Global Policy Forum

By Glyn Ford and Harlem Desir

The decision by European economy and finance ministers in Liege on Sept. 23 to commission a study of the effect of "Tobin-style" taxes on currency transactions indicates a new and surprising high-water mark of support for taxation on speculative capital flows.

James Tobin, a Nobel Prize winner in economics, initially proposed such a tax to "throw sand under the wheels of international finance" and prevent the financial system from being hurt by its own excesses. He proposed that any funds raised be credited to the World Bank.

Recent modifications have captured and transformed the proposal almost beyond recognition. The Tobin tax has been presented by the anti-globalization movement as a foolproof way to stem speculative capital flows, suppress exchange-rate fluctuations and avert crises while simultaneously providing hundreds of billions of euros to alleviate Third World poverty and, perhaps, even turn back the tide of globalization itself. All rather exaggerated claims.

The result, though, is that Tobin has followed Karl Marx in dissociating himself from those claiming to be missionaries for his ideas.

Yet we should not throw out and reject a good idea merely because of the excesses of its proponents. Certainly the need is there. The revenues from such a tax could provide enormous help for the world's poor. In the mid-1990s, the United Nations Development Program estimated that the cost of eradicating the worst forms of poverty, supplying water and energy, and providing basic sanitary conditions and an educational structure in the Third World would cost $30 billion to $40 billion per year.

Nor is there much argument over whether curbs on the ever more rapid churning of money in financial markets would help control the worst excesses of the casino economy by imposing some friction on financial market transactions among speculators who buy and sell currency on a short-term, quick-profit, round-trip basis.

Furthermore, there is no evidence that a 0.1 percent tax, for example, would have a negative impact on the international funding of goods and services, although it would raise about 100 million euros. In fact, the stability brought by the tax could contribute to a healthier financial environment for companies that exchange real goods and services.

Since currency markets were liberalized, the transaction volume has increased 83 times. The assets that global banks now call upon equate to less than three days of trading on the international market. Global manufacturing and service sectors can only benefit from an economic environment that prevents years of work and effort from being wiped out by a currency market blip that crashes automatic selling programs, forcing currencies into crisis and states into economic recession.

The lesson of the collapse of the "Tiger economies" in the late '90s shows the potential benefits of a Tobin-style tax. Southeast Asian economies are still recovering. The currency debacle led to a loss of confidence among big and small investors, a withdrawal of capital and investment, and the closure of thousands of companies with the loss of millions of jobs. Industries, countries, cities and communities were devastated. Had a Tobin-style tax been in effect to help soften the scale or duration of the crisis, it would have been of enormous benefit.

The key issue is not whether Tobin-style taxes are needed, but can they actually work? The answer is yes for two reasons.

* The claim that the tax must be global is nonsense. Few currency transactions fail to start or finish in one of the world's harder currencies -- dollar, euro, yen or Swiss franc. Eighty percent of all foreign exchange transactions are handled in just seven countries (Britain, United States, Japan, Singapore, Switzerland, Germany and Hong Kong). It is increasingly clear that a Tobin-style tax could be applied to either dollar- or euro-based transactions alone. The former is unlikely, though, given the political complexion of the current administration.

* The tax is collectible. As economist Rodney Schmidt says, all you do is impose the tax at the settlement houses where all currency transactions eventually conclude.

Europe, with more than 75 percent of global foreign exchange transactions, has the opportunity to drive the debate forward. There is pressure for a study of how the European Union might impose the tax unilaterally, and how the proceeds might be distributed to the African, Caribbean and Pacific groups of countries overseen by the joint European Parliament ACP Assembly.

The sight of Tobin proponents on the streets of Seattle, Gothenburg or Genoa should not blind industry into opposing a tax that would contribute to providing a more stable economic platform to ensure not only their own well-being but also that of the countries in which they operate.

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