The Tobin Tax
March 17th, 2006
In the early 1970s, the daily turnover in the world’s foreign exchange markets was approximately US$18 billion. In the mid-1980s, it was around US$150 billion. Just two years ago, in 2004, it was a massive US$1.9 trillion (up from US$1.8 trillion in 2002). We are talking about growth previously unimaginable, but when seen in the light of the almost equivalent growth in speculative activity, the massive turnover seems less surprising.
Speculative flows have become one of the most fearsome forces in the world - capable of delivering great currency instability and financial crises, especially at times of economic uncertainty. In our region alone (South-East Asia), we’ve experienced the 1997 Asian Financial Crisis that started in Thailand, and eventually consumed most countries in Asia. The Russian rouble’s meltdown in 1998 and the Argentinian crisis in 2001 are more recent, but possibly less devastating examples.
It is in the wake of this powerful speculative force that the Tobin tax has been considered. In 1978, James Tobin - a Nobel-prize winning economist - first suggested a small tax on foreign exchange transactions, that would be applied on most, if not all, major economies. The tax would just be tiny one, about 0.1 to 0.5 percent, payable on all spot or cash exchange rate transactions, to deter speculative activity. It was argued that this would make speculative transactions more costly and would therefore, reduce the volume of such transactions - leading to possibly greater exchange rate stability.
