Tobin or not Tobin?

The proposal for a ‘Tobin tax’ on international financial speculation is gaining widespread support. Advocates of the tax claim it would help to stabilise the global financial markets and benefit the poor.

But the campaign for such a tax is more likely to damage poorer countries’ chance of development than it is to ameliorate global poverty.

Since a group called ATTAC (Action pour une Taxe Tobin d’Aide aux Citoyens) started to campaign for the tax in France in 1998, it has gained support in many countries (1). Many national parliaments have endorsed such a tax in principle, including those of Belgium, Canada and France (2). Others who have said the idea is at least worthy of debate include UK chancellor Gordon Brown, German chancellor Gerhard Schroder and the International Monetary Fund (3). Even popular culture has got involved: in the UK, the charity War on Want’s campaign for the tax includes a cinema advert showing vultures picking apart a dead animal, which features Radiohead and Ewan McGregor (4).

But what is the Tobin tax, and how would it work?

The original idea of the tax – largely ignored after it was first proposed by an American economist called James Tobin in 1972 – is relatively straightforward. Even a minute tax on every foreign exchange transaction would help to curb financial speculation by making it more expensive. Such a tax would, in this view, help to cool the giant casino that is the world’s financial markets.

Recent campaigners for the tax have added a redistributive element. The original article that sparked off the campaign for the tax in France estimated that a 0.1 percent tax on currency transactions could raise $166billion (£117billion) a year (5). In Britain, War on Want calls it a ‘Robin Hood tax’, to show that the tax can be used to take from the rich to give to the poor.

As an idea, this might sound eminently fair. But the attack on financial speculation put forward by campaign for a Tobin tax mystifies the key problem facing people in the world’s poorer countries. It is not greedy speculators that cause deprivation for the bulk of the world’s population, but underdevelopment. The lack of indigenous economic growth in these countries puts them at the mercy of external forces, and the solution to this problem is development. Yet the Tobin tax idea in no way encourages development – it calls only for redistribution and restraint. And even the hand-outs that it proposes are not as generous as they might first appear.

One of the things that makes a Tobin tax seem attractive is the sheer amount of money discussed by supporters of the campaign. They frequently repeat the staggering figure that the turnover of the global foreign exchange markets is $1.5trillion – that is $1,500,000,000,000 – every day. So a day’s turnover is roughly equivalent to Britain’s Gross Domestic Product (GDP), while a week is equivalent to America’s GDP.

But campaigners rarely stop to question what the $1.5trillion figure really means. This figure is lifted from a 1998 survey by the Bank for International Settlements (BIS) – the central bank for central bankers. Yet the next triennial BIS survey, carried out in 2001, showed that the figure has fallen to $1.2trillion a day (6). One of the main reasons for the fall is the introduction of the euro. The removal of 12 different national currencies means that there is less business for the foreign exchange markets.

Of course $1.2trillion a day is still a huge amount of money. But the figure is not quite what it seems, for it does not represent a real transfer of resources – or even a paper or electronic exchange. Many of the numbers quoted in relation to such transactions are notional. They represent the maximum size of possible transactions, assuming that they were not counterbalanced by other transactions in the opposite direction. It is unlike a real casino, where the amounts gambled are more likely to be painfully real than largely notional.

Although this might sound complicated, the principle is the same as in common household transactions. For example, somebody might pay an insurance company £100 a year to insure their £100,000 house against burning down. In one sense it is a £100,000 transaction; but it is misleading to quote it as such without explaining what it means. The small number of people whose houses are destroyed by fire will get large sums from the insurance company. But this will be counterbalanced by a huge number of people who pay their insurance company and get no payment in return (7).

In a similar way, the real level of transfers in the global foreign exchange markets is only a few percent of the notional level. It is impossible to estimate precisely, but the level of transfers certainly runs into billions – not trillions – of pounds daily. The idea of the foreign exchange markets towering over the world’s largest economies is ludicrous.

Taking this inflation of figures into account, it is clear that any tax on currency transactions is likely to raise far less than the Tobin tax advocates suggest. And that is even assuming that those market participants do not find ways to minimise their tax payments or avoid them entirely. In any market system those with the most money always find ways – usually perfectly legal – to limit the amount they pay in tax. This would be as true of the Tobin tax as it is already true of income tax.

