Economia

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.

There is another critical advantage from the Tobin tax: Substantial revenue (in the hundreds of billions annualy) which could be used towards internationally-agreed purposes, including poverty eradication. Such a large amount of money would easily fulfill Jeffrey Sachs’ requirements, laid out in his latest book, The End of Poverty. Last but not least, the Tobin tax would return an element of control over the financial markets to the various governments - though little as that may be.

But if the Tobin tax was perfect, we would probably have seen it implemented by now. There are problems with both the tax itself and the implementation process. Firstly, consider the magnitude of the tax. All parties agree that the tax should be minimal - easily less than 0.5% - but considering that currencies have devalued by up to 50% during recent crises, would such a small penalty even sting? But raising the Tobin tax would result in penalising conventional business activity, so there doesn’t seem to be a solution from this end.

What about the most traditional of taxation nightmares, tax avoidance? Financial instruments are now so sophisticated that the only way to ensure that speculators are locked solid would be taxing every sort of financial instrument available today. This would mean taxing derivatives like foreign exchange futures, which would generally result in serious management problems as no money is actually exchanged on the spot. This administration problem actually holds for even the general implementation of the Tobin tax given the large number of foreign exchange markets and transactions.

But even with all the negative notions attached to the Tobin tax, it has not been denied that the tax would be a useful one if implemented correctly. The problem is the lack of international support and cooperation towards its introduction. Even global organisations like th International Monetary Fund (IMF) have not declared their support for the idea. As such, it is likely that we will have to live with the current currency instabilities for a long time to come.