PERSPECTIVES FOR CURRENCY TRANSACTION TAXES AS A PART OF A NEW INTERNATIONAL FINANCIAL ARCHITECTURE
The proposal for a currency transaction tax (CTT) or the so- called Tobin tax was first made by James Tobin almost thirty years ago. While nothing has been done towards implementing such a tax – on the contrary, the liberalisation of capital markets and financial transfers has continued at an accelerated pace – the proposal remains valid and has gathered more support than ever before, particularly through the efforts of NGO networking.
Parliamentarians in many countries – not only in Europe but particularly in Canada – and in the European Parliament have embraced the proposal. Governments have been more circumspect, but I presumably would not be here today had not the Finnish government included in its government declaration last April the following paragraph:
”Transparency in international organisations must be increased and their ability to respond to the instability arising from free movement of capital and the challenges of globalisation must be strengthened. In this connection, the introduction of comprehensive international systems aimed at countering disturbances caused, for example, by short-term speculative capital movements must be addressed and clarified.”
Although this does not specifically mention the Tobin tax the intention is clear enough.
The Tobin tax is an almost deceptively simple idea: a tax levied on every currency change, set on a low enough level not be a hindrance on any transactions needed to finance real trade in goods and services or long-term capital investment but high enough to discourage the bulk of destabilising speculative money movements. Given the vast amount of daily currency transactions – almost 1500 billion dollars – a tax of just 0.1 percent could generate more income than the total amount of official development aid from the industrialised to the less-developed countries. The introduction of a Currency Transaction Tax could, at a stroke, solve all the problems of development financing.
Why has such a self-evidently wonderful idea not been put into practice? Could it be because it is, alas, too good to be true?
Usually the proposal is dismissed by referring to either the technical difficulties and unworkability of such a tax or the lack of universal support for the idea which makes it unenforceable, or both. Some also question whether the CTT would have been able to prevent any of the more serious financial crises of recent years involving extreme currency fluctuations.
To refer to the opposition to the proposal by enough if not all of the significant governments whose participation is usually taken as being crucial for the implementation of the CTT has an element of self-fulfilling prophesy about it. Nevertheless it is a very real argument, and ideas to circumvent this by having the tax introduced by a group of ”like-minded” countries acting as an avantgarde, are in my opinion both technically or politically even more unrealistic than a global agreement on the tax.
Given the existence of the Euro and the EU-countries commitment to the EMU it is not conceivable that individual EU-countries could act independently of the EU on the CTT. The elimination of currency fluctuations inside the Euro-area has also reduced the sense of urgency that was earlier felt concerning the risks of speculative currency fluctuation. It would be a mistake, however, to think that the Euro has insulated Europe from the potential instability of international financial markets. Thus, quite apart from considerations of balanced global development and the needs of the developing countries, Europe too has a vital interest in pursuing international financial stability.
Getting the Currency Transaction Tax on the International Agenda
Considering the wide scope of the popular debate on the Tobin tax surprisingly little research has actually been done or at least published on the practicalities of a CTT. To the best of my knowledge no International Financial Institution or other international organisations have in the recent past produced any published study (as distinct from limited circulation intra- organisation papers) on a Tobin tax-like international currency transaction tax.
I think the time has come to seek more clarification and authoritative analysis on currency transaction taxes. To this effect the efforts underway in the preparatory process for the UN Social Summit + 5 – which convenes this week in Geneva – to get a study launched on the idea of a Currency Transaction Tax and its potential advantages and disadvantages should be supported. We hope that other governments will join Finland in supporting the proposal for such a study and hope you can mobilise parliamentary support to that end.
Another UN process which we should also make full use of is the UN Conference on Development Finance to be held next year. The currency transaction tax should be promoted in that context and in the preparatory process for the conference.
The CTT must be seriously studied and should remain on the agenda until implemented, unless further study on the proposal definitely comes to the conclusion that it is impractical or non-workable. We should not, however, focus solely on the CTT pro posal. Regardless of what the final outcome on the CTT is we need to develop also other means and instruments for achieving more stability in the international financial markets have been developed and taken into use.