The argument that such a tax could help to stabilise the global financial markets seems more compelling. Campaigners point to examples such as the Asian financial crisis of 1997-98 to show how financial volatility is hurting developing countries. And indeed it is true that many millions of people in Asia suffered economic pain as capital was rapidly withdrawn from these countries. But such volatility was a symptom of more fundamental problems.

The original flow of Western capital into East Asia, for example, was a result of economic atrophy in the developed world. As economic growth slowed in the West, a huge amount of surplus capital found its way into the financial markets. The rush of Western money into the booming Asian economies during the first half of the 1990s was a prime example of this trend. It was economic lethargy, not greedy speculators, that was to blame for this phenomenon.

As relatively underdeveloped economies, Asia’s developing countries were also vulnerable to external forces. Given that much of their external trade was with America and Japan, they were acutely susceptible to shifts in foreign exchange rates. Under such circumstances a rise of the dollar against the yen was always likely to cause such countries problems. But again, the problem was the vulnerability that is a chronic part of underdevelopment, and cannot be easily blamed on financial speculation.

In fact, most of the world’s poor economies are deemed unworthy of speculation. Only a relatively small number of such countries have regular access to the international capital markets. Sub-Saharan Africa, for example, is not generally the subject of short-term speculation. There are far easier ways for the rich to make money than to invest in a marginalised region of the world economy.

What the billions of people who live in the world’s poorer countries need is rapid economic growth. It is only by investing in and improving the productivity in such countries that individuals who live there can have reasonable living standards. Economic development is the only way to make such countries less vulnerable to external forces that are outside of their control.

In focusing on financial speculation rather than the deeper problem of underdevelopment, the campaign for the Tobin tax encourages those who are concerned about global poverty to attack the wrong target. But there is another problem with the Tobin tax campaign, which is not so readily apparent. The campaign implicitly reinforces the message that more restraint is needed in relation to development. By exaggerating the impact of financial instability, it helps to feed the demand for more curbs on economic activity.

In this respect the campaign is consistent with the current fashionable dogma of ‘sustainable development’. This deliberately ambiguous concept provides campaigners with a way of expressing their anxieties about development without being explicitly anti-growth (8). They can acknowledge the need for growth in principle while attempting to hamper it in practice, by attaching numerous conditions.

The fact that rapid economic development might raise other new problems is something that societies can deal with, and have dealt with throughout history. To the extent that financial instability or environmental damage can occur as a result of growth, they need to be tackled when they arise. But holding back from economic growth can only mean leaving the mass of the world’s population subject to appalling poverty.

For those concerned about the world’s poor, the first priority is to attack the right target. A populist campaign against greedy financial speculators only mystifies the real causes of underdevelopment. Campaigners would do better to question the impoverished vision of sustainable development, which is holding the third world back from the economic growth it desperately needs.

Daniel Ben-Ami is the author of Cowardly Capitalism: The Myth of the Global Financial Casino, John Wiley and Sons, 2001

(1) See ATTAC’s English website, the Association for the Taxation of Financial Transactions for the Aid of Citizens

(2) France backs Tobin tax, BBC News, 29 August 2001; ‘Tobin tax meets market opposition’, Jennifer Hughes, ft.com, 13 March 2002. The French senate has overturned the decision of the lower house to endorse the tax

(3) See ‘Globalisation: Speech Given by the Chancellor, Gordon Brown, at the Press Club Washington’, 17 December 2001, available at HM Treasury; ‘Schroder calls for debate on speculative capital flows’, Haig Simonian and Tony Barber, Financial Times, 5 September 2001; ‘Kohler says IMF may look again at ‘Tobin tax’, Hugh Williamson, Financial Times, 11 September 2001

(4) See War on Want’s campaign for the Tobin tax on the War on Want website

(5) Disarming the markets, Ignacio Ramonet, Le Monde Diplomatique, December 1997

(6) ‘Central bank survey of foreign exchange and derivatives market activity in April 2001: preliminary global data’, Bank for International Settlements press release, 9 October 2001, available on the Bank for International Settlements website

(7) For more on the notional character of many financial statistics see chapter six of Cowardly Capitalism: The Myth of the Global Financial Casino (published by John Wiley). Buy this book at Amazon (USA) or Amazon (UK)

(8) For more on sustainable development see ‘The Economics of Sustainable Development’, James Heartfield, in Ian Abley and James Heartfield (eds) Sustaining Architecture in the Anti-Machine Age (Wiley 2002)