The British Government outlined its opposition to a global tax on currency speculators yesterday ahead of the meeting of European Union finance ministers later this month.
The notion of a levy on speculators – commonly known as the Tobin tax after its originator James Tobin – has gained currency last month after it was endorsed by Lionel Jospin and Gerhard Schroder, the premiers of France and Germany respectively
But in a keynote speech on globalisation yesterday Jack Straw, the foreign secretary, said: "The Tobin tax risks distracting us from the real issue – how to respond to global poverty and inequality."
However, he went on to say he agreed with Chancellor Schroder, that the rich nations needed to tackle the "weak spots" in international financial regulation.
European politicians are definitely in the mood to talk about global poverty. The coming-of-age of the anti-globalisation movement – and its unpleasant offspring, the balaclava thug – has made the authorities realise they cannot brush these issues under the carpet.
Instead they seem prepared to debate a wider range of concerns including the influence of the financial markets, the power of the multinational corporations, the role of the International Monetary Fund and the World and more general issues such as global poverty, debt and environmental destruction. Tom Dawson, director of external affairs at the IMF, said: "The Fund would expect to be part of a dialogue as people look as to whether and how such a proposal might be implemented."
Despite Mr Straw's statement of opposition, Clare Short, the International Development Secretary, is in favour and the Treasury is understood to be open to debate.
Ed Balls, the Chancellor's chief economic policy adviser, is to meet Bernd Spahn, a German economist who has developed a refined "two-tier" tax with a higher tax rate during times of market turbulence.
Yesterday, the Treasury stuck to its line that it supported moves to deliver extra resources to relieve global poverty. "We are happy to look at ways of progressing this agenda with our European colleagues," said a spokeswoman.
The Treasury is understood to doubt the tax could work in practice – a view shared in the City – or that it would be effective. The chief concern is that a tax of 0.25 to 1.0 per cent would have done little to prevent recent emerging market crises such as 50 per cent devaluations in Thailand and Indonesia in 1997. There would also be opposition to a tax in the City, which successfully mobilised opposition to EU proposals for a withholding tax on cross-border investments.
London is the global capital of the foreign exchange market taking 32 per cent of the $2 trillion that is traded every day. London has more business than New York and Tokyo put together. One senior London currency trader said any tax would be "simply unworkable". "If it were introduced it would have to be done globally," he said. "But if, say, the European Union agreed to do it alone, that would automatically push the business to places such as Singapore or the Bahamas and it would just go off-shore."
He added it would require the agreement of all developed countries in the world. "You would also have to tell the difference between a genuine deal that is trade-related and a speculative trade," he said. "That is almost completely unworkable given the number of trades."
Proponents of the tax believe these objections are either weak or can be surmounted. In the UK the lead has been taken by War On Want, the charity, which believes that the tax would be a "win-win" deal for the poor. On the one hand it would reduce speculation by raising the cost of short-term deals while the money raised would boost the resources available to tackle global poverty. Steve Tibbett, its senior campaigner, said: "This is about market failure in the financial markets. It is about making markets deliver for a broad range of people, poor countries as well as rich."
He said War on Want's concern arose after seeing the impact on the crises in South-east Asia in 1997, Russia in 1998 and Brazil in 1999 had had in terms of unemployment in the developing world. It believes that a "two-tier" tax would answer criticisms that a levy would not work. He said it is practicable for the taxes to be collected on a national basis but instituted by international agreement. Despite fears France and Germany are supporting the idea simply to curry domestic political support and to placate the increasingly powerful anti-globalisation movement, Mr Tibbett believes it is a sign of progress.
"They could have given their support to any number of issues, such as debt, but they chose to make a statement about the Tobin tax," he said. "We want to get recognition of issues such as currency speculation and market instability. We have problems getting that message across and Tobin is a message for that."
Diane Coyle, a writer on global economics and managing director of Enlightenment Economics, a consultancy, said market instability needed to be tackled but that the Tobin tax was probably "impractical" for the reasons shared by the City and Treasury. She pointed to Chile, which instituted a "reserve ratio" where investors had to leave 5 per cent on deposit for a year before they could withdraw their investment. "The problem with a tax is that to work, it would have to be so high it would never get agreement," she said.
"Chile's system is flexible and can be administered by the country.
"There are lots of sensible market economists who believe that immature markets cannot cope with these flows and if there is to be liberalisation then there should be precautions in place."
JAMES TOBIN: A SEVENTIES SOLUTION TO CURRENCY SPECULATION
The idea of a levy on speculative global currency transactions was first proposed in 1978 by James Tobin, a Nobel Prize-winning economist and professor at Yale University in the US. It would be applied uniformly by all major countries. A tiny amount (less than 0.5 per cent) would be levied on all foreign currency exchange transactions to deter speculation on currency movements. The idea was not greeted with enthusiasm in the 1970s, as it was a period of optimism and confidence in floating exchange rates. In the current climate of hostility against speculators and all things global, the idea has been adopted by a wide range of non-governmental organisations. One irony is that Professor Tobin, now aged 83, has said he is uncomfortable his name has been adopted by groups that were involved in the violence at the G8 conference in Genoa. "They are abusing my name," he told Der Spiegel newspaper last week. "I have nothing to do with these anti-globalisation revolutionaries."
Professor Tobin, who was an adviser to US President John Kennedy, is best known as a liberal economist who was at the forefront of the criticism of right-wing monetarism.Reuse content