Global Policy Forum

The Real Impact of Currency Speculation in the 1990s

By Helen Hayward

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The globalisation of financial markets has led to a succession of financial and economic crises. The events of the last decade suggest that these crises can be expected to recur with increasing frequency, and that they will prove progressively more costly to deal with, in social and economic terms.

A central factor in the financial crises of the 1990s has been the role of currency speculation. Speculation can be defined as "the act of buying and selling with the aim of benefiting from price movements, rather than to finance international trade, or to acquire interest-bearing assets".

These crises have had devastating consequences for the developing world, and a disastrous impact on the poor. Populations have been hit by rising unemployment, wage cuts, inflation and reductions in public spending. Vulnerable sectors - women, children and the elderly - have been particularly hard hit. The progress of human development is being thwarted by the failure of governments and international institutions to regulate the global economy.

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A reliance on volatile forms of short-term investment leaves the fragile economies of developing countries vulnerable to sudden changes in financial markets. One common thread in all these crises is the central role of speculative trading on foreign exchange markets. The increased frequency of financial crises must raise questions as to the desirability of pursuing policies aimed at the progressive liberalisation and deregulation of financial markets, and urge the consideration of measures instead aimed at stabilising this volatility. A Tobin tax - a small universal tax on currency transactions - could help to deter speculation by making currency trading more costly.

There are arguments to suggest that such a tax could act in particular to deter short-term transactions, because it would make the rapid movement of large sums of money between countries more expensive. The disincentive to long-term capital flows would be much smaller. The volume of destabilising short-term capital flows would decrease, leading to greater exchange rate stability. It might enhance not only market efficiency but also global financial stability. It could reduce the volatility of global financial markets, allowing greater scope for the exercise of fiscal and monetary policy within nation states. It could also restore some of the autonomy governments and central banks can lose as a result of speculation.

The other advantage of a Tobin tax, and one particularly appropriate in view of the current diminishing scale of aid budgets, is its revenue-raising potential. The progressive globalisation and liberalisation of the world's economy, and the increasing frequency of economic crises, render the adoption, or at least the consideration, of such a measure a matter of some urgency.

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