Global Policy Forum

By Young-Chul Kim

Paper presented at the January 16, 2003 Tobin Tax Conference in Washington, DC organized by the New Rules For Global Finance Coalition.

The Tobin Tax aims at hindering short term speculation and stabilizing exchange rates by levying a small tax rate on currency transaction. Considering the fact that people in East Asian countries were the victims of the financial crisis, it is very surprising to find that the general attitude toward the Tobin Tax, whether on the part of governments or the public, is so lukewarm. Hearty cheers for adoption of the Tobin Tax was expected, but the reality has been deep silence.

To understanding this strange situation, it is necessary to know how East Asian countries have pursued their economic growth. Foreign money has been desperately sought to sustain high economic growth due to their low domestic savings. Even they experienced such a fatal shock during the financial crisis, foreign money is not what they can dispense with, but what they should welcome to guarantee higher economic performance.

It can be said that East Asian countries are afraid of financial crises reoccurring in the future, while they are not interested in capital control which may deprive them of necessary foreign capital. Thus, the silence among East Asian countries on the issue of the Tobin Tax could be due to shortage of choice, but not to lack of courage or ignorance.

Politics of Recovery from the Crisis in East Asia

Various attempts have been made to explain the causes of the sudden collapse of East Asian countries. Some analysts have blamed the domestic policies, while others have questioned the role of global finance. However, the fact is that the crisis was the product of a combination of external and domestic factors, which globalization failed to integrate. Depending on which factor was dealt more seriously, recovering measures differed a lot by country. Moreover, China and Japan, two pivotal and rival countries in the region, took different approaches to cope with the crisis.

Contrast between Korea and Malaysia on Capital Control

In Korea, all the charges for causing the crisis were forwarded to domestic factors. Accordingly recovering measures focused on reforming the domestic economic structure. Being bailed out by the IMF, the Korean government was forced to follow the IMF directions. Restructuring programs were applied to the corporate, financial, public and labor sectors, with an emphasis on strengthening market discipline in economic and business sectors. Surely, capital controls were removed as a condition of accepting IMF bailout programs.

The Korean government never raised any question about the mischiefs of global finance and its negative impact on East Asian countries. Domestic politics explains in part why the Korean government took this position. There was a presidential election at the end of 1997 when Korea turned to the IMF to beg for bailout money. The president-elect, Dae-Jung Kim, who was basically reformist-minded, decided to take advantage of the financial crisis to push forward his reforming policies, restructuring the outdated Korean economic structure. He utilized the authority of the IMF to avoid internal resistance from the conservative political and economic groups against his reforming policies. For fulfilling this political purpose, the Korean government had to pay full commitment to the legitimacy of the IMF.

Malaysia took an opposite path in its recovering process from the crisis. Instead of approaching the IMF to help it out, the Malaysian government adopted exchange and capital controls, blaming global finance as a primary cause of the crisis. Minister Mahathir Mohammad justified the government's decision by making a severe attack on speculators, saying "there are a lot of things we can now do because we don't have to face actions of speculators to stop us. The free market has failed and failed disastrously because of abuses, not because the system is bad."

Some observers, however, believe that Mahathir's criticism against speculators was politically motivated. He intended to avert people's attention toward the external enemy to escape domestic political plight. The 'breathing space' provided by attacking the outside enemy was used by Mahathir to strengthen his political foothold in domestic politics. The Malaysian government provided bailouts of enterprises such as Sime Bank, Renong and Konsortium Perkapalan Berhad, but they are said to be owned and controlled by people close to Mahathir's family and political party. In the case of Malaysian, the political motivation cauded severe damages to the very purpose behind the logical justification of capital controls.

Struggle for a Hegemonic Role between China and Japan

China managed to protect its economy from the contagion effects of the East Asian financial crisis thanks to capital control. It still provides the country with policy instruments to deal with capital flows and its impact on the domestic economy. With the help of a fixed exchange rate and an independent monetary policy, the Chinese authorities have maintained financial stability. Although the Chinese government accepted the obligations of the IMF's Article VIII in December 1996 and thereby made the Yuan convertible on the current account, it has adopted a very cautious approach towards liberalization of capital account transactions. With emphasis on attracting long-term investment flows, China has taken special measures to restrict and curb portfolio investment and other short-term speculative inflows.

China has been able to keep off short term capital inflows as 80 percent of its external debt is long term and 90 percent of investments are in the form of FDI. At present, China is the biggest placement of foreign capital in the world, successfully complementing short domestic savings by and large. East Asian countries would like to see China exporting capital to them after sucking up massive amounts of FDI.

At the height of the 1997 financial crisis, when Asian currencies fell like dominos, China kept the worth of its currency steady, providing neighboring countries with a measure of stability, but at the expense of its worn external competitiveness. The East Asian crisis was a good opportunity for China to confirm its increased economic power. Recently Asian countries are talking about 'China threat', meaning that with Japanese economy still gloomy, China is becoming a hegemonic country by influencing East Asian countries the way the US did in the past.

