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FINANCIAL SPECULATION - TAMING THE SHREW

by Judith Achieng

Copenhagen,21 Jun 2000 (IPS) -- If Jesper Jespersen had his way, global financial speculation, described as a ‘hot money casino’ by its astronomical growth over the last decade, would have been tamed.

The solution to what he terms a ‘threat to the global financial system’ is, according to the Danish professor of economics, the Tobin Tax.

This is a small tax proposed in 1978 by economist and Nobel Prize winner, James Tobin, on all currency transactions.

According to Tobin, the tax, usually small at less than 0.5%, would not only ‘throw sand in the wheels’ of speculation, but also generate revenue which can be directed to other development areas.

Jespersen, who lectures at the Copenhagen’s Roskilde University Centre, is among a growing number of experts who, fearing future economic crises similar to those triggered by speculation in South East Asia in 1998, are calling for new safeguards to curb the growing financial markets.

The South East Asian experience has also seen the growth of numerous civil society and non-governmental organisations, acting in solidarity to pressure their governments to support the enactment of the Tobin taxation system.

“Just like smoking, speculation must be forbidden, or taxed, in an attempt to reduce the side effects,” Jespersen told a public social development meeting here this week.

The meeting, Solidarity 2000, organised by the Danish association of international cooperation (MS), brings together some 400 hundred delegates from third world countries to discuss progress in social development.

The meeting is preparatory to the Copenhagen+5 meeting to be held in Geneva, Switzerland next week.

The Tobin Tax, experts argue, would not only improve the behaviour of investors but also generate revenue for states to inject into other development projects.

The social effects of the tax, they say, will include more stable economies, since it is expected that the tax is generally higher than the marginal profits obtained from the quick currency transactions. It would also increase funds for development and social areas.

“Tobin tax is a ‘sin’ tax designed to punish an activity that results in unacceptable social and economic costs to the majority,” says Robin Round, of the Vancouver based Halifax Initiative.

“The tax is about economic justice. We need to put people before markets,” she says.

The world capital markets, with the new Bretton Woods-led liberalisation has, in the last few years, resulted in a major increase in short term speculative financial movements across borders.

At a $1.5 trillion daily flow, the international financial transactions, most of which are based purely on speculation of currency value and interest rates, are estimated at 50 times the size of global trade. This figure is doubled every 10 years.

Other groups in both in the North and the South are calling for new monetary systems which can control the unstable currency systems.

In a petition, a group of 21 legislators say; “the evolution of stock markets is particularly harmful to humanity because it is the major cause of the instability of the currency system, which leads to serious and contagious economic crises”.

Proponents of the Tobin Tax claim the only obstacle to the introduction of the tax is political resistance. Of late, however, there has been, some international political softening towards the tax, with countries like Canada being among the first to propose legislation on financial transactions.

A number of countries in Europe have also indicated a possibility of introducing the tax.

Round says that although speculation has negatively affected minority groups, it has become difficult to get a fair hearing on the tax as critics include some of the most powerful banks and investment houses in the world.

“International investment firms and banks often win big but the game has devastating and far reaching economic, social and political impacts on the losers, who do not even play,” she adds.

However, Bertil From, of the Danish Bank - the largest bank in Denmark - does not believe currency speculation is a problem. And if it needs taming, then the best way would be by transparency and close supervision and not through taxes, he says.

“Taxes will make the dis-equilibrium in the financial system even bigger and during a crisis it would make a crisis more severe,” he says.

Opponents of the tax, like From, claim that the Tobin Tax will hit the poor. They also argue that the tax needs global political consensus for it to work, a difficult target to reach. A lack in political consensus, they say, would result in investors moving to offshore tax havens and marginalisation of others.

 


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