Perspectives for currency transaction taxes as a part of a new international financial architecture by Minister for Foreign Affairs Mr Erkki Tuomioja, Brussels 28 June 2000
The proposal for a currency transaction tax (CTT) or the so-called Tobin tax was first made by James Tobin almost thirty years ago. While nothing has been done towards implementing such a tax - on the contrary, the liberalisation of capital markets and financial transfers has continued at an accelerated pace - the proposal remains valid and has gathered more support than ever before, particularly through the efforts of NGO networking.
Parliamentarians in many countries - not only in Europe but particularly in Canada - and in the European Parliament have embra-ced the proposal. Governments have been more circumspect, but I presumably would not be here today had not the Finnish government included in its government declara-tion last April the following paragraph:
"Transparency in international or-ganisations must be increased and their ability to respond to the instability arising from free movement of capital and the chal-lenges of globalisation must be strengthened. In this connection, the introduction of comprehensive international systems aimed at countering disturbances caused, for example, by short-term specu-lative capital movements must be addressed and clarified."
Alt-hough this does not specifically mention the Tobin tax the inten-tion is clear enough.
The Tobin tax is an almost deceptively simple idea: a tax levied on every currency change, set on a low enough level not be a hindran-ce on any transactions needed to finance real trade in goods and services or long-term capital investment but high enough to discourage the bulk of destabilising speculative money movements. Given the vast amount of daily currency transactions - almost 1500 billion dollars - a tax of just 0.1 percent could generate more income than the total amount of official develop-ment aid from the industrialised to the less-developed countries. The introduction of a Currency Transaction Tax could, at a stro-ke, solve all the problems of development financing.
Why has such a self-evidently wonderful idea not been put into practice? Could it be because it is, alas, too good to be true?
Usually the proposal is dismissed by referring to either the technical difficulties and unworkability of such a tax or the lack of universal support for the idea which makes it unenfor-ceable, or both. Some also question whether the CTT would have been able to prevent any of the more serious financial crises of recent years involving extreme currency fluctuations.
To refer to the opposition to the proposal by enough if not all of the significant governments whose participation is usually taken as being cru-cial for the implementation of the CTT has an element of self-fulfilling prophesy about it. Nevertheless it is a very real argument, and ideas to circumvent this by having the tax introduced by a group of "like-minded" countries acting as an avantgarde, are in my opinion both technically or politi-cally even more unrealistic than a global agreement on the tax.
Given the existence of the Euro and the EU-countries commitment to the EMU it is not conceivable that individual EU-countries could act independently of the EU on the CTT. The elimination of currency fluctuations inside the Euro-area has also reduced the sense of urgency that was earlier felt concerning the risks of speculative currency fluctuation. It would be a mistake, however, to think that the Euro has insulated Europe from the potential instability of international financial markets. Thus, quite apart from considerations of balanced global development and the needs of the developing countries, Europe too has a vital interest in pursuing international financial stability.
Getting the Currency Transaction Tax on the International Agenda
Considering the wide scope of the popular debate on the Tobin tax surprisingly little research has actually been done or at least published on the practicalities of a CTT. To the best of my knowledge no International Finan-cial Institution or other inter-national organisations have in the recent past produced any published study (as distinct from limited circulation intra-organisation papers) on a Tobin tax-like international currency tran-saction tax.
I think the time has come to seek more clarification and autho-ritative analysis on currency transaction taxes. To this effect the efforts underway in the preparatory process for the UN Social Summit + 5 - which convenes this week in Geneva - to get a study launched on the idea of a Currency Transaction Tax and its poten-tial advantages and disadvantages should be supported. We hope that other governments will join Finland in supporting the pro-posal for such a study and hope you can mobilise parliamentary support to that end.
Another UN process which we should also make full use of is the UN Conference on Development Finance to be held next year. The currency transaction tax should be promoted in that context and in the preparatory process for the conference.
The CTT must be seriously studied and should remain on the agenda until implemented, unless further study on the proposal de-finitely comes to the conclusion that it is impractical or non-workable. We should not, however, focus solely on the CTT pro-posal. Regardless of what the final outcome on the CTT is we need to develop also other means and instruments for achieving more stability in the interna-tional financial markets have been deve-loped and taken into use.
By this I mean that while keeping up pressure for the CTT we should also demand and work for other reforms in the interna-tional financial sys-tem with the aim of increasing its transparency, stability and accountability. In this context the expe-rience of some countries, such as Chile and Malaysia, on use of unilateral measures to effect currency controls while remaining within the broad framework of the multilateral trade and payments regime should also be reviewed, as well as the possibilities of the cross-border capital tax (CBCT).
Reforming the International Financial Institutions
The debate on reforming the International Financial Institutions (IFI) has evolved in a positive direction during the last few years both at the inter-governmental level as well as in the institu-tions themselves.
The good news is that the famous - or infamous - so-called Washington consensus is breaking down with the growing realisati-on that neither the existing international financial architecture nor the policies espoused by the Bretton Woods-institutions have worked properly or brought desired results.
Serious efforts are going on to analyse the flaws and weaknesses of the old system. Although I do confess to some sympathy with those who took to the streets in Seattle and Washington during the past year I want to emphasise that rather than demonstrating with the aim of closing down the old institutions we should push for reforms and encourage those who have shown readiness to self-criticism.