With China emerging as an economic power in East Asia, Japan has feared a loss of influence in the region. East Asian countries benefited from the rise of the Yen against the dollar following the Plaza Accord of 1985 as their currencies were generally pegged against the dollar. The euphoria created by the global investment community in the 1990s was so high that countries previously known as developing countries earned the epithet of emerging markets. However, 'the Reverse Plaza Accord' which allowed to devalue the Yen in 1995 poured cold water upon the optimistic expectation for East Asian economies. The weak Yen deprived East Asian countries of the competitiveness of their exporting commodities, foreboding the economic crisis in a couple of years.

In September 1997, the Japanese government unilaterally proposed the establishment of an Asian Monetary Fund (AMF). The purpose of the AMF was to provide liquidity to forestall speculative attacks on the region's currencies. However, the Japanese proposal for AMF was turned down at the behest of the US and the European nations primarily because it challenged the monopoly of the IMF and the US role in the region. Notwithstanding several positive elements, one cannot overlook the fact that the Japanese proposal is instrumental to serve its interests in the region, just as the US uses the IMF to extend the interests of its corporations and financial institutions.

New Regional Mechanisms Sought for Economic Cooperation

Although the major players in East Asia are badly split over what must be done, one of the mantras after the onset of the East Asian economic crisis is the need to cooperate towards a regional solution to the crisis. It is true that when the financial crisis hit the East Asia in 1997, the region's economic institutions failed to deal with the crisis. Moreover, there was no effective cooperation program among East Asian countries in the financial sector. When the hedge fund attacked East Asian countries, they had to fight it alone. In the face of increasing instability of global financial markets, the need for regional institutions to dampen financial contagion is being increasingly acknowledged.

There are several reasons signifying the necessity of regional mechanisms. First, as individual countries lack resources and capacity to face severe financial crises, regional mechanisms can be useful in complementing national mechanisms. Second, greater attention must be paid at the regional level due to the regional concentration of financial and trade flows. Third, the contagion effects were substantially regional. Lastly, in comparison to the international mechanisms, regional mechanisms could be more appropriate, efficient and quick in controlling the contagion effects of the crisis. In the aftermath of the East Asian financial crisis, consequently, the debate on regional mechanisms at the East Asian level have been revived.

An important movement in the financial sector was the Chiang Mai Initiative, which in 2000 proposed an expansion of existing ASEAN swap arrangements, as well as the establishment of bilateral/unilateral swap arrangements among the ten ASEAN countries with China, Japan and Korea (ASEAN+3). Considering that a previous Japanese initiative of AMF floundered in the face of strong opposition from the IMF and the US, this movement is remarkable. The Chiang Mai Initiative has met with a favorable reception from various quarters, including the IMF as the Initiative stressed the strengthening of regional financial cooperation within the existing framework of ASEAN and its supplementary nature to IMF facilities.

There has been another significant trend toward building a new region mechanism for economic cooperation since the late 90s: FTA. The interest in FTA was driven by ASEAN, which decided in the early 90s to set up an ASEAN Free Trade Area (AFTA) and to reduce their tariffs. Furthermore, China and ASEAN have agreed to set up a China-AFTA within the next ten years and have conducted negotiations since the end of 2001. In an agreement between two of the more developed countries in Asia, the Japan-Singapore Economic Partnership Agreement(JSEPA) was made in January 2002. In addition Japan is currently conducting a FTA negotiation with ASEAN. Korea is just joining the discussion of FTA in the region and a Korea-Japan FTA would be a first step to be followed.

A driving force behind these movements is the increase in intra-region trade. Since the mid-1980s, firms from Japan, Asian NICs such as Korea, Taiwan and Hongkong, and currently China have actively engaged in FDI in other Asian countries. As a result, intra-firm trade increased rapidly between parent company and subsidiaries and intra-region trade increased as well. However, the financial crisis proved the simple expansion of regional trade is not sufficient, as an unexpected shock in one country has a negative impact on the other countries through a sudden decrease in trade and FDI. A natural logical step is to build a new organization to deal with this issue in East Asia, and FTA negotiations are one way to pursue this goal. In the past, the main purpose of a FTA was to imply increase trade volume among its member countries with tariff reduction. However, FTAs discussed in East Asia tend to focus on aspects beyond trade such as member countries' attraction of foreign investment, economic reforms and industrial cooperation.

