Global Policy Forum

By Harlem Désir

The French Ministry of Finance has delivered its verdict: the Tobin tax is, they say, not feasible. Impracticable and counterproductive, they add, in a report just submitted to the National Assembly. That makes two reasons to say no. But, as is often the case when two reasons are given for a refusal, one may wonder whether the real reason is something else.

In essence, the Finance Ministry's report simply reaffirms the administration's position, which was already expressed in a report issued by the Finance Ministry in 1998. The argument against the possibility of establishing a tax of 0.005% to 0.1% on foreign-exchange transactions is well-known: in order to be effective, such a tax would have to be applied in all countries. But as the report notes, 'there is currently no consensus within the European Union, within the G7, or within the OECD'. One should therefore abandon the idea; applying the tax only in certain countries 'could provoke a widespread flight towards non-participating regions, and have the paradoxical effect of strengthening offshore financial markets'.

The supporters of the Tobin Tax have thus been warned. Their idea, though 'generous', could, in practice, play into the hands of the enemy, i.e. tax havens, which, as everyone knows and as the example of Monaco demonstrates, the Finance Ministry combats with the greatest vigour. However, this 'realistic' argument comes up against a major objection: although it is not often mentioned in this debate, taxes do indeed exist in many of the world's financial markets, such as the stock markets of Singapore (0.2%), Hong Kong (0.4%), Wall Street (0.0034 %), and Paris (0.6% to 0.3%). Everyone accepts these taxes, because they cover the operating costs of the stock exchanges, and provide for their security funds. Why would the Tobin Tax be less feasible?

The Finance Ministry's report offers another argument, which doubtless reveals the deeper reasons for its rejection of the Tobin Tax: a unilateral measure 'could aggravate the difficulties faced by the Paris foreign exchange market in competing with London and, to a lesser extent, with markets outside Europe'. In short, by implementing the Tobin Tax, France would be sending a negative message to the economic and financial world, which could, in turn, shun France. The converse of the same argument was presented by the British Minister of the Treasury to a delegation of members of the European Parliament and of the Chamber of Commons, to justify the British government's refusal to support the Tobin Tax: trading would relocate to other markets, and the City would lose jobs.

A sensible European mind would say that they should meet, and harmonise their positions. If Europe responds collectively and in a consistent manner, there will be no fiscal dumping between member states. But it seems that positions have been harmonised in the other direction, by a symmetrical commitment to do nothing. In fact, the French Ministry of Finance has presented, to reach the 'same objective' as the Tobin Tax, the same counter-proposals that were put forward by Tony Blair's government, as well as by the G7 after the Asian currency crisis of 1997. Although we have heard more and more declarations, since then, about the need for a 'new international financial architecture', in practice, the world's financial system has remained the same, as vulnerable as ever to its own excesses. It is difficult to see how the Finance Ministry's 'four main proposals', which are simply reformulations of the same pious hopes, would change anything:

'Define and implement a principle of organised financial liberalisation of capital flows', says the report. One might as well propose a better-organised disorder, since the very principle of financial liberalisation is not to organise at all, having established the free circulation of capital as a cardinal virtue.

According to the Bank for International Settlements, 1,800 billion dollars are exchanged every day, on average, on the foreign exchange markets, up from 200 billion dollars in 1986. Computerised trading systems, and the liberalisation of the market, have transformed into a flood what was, 20 years ago, only a marginal phenomenon. Today, more than 90% of foreign exchange transactions have no direct link with the exchange of merchandise, services or investments. More than 80% of these transactions involve the sale of currency purchased less than a week earlier. Traders speculate on variations, even minor ones, in interest and exchange rates, which they anticipate or provoke. Since the sums traded are considerable, a small variation can bring a large profit. But given their erratic and unpredictable character, these flows of capital can, in the space of a few hours, bring about the collapse of a currency, and plunge an entire country into a recession.

Mexico in 1995, Thailand in 1997 and Brazil in 1999, among many others, have learned this the hard way. George Soros's speculative attacks against the pound sterling in the 1990s, which brought him a profit of a million dollars in one day, have gone down in history. It was in an attempt to respond to this increasing disorder, which was already perceptible in the 1970s, that James Tobin, who won the Nobel prize in 1981, proposed his tax. It would be small enough not to affect investments or the exchange of merchandise, but by accumulating with each short-term currency exchange, it would slow down speculation. At the rate of 0.25%, a daily purchase and sale would cost nearly 50% per year.

