

Figure 3: Mean income per capita in the Swiss cantons

Figure 4: Incorporation of secondary residences into the spatial development plans

Figure 5: Change rate in expenses for environment and spatial planning

Figure 6: Popular vote on theZweitwohnungsinitiative11 March 2012

Appendix

Figure 7: Share of secondary residences in % of total cantonal residences

Figure 8: Aggregated change in cantonal expenditures on environment and spatial
planning

List of abbreviations

illustration not visible in this excerpt

1. Introduction

It is an ongoing discussion in the political science literature whether a federalist country rather provides a valuable setting for policy experimentation in the subnational entities or whether too much autonomy leads to destructive competition among them. One often mentioned and tested approach to the field is the race to the bottom hypothesis. The hypothesis has been used in studies on tax policy, economic development, social policy, wage setting, environmental policy and many more (Harrison 2006: 20-21). In this seminar paper the race to the bottom hypothesis will be tested for land use policy and therein the regulation of secondary residences in Switzerland. I will apply the indicators Nancy Olewiler used for her study on air pollution policy in the Canadian Federation from 2006 and make modifications where necessary. Following the Swiss Federal Office for Building and Regional Planning (ARE), secondary residences are defined as follows: every residence that is not the main residence for someone and therefore only temporarily inhabited is a secondary residence. Secondary residences can be used as private second homes for the owners, as private vacational residences that are also rented to friends and relatives and as commercially managed holiday apartments (ARE 2010: 8).

The broader frame for the study is provided through the people´s legislative initiative on the federal level on secondary residences, theZweitwohnungsinitiative. It has been submitted to a popular vote in Switzerland on 11 March 2012 and succeeded with a razor-thin majority of 50.6 % of total votes. The initiative demands that the share of secondary residences in the Swiss communities can not exceed 20 % of the total number of residences. In those communities that already have a higher share an immediate building freeze has to be enacted. Longchamp et al. showed that the share of secondary residences in a community is a good explanatory for the result of the popular vote (Longchamp et. al 2012: 3). Those communities with a share already higher than 20 % mostly voted no, while the communities with less secondary residences rather voted yes (ibid.). Hence, one can argue that those parts of Switzerland that will not be heavily affected by the implementation of the initiative imposed the building limitation on those parts that effectively will be. In finance terms, this is a violation of the principle of institutional congruence whereupon those groups that decide on a policy have to be those that are affected by it and pay the costs (Blankart 2011: 206). The direct democratic structure of Switzerland enables in it´s extremes an unaffected majority to dictate policies to a highly affected minority. The result of the popular vote shows the fear of the Swiss people that some cantons will use their autonomy in land use policy to attract building companies, investors and tourists by lowering the standards for second residences. The fear of an uncontrolled development and housing sprawl that destroy the beautiful rural parts of Switzerland is rampant among the more urban cantons. This conflict is intensified by the economic meaning of second residences for the touristic regions in rural and alpine Switzerland. According to the ARE, the local building sectors fear to lose their economic means of existence without a strong subsector for secondary residences. Equally, for tourism companies a sufficient number of diverse types of accommodation in a region is vital (ARE 2010: 6). On the other hand, there is the traditional hotel sector that feels threatened by the growing competition through privately leased secondary residences. And the local residents suffer from rising real estate prices and villages that are characterized by so called cold beds during the low season (ibid.).

The paper will start with an introduction into the basic assumptions and implications of the race to the bottom hypothesis and point out the theoretical suggestions how a race to the bottom between subnational entities can be overcome (Chapter 2). Chapter 3 provides the empirical evidence in favour and against a race to the bottom in land use policy among the Swiss cantons. Building on the data we will be able to assess the overall robustness of the hypothesis for the regulation of secondary residences in Switzerland. Chapter 4 concludes with a resume of the findings, possible explanations and a classification of theZweitwohnungsinitiativein the field.

2. Race to the Bottom Hypothesis

2.1. What does the race to the bottom hypothesis say?

In a federal system with more or less sovereign subnational entities, goods, services, people and capital can move freely across jurisdictional borders. A race to the bottom in taxes, labour or environmental standards is triggered by the subnational states that compete for those flowing goods (Harrison 2006: 1). There are two scientific views on the effects of this free movement: one that sees interjurisdictional competition as destructive or inefficient force that reduces citizens´ welfare and one that sees such competition as desirable force that enhances democratic accountability and economic efficiency (ibid. 3). The race to the bottom hypothesis dates far back. In a book from 1967 Georg Break stated that governments from competing jurisdictions closely monitor the tax levels of rival jurisdictions and react strategically to them in their own tax policy decisions. According to the hypothesis, subnational governments do not lightly set higher taxes independently. The effect of this behaviour is a generally low overall tax level in a federal country (Oates 1999: 1134).

