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Taxing the global casino

By James Ensor - posted Saturday, 15 September 2001

The world of international finance has become a global casino in which investors play the bond and currency markets in the hope of profiting from minute to minute, hourly or daily fluctuations in prices around the world. Traders make money from movements in currency values and interest rates, with the potential for the greatest profits in highly unstable markets such as those in Southeast Asia in 1997.

Approximately $1.5 trillion is traded in this way every day, 95% of which is short term speculation - with four out of every five trades completed within a week. This foreign exchange speculation now outstrips global trade in goods and services. Global trade in goods and services amounted to $ 6.5 billion in 1998, the equivalent of less than five days of trading on foreign exchange markets.

The majority of this speculative foreign exchange dealing is done by the world's largest banks. The world's top ten banks - including Merrill Lynch, Citigroup and Chase Manhattan - control 52% of the global foreign exchange market. The value of foreign exchange transactions conducted by Citigroup Bank in 1998 - $8.5 trillion - exceeded the value of the gross domestic product of the United States in that year. The banks operate in their own interest and on behalf of large corporate and private clients, insurance companies and superannuation funds.


Unlike investments in goods and services, speculators make money from money alone. No jobs are created and no services provided. The international investment banks are the big winners from such speculation. The losers are often those least able to pay the price - the poor and marginalised who are the victims of financial crises triggered by the rapid withdrawal of speculative funds from emerging economies. As the Southeast Asian, Russian and Mexican financial crisis demonstrated, an enormous human toll is extracted from the citizens of these countries when currency speculators rapidly withdraw their funds.

As national economies become more liberalised and integrated, future financial crises will be inevitable unless changes are made.

The Tobin Tax.

In 1978 Nobel Prize winning economist James Tobin proposed a small global tax be levied by all major countries on foreign exchange transactions in order to stem the rapid increase in currency speculation. Such a tax - now popularly referred to as a Tobin tax - would be set low enough so as not to have an adverse effect on trade in goods and services or long term investments, but would help stabilise exchange rates by making speculation less attractive.

If a Tobin tax were set at a rate of less than half of one percent of the value of each international currency transaction, the change in value of the currency would have to be greater than that amount for the currency speculation to be profitable. As speculative currency transactions usually occur on much smaller margins, a Tobin tax would reduce or eliminate the profits and hence the incentive to speculate.

A Tobin tax could serve to boost world trade by helping to stabilise exchange rates, as wildly fluctuating rates create significant uncertainty for legitimate businesses involved in international currency transactions. Less exchange rate volatility would result in businesses spending less money hedging (using cash to buy currencies as precaution against future price changes), freeing up capital for investment in new production.


A Tobin tax would also reduce the power financial markets have to determine the economic policies of national governments. Traditionally, a country's central bank was able to buy and sell its own currency on international markets to keep its value stable, most commonly buying the currency when heavy investor selling of the currency threatened to reduce its value. Many countries are now simply unable to protect their currencies from speculative attack because speculators now have more cash than all the central banks put together - official global central bank reserves are now less than half the value of one day of global foreign exchange turnover.

By reducing the volume of foreign exchange transactions, a Tobin tax would mean that central banks would not need as much reserve money to defend their currency, freeing up funds for productive investment for the benefit of their citizens in areas such as education, health and poverty reduction. By allowing Governments to act in the best interests of their own development, a Tobin tax would reduce the extent to which Governments are beholden to fickle financial markets.

Conservative estimates indicate that a Tobin tax could generate revenue of up to $300 billion annually. The potential benefits of these funds for poverty reduction are enormous. The United Nations estimates that the costs of wiping out the worst forms of the world's poverty and environmental destruction would be around $225 billion annually.

The biggest barrier to implementation of the Tobin tax is political will. The tax is viewed as a threat by the financial community and has met stiff resistance by a sector with huge political influence. The very concept of putting human development before markets challenges the current form of globalisation and those who control it. Despite this, the Tobin tax has growing support around the world, backed by governments, unions, academics and an international network of supporters groups.

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About the Author

James Ensor is Director of Public Policy at Oxfam Australia.

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