The destructive turbulence of global markets has aroused interest in a measure that would not only calm the financial waters but also perhaps eliminate abject poverty. In 1978, Professor James Tobin proposed a 0.5 percent tax on foreign exchange transactions. The effect of what has since become known as the Tobin Tax would be to reduce exchange-rate volatility caused by short-term, speculative transactions, which enrich the few and impoverish the many.
The value of international exchange transactions is generally estimated at more than $1.5 trillion each day, of which a mere 5 percent is directly related to settlements for traded goods and services. The short-term transactions can mostly be classified as unproductive speculation.
The Tobin Tax wouldn’t be sufficient to discourage foreign exchange speculation. The international banking system should investigate other methods to limit the destabilizing effects of speculation. For example, after the Mexico crisis, some Latin American countries, such as Brazil, Chile, and Colombia, introduced a tax system favoring long-term investment over short-term speculation. In Chile and Colombia, the central bank imposed a deposit requirement for currency trades.
Many economists and conservative leaders argue that removing restrictions on capital flows has had an overall beneficial effect on the international economy. They regard imposing restrictions as mistaken. Speculation, they would say, automatically corrects economic malfunctions; clever speculators spotted the weaknesses of the South East Asian economy and promptly launched a financial attack against the Thai baht. The whole economic system collapsed, provoking a chain reaction in the region. Thus, free movement of capital lanced the economic abscess.
But advocates of such a view didn’t take into consideration the millions of people now facing poverty. While I don’t deny that the governments in South East Asia made economic errors, it’s cynical to advance a remedy that rewards a few speculators but hurts the poorest people. The main argument for the Tobin Tax is that it would end this cynical game. Another is that it would raise a huge amount of money, up to $1 trillion each year – revenue that could be put to excellent use.
The financial crisis in South East Asia forced the central banks to make tremendous efforts to save their national currencies, driving their foreign debt to new heights. In an attempt to dampen the crisis, the International Monetary Fund (IMF) invested vast sums of money. In contrast, the amount of money made available for official development assistance (ODA) is peanuts. Annually, Organization for Economic Cooperation and Development (OECD) countries donate a mere $50 billion to the developing countries. Many times this sum is needed to resolve the average financial crisis, in funds that eventually have to be paid back.
Moreover, obtaining these funds is conditioned on the implementation of a program of liberalization, deregulation, and slashing social spending. After these conditions are fulfilled, the donor countries set up all kinds of aid projects in a vain attempt to meet the direst needs that erupt.
In contrast, the Tobin Tax would both temper the speculation that leads to such crises, and provide funds to address them when they do occur in a manner far more beneficial to the countries affected. Unfortunately, the 20 January vote in the European Parliament illustrated the absence of a political majority willing to introduce the Tobin Tax, with 229 votes against, 223 in favor, and 36 abstentions. Therefore, we first have to reach a consensus in the national parliaments. To this end, I founded the ATTAC group (Action for a Tobin Tax to Aid Citizens) in the Belgian Parliament to broaden support for such a tax here. Like-minded parliamentarians in France and Finland have founded similar groups.
By analyzing the available information and initiating a debate between the parliament and civil society, we should be able to eliminate the existing prejudices against the Tobin Tax. The first step will be to introduce a resolution in the Belgian Parliament demanding that the government take a clear position during the next Interim Committee meeting of the IMF.
Next, we must convince the other parliaments to act likewise and return the discussion to the European Parliament and Commission. Eventually, the G7 grouping of the world’s wealthiest countries will have to decide on the tax. Until now, European finance ministers have neglected any discussion.
All that is needed to impose the Tobin Tax is political will. If world leaders are willing to recognize the necessity of stabilizing the financial markets and stress the importance of international solidarity, introduction of the Tobin Tax will just be a matter of time.
The Human Development Report 1997 stated that eliminating abject poverty doesn’t necessarily have to cost a lot. Meeting the basic needs (education, health, nutrition, and clean water) in developing countries would cost $40 billion each year. The same amount would be needed to eliminate abject poverty.
An annual investment of $80 billion would change the world into a better place to live. Introducing a tax of a mere 0.05 percent on global financial transactions would already be enough to give everyone what is in fact their right. In the name of free financial markets, one should not oppose such a simple idea.
Dirk Van Der Maelen is president of the parliamentarian group of Belgium’s Socialist Party.