Charlotte Denny
The GuardianThe global financial crisis which began in Thailand in July 1997 has destroyed economies, thrown millions into poverty and set back development efforts in Asia and other regions by years. Most recently it has spread to Brazil and looks likely to threaten other Latin American countries this year.
Unbelievably, the catalyst for all this destruction was what might seem like a small event - a fall in the value of the Thai currency, the baht. Before the summer of 1997, Thailand fixed its currency to the US dollar in much the same way that in the early 1990s the UK pound was pegged to the value of the German mark in the European Exchange Rate Mechanism. Like Britain in 1992, Thailand found itself under attack by speculators - dealers in foreign exchange - who decided that the baht's value against the dollar was too high. When dealers sell a currency, it is hard for national governments to defend its value. The volume of money which changes hands on these markets each day - around $1.3 trillion - dwarfs the foreign exchange reserves that central banks hold. They can try and buy up the currency to support its value, but the speculators have far more money than they do and usually win the contest.
The Thai government was unable to defend the baht's dollar peg and gave up the fight on July 2nd. The speculators realised other currencies in the region were vulnerable. They turned their attention to the Indonesian and Korean currencies, triggering a wave of devaluations throughout the region.
The countries which were forced to devalue have paid a high price. To attract new foreign investors - so they could continue to pay the interest on their old loans - they have been forced to put up interest rates to punishingly high levels. High interest rates have thrown their economies into recession. Without access to foreign capital, companies have gone bankrupt and many workers have lost their jobs. In Indonesia alone, an estimated 11 million people have joined the breadline.
Foreign exchange dealing isn't just about speculation. Dealers buy or sell on behalf of clients who are importing goods from other countries, or want to make long term investments in other economies. But most of the $1.3 trillion is so-called hot money - short term funds in search of the best return.
One profitable option for the dealers is betting against a currency. If they borrow a currency in order to sell and it loses value, they can repay their loan at a lower rate. If they win their gamble they make huge profits. It is the workers and firms in the country whose currency is destroyed who pay the price.
One solution to all this instability was proposed some years ago by a Nobel prize winning economist James Tobin. Tobin said that foreign exchange dealing ought to be taxed at a low level - say one per cent or less of each transaction. Genuine exchange dealings for real goods or investment might be slightly reduced but would go ahead in most cases. But the speculators would find that their activities suddenly became more expensive. To win their bets, they have to move huge volumes of money. A Tobin Tax would, as its inventor said, throw some sand in the wheels of global finance.
It would take considerable political effort to achieve an effective tax on speculation. If just one country refused to join in, then large parts of the finance industry would relocate in a flash to where they could operate unhindered.
But as the cost of the ongoing fallout from the Thai devaluation mounts, and the G7 is unable to come up with effective alternatives, a growing number of campaigners are reassessing Tobin's idea. It is simple and easy to understand, unlike the grandiose plans to "reform the world's financial architecture" being touted by Britain and other countries which seem to be more about grand statements than practical politics.
A Tobin Tax could reap a double benefit. If it works, the volume of foreign exchange transaction will be reduced but will not be completely extinguished. So the tax should raise some revenue. Why shouldn't this be invested in the people who usually gain least from the activities of the financial markets, the world's poor? A tax which cuts down on speculation and is invested in poverty reduction would be a win-win solution for development.
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