Introduction

"Win-win for the world's poor"
War on Want

First proposed by Nobel prize-winning economist James Tobin in the 1970s, the idea of a currency transactions tax (CTT), or Tobin tax, has steadily gained support ever since. Currency speculation has played a decisive role in recent financial crises, causing widespread chaos and poverty. A small charge on currency transfers would calm damaging speculation while simultaneously raising huge sums for development.

Currency speculation

Over one trillion dollars ($1,000,000,000,000) changes hands every day on global foreign exchange markets. More than 80% of this trading is of a speculative nature, buying and selling money for profit’s sake. This involves banks, hedge funds and other financial institutions betting on changes in exchange rates over short periods of time. In a crisis situation, currency dealing rapidly increases and dealers often act as a 'herd', following each other blindly. Herding can lead to a 'contagion' effect where nearby or linked economies are rapidly affected in the same way. This currency gambling is not part of any genuine trade or investment and it can result in basically healthy economies collapsing within a very short time frame.

Currency crises hit the poor

Recent currency crises have hit Asia, Latin America and Africa - disproportionately affecting the most vulnerable in those societies.War on Want works in some of these areas and has witnessed the devastation. Some estimates suggest that in the first few months of the East Asian crisis in 1997-8 more than 10 million people lost their jobs. Millions more were caught up in the aftermath, pushed into poverty and debt. Governments had to divert resources from social programmes to propping up their currency. Long-term investment also suffers. In Brazil, in 1999, $30 billion in capital fled the country in just a few weeks.

How the Tobin tax works

An internationally agreed tax on currency transactions would be timely. Marginally increasing the cost of trading in currencies could stop a lot of the damage that 'hot' (short-term) money causes to poor economies. Speculators thrive on a volatile system. They need boom and bust to keep their profits up. A Tobin tax would help calm speculation on markets, simultaneously producing revenue for combating world poverty.

A minimal tax, say 0.1%, on currency transactions would not hold back productive business transactions for trade and investment. But speculative transactions would be hit harder because speculation relies on very small margins of difference between currencies.

It would not stop all speculation or prevent all crises but it would make them less likely. If a crisis did occur it would be delayed and more manageable. The tax can even be refined in application so that the levy increases in times of severe crisis. This modification, known as the Spahn mechanism, would give the tax the power to act as a 'circuit-breaker' in times of intense financial turmoil.

How will the tax be collected?

Given that the effectiveness of the tax depends on universal implementation, it would have to be collected on a national basis, but instituted by international agreement. Presently 84% of all foreign exchange transactions occur in just nine countries. A tax introduced in these nine would initially provide a workable regime. As all transactions are electronically tracked through a centralised system of settlements, collection would be relatively straightforward and could be handled by central banks or financial regulatory bodies.

International support

In recent years, there have been increasing support for Tobin-type taxes. The idea is being seriously considered by the UN and the European Union and several national governments have called for its introduction. It also has the support of over 350 economists and nearly 900 parliamentarians across the globe.

The Canadian Parliament has taken a lead on the issue internationally. In March 1999 the Canadian parliament, with government support, passed a motion calling on their government to promote the tax internationally. And in November 2001 the French parliament passed a law committing France to the introduction of the tax when other EU countries sign up to it. In the UK 147 MPs have signed a motion in favour and the proposal has the broad support of the Liberal Democrats, the Greens, Plaid Cymru and the SDLP. Having initially been sceptical about the idea, the British government has become much more positive in recent times. In a landmark speech given to the Federal Reserve Bank, New York, Chancellor Gordon Brown said he had an "open mind" about the idea.

Huge resources for fighting poverty

The tax could fund a huge increase in anti-poverty programmes. Aid to poor countries stands at around $55 billion per annum and it is falling. Basic education and health care, food security, water and sanitation could all be funded from the Tobin tax. It has been estimated that a tax of 0.1%, even after its calming effect, could raise between $50 and $300 billion a year. Even at the low end this would match existing levels of official aid.

The pot of money could be controlled and distributed by a new democratic authority under the auspices of the UN General Assembly, set up specifically to deal with sustainable development (see the War on Want report 'The Robin Hood Tax'). Such a body must be transparent and accountable and must have developing countries as genuine partners within its decision-making process. A new system of regulation and redistribution will ultimately mean more stability and less poverty.