For the following study on land use policy in Switzerland we need to extend the hypothesis to environmental policy: In order to attract new business and create jobs, public officials compete by reducing local environmental standards to lower the costs of regulative measures for firms that locate within their borders. In this case, interjurisdictional competition leads to excessive environmental degradation (Oates 1999: 1135). In the case of land use policy and the special field of secondary residences a race to the bottom can be depicted as lenient regulations for the construction and utilisation of those residences. The lower the costs for home owners that use some of their properties as secondary residences in one of the ways mentioned in the introduction, the more willing they will be to keep their properties and construct new ones. This can attract tourists, generate tax revenue and promote the economic development of a region. Therein lies an important precondition for a race to the bottom: We need to observe competition among subnational governments rather than cooperation. The next chapter will introduce four other factors than influence the probability of a race to the bottom.

2.2. Factors influencing the probability of a race to the bottom

The degree of autonomy for subnational entities is the most important factor for interjurisdictional competition. Subnational states can react strategically to interjurisdictional competition only to the extent that they have meaningful autonomy in a given policy field (Harrison 2006: 7). Secondly, the credibility of an actor´s or industry´s threat of relocation will influence the probability of a race to the bottom (ibid.). The credibility will depend on costs and benefits to the actor. Those in turn are influenced by the magnitude of policy divergence between the subnational state of residence and the new one as well as the significance of that divergence to the actor, the legal impediments to relocation, the distance and the actor´s ties to the community (ibid.). Thirdly, the impact of the actor´s relocation will play an important role (ibid.). If a Swiss canton does not depend economically on tourism and secondary residences, it might not care if some investors, constructors or home owners leave it´s territory to invest, build and work in another canton. Hence, it is not vulnerable to the competition with it´s neighbours and can set it´s policies independently. In general, the relocation of capital is less costly than the relocation of a firm or individual (ibid: 8).

2.3. Remedies for a race to the bottom

In the literature, one can find two broad options for responding to a potential race to the bottom: a) Harmonization among the subnational entities without interference or binding standards from the federal level. This is most promising in an institutional setting where the subnational governments can meet face to face on a regular basis. The provincial coordination is used to avoid races to the bottom (Harrison 2006: 17^[1]). b) Intervention of the federal government which sets binding standards of it´s own. It can promote equalization between the subnational states instead of diversity through binding lower levels of regulation (coercion), monetary incentives or persuasion (ibid. 18). Of course, an intervention of a higher governmental level to ostensibly stop a race to the bottom may also be a welcome reason to broaden the jurisdiction and influence of a national or even supranational authority.

2.4. Linguistic ambiguity

In an essay from 1996, Swire points out that the terms race to the bottom - and race to the top for the contrary development of competition for stricter regulation - have been used in two distinct senses without sufficient distinction (Swire 1996: 79). On the one hand, he discovers a descriptive sense where the terms bottom and top describe whether interjurisdictional competition leads to lower or higher standards in the sense of less or more governmental intervention. On the other hand, he sees a prescriptive meaning where the terms have a more normative character and stand for less or more efficient or otherwise desirable outcomes due to the competition (ibid: 74-76). Swire proposes a distinction between these two meanings: a race to laxity versus a race to strictness for the descriptive meaning and a race to desirability versus a race to undesirability for the prescriptive sense. In the case of the races to laxity and strictness the bottom line is where there´s no governmental intervention into a particular policy field. For the races to desirability and undesirability it is far from obvious how an efficient and desirable goal in any policy field ought to be measured. “The term desirability stands as a placeholder for whatever goals will typically be in dispute” (ibid.). In the traditional ideas of a race to the bottom, the literature has mixed races to laxity and races to undesirability or combined them to analyse a policy development that is characterised by less regulation and standards that are below what citizens would prefer (ibid. 80). For the sake of unambiguousness this paper will focus on the hypothesis as a race to laxity versus strictness because more or less regulation is easier to measure than outcomes in terms of desirability. Still, it is important to bear in mind that the terms laxity or bottom and strictness or top say nothing about the normative or democratic quality of a certain policy.

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^[1]For more insight on this matter see Potoski 2001: 135 and Swire 1996: 68