Up to now Asian countries' first priority is export-oriented industrialization. As a result, their industrial structures are becoming similar to one another, leading to cutthroat competition in the world market. In this regard, particularly, industrial cooperation among three Northeast Asian countries, namely Korea, China, and Japan is crucial. Recently Supachai Panitchpakdi, secretary general of WTO, said that "the future of Asia was in the hands of these three countries. Collective effort is required in these economies to restructure and maintain growth otherwise there will be a holocaust instead of a mere depression." Japan has high technology and capital, China has a big market and abundant resources including low-cost labor and Korea has experience in economic development in a short span of time.

Even with some animosity inherited from the past and ongoing rivalry consciousness, their cooperation is getting more very crucial as they begin to share some fear that "the East Asian financial crisis provided Washington to launch an economic resubordination of the region via IMF programs promoting structural reform along free-market, Anglo-Saxon lines" as Walden Bello describes. The East Asian financial crisis gave an important momentum for them to think of the necessity to build regional mechanism for economic cooperation to remain an 'economic engine' in the future.

The Tobin Tax in the Context of East Asia

Some explanations on Lack of Interest in the Tobin Tax

East Asian countries were victims of the financial crisis. Considering the fact that the Tobin Tax became a global issue after the East Asian financial crisis, East Asian countries should have hailed the Tobin tax most. However, the reality is that Westerners take the leadership of promoting the Tobin Tax while East Asian countries, the victims of the crisis, are split on the issue and falter in making their united voice heard. There are some explanations for this, including the following:

First, East Asian countries are only interested in preventing the crisis from reoccurring in the future, but not in capital control itself which might cost more to induce capital inflows in their territories. Their national agenda of East Asian countries is to continue economic growth, which will inevitably lead to the attraction of foreign money. They don't want risk of slower economic growth by imposing the Tobin tax.

Second, people in East Asian countries simply understand the Tobin Tax as being levied on the very wealthiest countries and distributed among poor countries. In short, the Tobin Tax is viewed as the game between North and South, with some advocates simply motivated by ethical and humanitarian claims. But, speculative money gave people in East Asian countries 'real' shocks and the impact of the Tobin Tax would be much more pronounced to 'emerging' markets than any other countries. They find themselves distanced by the way Westerners deal with the issue of the Tobin Tax.

Third, the Tobin Tax needs capital liberalization as a condition to apply it. The Tax is meaningful only when capitals move freely across the national borders. As mentioned before, China and Malaysia employ domestic measure of capital control, following "policy-driven rather than market-driven" economic practices. They are successful in capital controls through domestic policy tools and, consequently, in no need of the global scale scheme of the Tobin tax.

Fourth, Korea, Indonesia and Thailand, faithful pupils of IMF, have promoted structural reform along free-market, Anglo-Saxon lines. They have liberalized capital and exchange markets according to the IMF direction. Currently they are left with very few domestic policy tools, if any, to protect its domestic markets from a speculative attack or external shock. These countries are actually in a dire need of the global mechanism to control speculation. Problem remains that the adoption of the Tobin Tax is a breach of faith to IMF and its ideology of Neoliberalism which these countries have been striving to materialize.

Fifth, civil power is a main engine to push the idea of the Tobin Tax. However, civil groups are not well organized in East Asia. Moreover, the weakly empowered civil groups concentrated most of their energy on domestic problems, such as improving civil rights and enhancing democracy. They tend to think that with poor human power and resources, priority should be given to solution of domestic problems rather than to devotion to the global issue such as the Tobin Tax as there still remain a lot of urgent tasks to be tackled by them domestically.

Campaigning the Tobin Tax from the Perspective of East Asia

How to position East Asia in the discussion of the Tobin Tax? East Asian countries were the victims of the 1997 financial crisis which actually triggered the discussion of the Tobin Tax worldwide while they continue to be the biggest demand for the global money for development.

The challenge is whether they can take advantage of the liberalization process, which to a large extent is being pushed on them externally, while at the same time avoiding the devastating consequences as in 1997. The kind of challenge faced by East Asia constitutes the heart of the question regarding the Tobin Tax. The campaign for the Tobin Tax could not be successful without tackling directly the East Asian dilemma.

For this, a special mechanism could be invented in the framework of the Tobin Tax to encourage FDIs, by providing high incentives for long-term investments. The revenue collected by levying a tax on the short-term financial transactions could be utilized for this purpose.

There comes a big trend to find ways of promoting regional economic cooperation among East Asian countries as shown in active discussion of FTA agreements among themselves. To take advantage of the trend of regional cooperation, while inducing East Asian countries to actively join the discussion of the Tobin Tax, it would be possible to build a regional-level governance body which supervises and rules the Tobin Tax in the region, having a certain degree of autonomy between national states and global institutions as the IMF and the World Bank.

Global civil citizenship is a main driving force to promote the campaign of the Tobin Tax. For this, consolidation of citizens in East Asian countries, or 'Civil Asia' should be built first. Global civil organizations and networks should pay more attention to this goal, not only to get supporters for the Tobin Tax from the region, but also to enhance democracy domestically and globally.