The American congressmen who, in April 2000, proposed a resolution in favour of the Tobin Tax, compared it to the 'sin taxes' levied on tobacco and alcohol. Although these taxes do not completely eliminate undesirable practices, they reduce them, and they finance prevention. James Tobin expected that such a tax would stabilise financial flows, give states and central banks a greater autonomy in setting monetary policy, and provide a significant source of revenue.

In a recent interview in the French press, Robert Mundell, another laureate of the Nobel prize for economy, who is opposed to the Tobin Tax and whose work is known to have frequently inspired the Ministry of Finance, said that there was a risk that the tax would slow down certain movements of capital. This is a strange criticism, almost an homage, since that is precisely the objective of the tax.

But the debate centres on this very question. The supporters of the Tobin Tax do not believe that completely free circulation of capital leads to an optimal situation from the point of view of economic development. The Tobin Tax is certainly not a miracle cure. Other measures may, of course, be taken, and have been taken in certain countries in recent years, to reduce and discourage the movement of capital for short-term speculation.

For example, Malaysia and Chile require the deposit of a minimum percentage of capital invested for a certain period of time; this helps protect the stability of the local currency, and promotes long-term investment. But this meant violating the prescriptions of the IMF, which denounced these unilateral measures as impracticable, ruinous and counterproductive. Today, it is widely recognised that they have in fact been positive for these countries. That is why there is a certain irony in proposing, as the Finance Ministry's report does, a 'reinforcement of the role of the International Monetary Fund in the regulation of the financial system', without requiring that its objectives, policy and composition (e.g. the roles and relative influence of the poorest countries) first be redefined.

As for the report's main counter-proposal, one can only sympathise with its intentions, but it begs the question: 'Promote regional monetary cooperation, along the lines of what has been done in Europe, and initiate a real cooperation between the three principal monetary zones' is a traditional French position, but it has not escaped anyone's notice that the American Federal Reserve, for one, does not care a fig about the declining value of the euro, not to mention the fate of the Third World currencies. This is why increased cooperation between monetary zones, which is a long-term objective rather than a real focus for the work of international institutions, cannot be presented as an alternative to the Tobin Tax, and cannot be opposed to it in the name of feasibility.

It is hard to see how the Finance Ministry's fourth proposal, 'accelerate and intensify the fight against international speculation by fighting financial crime' is in conflict with the tax. If it were respected by the G8 countries, this commitment could only create conditions that would be more favourable to the introduction of the Tobin Tax. One way to deter traders from taking their activities to offshore markets would be to impose a surcharge on all movements of capital from these markets. It is a pity that the report does not suggest this.

In any case, it would be no easier to avoid the large markets when engaging in currency speculation than it currently is for those who trade on the stock markets. Of course, the more markets participate in the application of the Tobin Tax, the less practical such evasive tactics will be. Today, according to the Bank for International Settlements, 50% of foreign exchange transactions are carried out in financial markets located within the European Union. Europe therefore represents a critical mass, in market terms, which should enable the EU to become the first Tobin zone. Such a decision would have effects far beyond the borders of Europe. It would strengthen movements in favour of the tax in other regions of the world, where the debate would be completely transformed.

During the 1995 presidential campaign, Lionel Jospin was the first international leader, as he likes to remind us, to declare that he was in favour of a Tobin-type tax. On 1 July 2000, speaking to a group of young European socialists gathered on the occasion of the beginning of France's presidency of the EU, he said that it was time 'to promote it in international institutions'.

Which will win out: the political will affirmed at that time, or the Ministry of Finance? France can rely on the support that the Tobin Tax has found in an increasingly large number of countries in Europe and, moreover, on the new global public opinion which took the initiative by expressing itself in Seattle.

The Tobin Tax will not correct all the disorder and inequality that exists in the world today. But the Tobin Tax is a concrete proposition that would enable us to begin to counteract the domination of the financial markets, and to redistribute wealth on a global scale. It is a question of global justice. Depending on the level of taxation chosen, the estimates of the revenue that would be generated by the tax range from 50 to 250 billion dollars per year.

For the sake of comparison, the United Nations Program for Development estimates that it would cost 30 to 40 billion dollars per year to eliminate the most extreme forms of poverty by providing access to water, energy, sanitation, and education in the countries of the Third World. The Tobin Tax could prefigure the first 'global structural fund', following the example of the European structural funds, to help these countries catch up in terms of development, facilities and infrastructure, in a global market where, currently, might makes right. Europe can be the bearer of this vision, through the creation of the first global tax. France's presidency of the EU must not shy away from this opportunity, but must put this proposition on the agenda, as a priority for Europe.

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