Some important new thinking has emerged and it also seems some lessons have been learned from the past G-7, IFIs and the BIS (Bank of International Settlements) have already worked on these issues at some considerable length and produced a set of policies and measures of some of which are being applied and some which are under dis-cussion and development.
On certain key issues there is no consensus yet. Such is especially the division of work between the IMF and the World bank in crisis management, a matter of extreme importance. The birth of G-20 - adding more voice from developing country side - has naturally been a welcome development in the fora where new structures and policies are shaped for the adequate management of currency and capital movements.
I dare to say that this development - modest as it may seem - has already meant tangible progress from the point of view of crisis prevention and management. As I said many proposed measu-res still need further work on but they have a considerable backing and there is a good chance to make them operative.
The battlefield for reforming the international financial architecture is not a clear environment in which the battle lines separating the good from the bad are easily seen. The dividing lines run across the field in a haphazard fashion. There are differences between governments among the OECD countries, between them and deve-loping countries as well as between governments and the financial com-munity, not to mention those between the institutional actors and the fora of NGOs.
Furthermore, none of these groupings is homogenous but split on several issues. NGOs and civil society add to this variety of views. The wide variety of option which governments face do not make it easy to make progress speedily. It should also be stressed that there is no reliable way to test the achievements that have been reached so far in practice. We really do not know whether these new policies and arrangements will work or not. Only a crisis or the avoidance of them are the proof of the pudding.
Some modest achievements
Let me briefly highlight some of those measures - already being applied or under planning - and conclusions which seem to have emerged and which I think should be considered as achievements.
First, I wish to mention increase in transparency and strengt-hening of financial supervision. While the lack of proper regulation and supervision has been seen primarily as concerning the less-developed countries the problem is real in the developed countries too.
We in Finland have particularly bad experience of inadequate financial supervision on late 80s. A naive belief in capital market liberalisation and rushed implementation of it contributed to severe banking and currency crisis which meant that we entered the recession very badly prepared. Other countries have had similar, if not as severe experiences.
Today developing countries are offered and also supplied increasingly expertise to develop their financial systems. Incentives have been created with the aim of promoting the use of best practises in developing countries and transitional economies. It is clear that introducing changes to structures and to some key domestic regulations will take some time. Standards have been created to develop statistical work as the basis for any monitoring and others are in the pipeline on accountancy, corporate governance and public debt management. The IMF and the World Bank have started to produce country reports on observance of standards and codes as well as financial sector assessment prog-rammes country-by-country.
It should also be mentioned that a Financial Stability Forum was set up to offer a venue for discus-sion of issues related to stability of financial markets. Such topical issues include offshore financial centres, highly leveraged financial institutions like hedge funds, etc. FSF aims particu-larly at better co-operation between different actors. We should expect that dialogue to lead new arrangements and strengthened co-operation.
Secondly, efforts find ways and means to engage the private sector in the prevention and management of problems have so far met with little success. There are also practical problems. In crises and pre-crises it is important to avoid a quick depletion of finan-cing by debtor - creditor co-operation. It is important to make headway also on this issue. IMF resources have also been increased and some new facilities and arrangements have been created like Contingent Credit Line (CCL).
Thirdly, it has been generally accepted that all exchange policies and systems require a macro-economic policy which supports stabi-lity. It is difficult if not impossible to expect a currency regime to correct all wrong de-cisions in economic, monetary and financial policies. Inter-national financial arrangements can and should lend support but they can never offer all-embracing solutions.
Fourthly, although liberalisation of capital movements is still recommended by the IMF as an objective the organisation has now recog-nised that liberalisation has to take place in a managed way, gradually and with a proper timing and sequence. Capabilities for risk management in enterprises and financial institutions have to be developed and - if necessary - strengthened prior to the liberalisation. On this score I see a clear change - and a welco-me change - in the policy of the IMF.
All the above measures - and the list of what is being planned or under consideration was by no means exhaustive - have aimed at better management of capital move-ments and currency transactions.
I think we do have to confess that we have achieved our objectives only to limited extent. Furthermore, we do not know for sure whether the world economy as a whole or any country would be now better prepared for financial crises should they occur.
However, I am convinced that we have to continue working on these lines irrespective of what progress is made with the CTT. Working for better global financial governance means exploring every possible avenue since almost all the relevant possibilities are not mutually exclusive but rather complimentary to each other.
The News from Feira
Finally I want to comment the decision reached on the tax packa-ge at the Europe-an Council meeting in Feira. As always the outco-me can be viewed on as either a glass half empty or a glass half full. I subscribe to the latter interpretation. Up to now inter-national tax negotiations and agreements have focused on avoidan-ce of double taxation; today the much more pertinent agenda is to reach agreement on how to avoid double non-taxation.
Obviously the conclusions reached at Feira are merely the begin-ning of the beginning, but as such they represent an unpreceden-ted opening towards intergovern-mental co-operation to control interna-tional finance markets and to fight the erosion of the tax base which is one of the foremost threats that globa-lisation has brought about.
The EU member countries have agreed on the need to eliminate tax havens and to subject all incomes of their countries nationals to equal taxation and not to allow misleading appeals to banking secrecy to foil this goal.
That the Feira agreement refers to the need to involv-e the US and key third countries and to bring in the tax practices of depen-dent and associated EU territories in line with the agreed measu-res does not indicate weakness but on the contrary a demon-stration of determination to raise the issues involved on the global agenda where they inevitably must be addressed if we are to be able to find solutions to the challenges of globa-lisation and bring its negative effects under control.