/REPEAT//DEVELOPMENT-FINANCE: Speculation Tax to Prevent Disasters

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Beatrice Newbery

LONDON, Sep 8 1999 (IPS) - War on Want, a London-based campaigning charity, is calling for a tax on currency speculation which would calm global markets and help to prevent the financial destruction recently seen in Indonesia, Thailand, Russia and Brazil.

War on Want’s campaign recommends a universal tax rate of 0.25 per cent to be levied on all foreign exchange transactions, and argues that this would reduce the volatility of global financial markets and provide a measure of stability.

It would also provide a new, independent source of global revenue, raising in excess of 250 billion dollars a year, which could be used for social development and poverty reduction all around the world.

That amount is five times more than the world currently spends on aid and, according to figures gathered by Jubilee 2000 – a coalition of non governmental groups – would pay off all international debt within eight months.

The world’s foreign exchange markets show evidence of increasing volatility. According to the Bank for International Settlements,1.5 trillion US dollars changed hands daily on world currency markets in 1998.

Daily trading in currency derivatives amounts to an additional 973 billion dollars, and is growing at a rapid rate. In the early 1970s, in contrast, the sum traded was18 billion.

War on Want says the current figure far outstrips the amount necessary to carry out trade: only five per cent of the money is necessary for financing trade in goods and services. All the rest is speculative activity.

“This volatility, which enables banks to make multi-million dollar profits, contributed to the Asian economic crisis. For the victims of this crisis, this instability has meant unemployment or wage cuts, debt or bankruptcy, reduced government spending, falling living standards and increased poverty,” a report released this week says.

A speculation tax is called ‘Tobin Tax,’ after the Nobel prize winning economist, James Tobin, who first proposed the idea in the 1970s. Accordingly, War on Want’s campaign is entitled ‘It’s Time for Tobin.’

The Tobin Tax has gained increasing credibility as an efficient method of public financing of world development, especially when most developed countries are unable or unwilling to meet their aid promises.

According to the OECD (Organization for Economic Cooperation and Development) total global aid to developing countries has fallen by about 15 per cent in the last two years alone.

In April, Canada’s parliament voted to support a Tobin Tax by a majority of two-to-one. Deputies from all parties backed the motion, which called on the government to enact a transaction tax “in concert with the international community”.

The increase in the volume of currency trading in the last three decades is due to the break up in the early 1970s of the system of fixed parities among major currencies established after World War II and a move to floating exchange rates.

It is also due to the growing liberalisation of financial markets, and the introduction of electronic trading which makes it possible to deal with a greater volume of trade.

War on Want’s report, entitled The Global Gamblers: British Banks and the Foreign Exchange Game, says that British banks are among the major winners from this increase in speculation. Most currency trading is transacted between banks.

And, while American investment banks dominate the markets worldwide, British banks also make substantial profits from foreign exchange trading.

London is the world’s largest foreign exchange market, handling approximately a third of all deals, with a turnover of 637 billion dollars a day. New York, Singapore and Tokyo are the other major markets.

“These kind of activities can have devastating consequences for the lives of our partners in Indonesia and Brazil”, said War on Want’s Director, Catherine Matheson. “It’s about time that banks realised that their short-term profits can mean someone else’s long-term suffering”.

“We are asking the British government to put the Tobin Tax high up on its international agenda. We must see an end to the gambling with the lives of others. It is time for the rich bankers to give something back,” she stressed.

War on Want’s campaign will not be plain sailing. Its opponents say that the Tobin Tax could discourage international trade by increasing the costs of it.

But Steve Tibbett, the campaign’s spokesman, argues that “given that trade is essential for economic growth, a very small tax is unlikely to kill the demand for trade in various countries.”

“Up to 40 per cent of current trade takes the form of the shipment of goods between the branches of transnational corporations financed by bookkeeping entries, rather than conversion of one currency into another. Therefore most of these transactions are not even liable to the tax,” he adds.

“In fact, trade would most likely be boosted by a Tobin Tax as greater confidence in exchange rate levels would allow better planning and forecasting of trade transactions,” Tibbett says.

At present, 84 per cent of all foreign exchange transactions occur in just nine countries. Introduction of the Tobin Tax in these and a few other countries may initially provide a workable tax regime.

War on Want recommends that the tax be instated through an international agreement, backed by national legislation and suggests that it is applied where the transactions occur or where the deal is made, making collection of the tax the responsibility of the national central bank.

The setting up of a global settlement bank The Continuous Linking Settlement (CLS) Bank, in mid-2000 will make identification and taxing of currency transactions much simpler. The CLS Bank will track settlements of all deals around the clock.