Ross Buckley, Professor of Law at University of NSW, one of Australia’s leading minds on the financial transactions tax (Robin Hood Tax), and academic adviser of Jubilee Australia, writes a compelling piece about reclaiming our financial sectors.
Professor Buckley expresses his bemusement at why the Australian Government would not want either a bank levy or the preferred tax on wholesale financial transactions.
“It might seem like a paradox, but we need the tax because we need efficient markets. Markets determine prices and allocate resources far better than any other mechanism. Capitalism relies on markets working. As the global financial crisis has proven dramatically, global financial markets are less regulated, and work less well, than in decades past.”
Assets are often bought, held and sold in under a second. “Many French hedge funds recently moved their trading computers to London because the time it took electronic messages to travel from Paris was placing them at a disadvantage. Goldman Sachs has moved its computers right beside those of NASDAQ, the online exchange, and each millisecond gained, by Goldman’s own admission, is worth at least US$100 million.”
He cites the words of Lord Turner, head of Britain’s Financial Services Agency, when he described this type of trading as “socially useless”. But according to Professor Buckley, it’s even worse than that: “Speculation has become the dominant form of market activity and works against productive investment. Short-term speculation distorts and damages the critical price-setting function of markets, and it consumes financial assets that could be invested long-term in the real economy.”
“THE IDEA that we need to reweight our markets in favour of longer-term investment and away from rewarding short-term speculation is not a radical one. Last year the Aspen Institute in the United States issued a paper, “Overcoming Short-termism,” signed by a who’s who of corporate America, including Warren Buffett and Peter Peterson, together with the former chairs of IBM and Goldman Sachs, and others.
“As Warren Buffet has pointed out, the globalisation of finance has benefited the financial markets far more than anyone else. The incredible rise in profitability of investment banks, hedge funds and private equity funds has translated into enormous political power, opposed to any regulation of the markets from which they profit so handsomely. We need to reclaim those markets for their real functions, to serve the real economy that provides our livelihoods.”
Despite plenty of warning signs, Australia has helped fund Exxon's massive natural gas project in PNG. Following SBS Dateline's story on 9 May, Jubilee Policy Coordinator Luke Fletcher wrote for New Matilda about implications for Australian taxpayers.
"The Dateline report did a very good job cataloguing concerns about the problematic aspects of the project (more of which below). However, it gave little attention to one detail about the PNG LNG which is critical to Australians: namely, that we are all investors. This part of the story needs further explanation and analysis, because it raises some important questions about the generally secretive nature of some aspects of government trade policy, and about the conflicts of interest that arise for Australia when it spruiks sustainable development in a former colony that is also its largest aid recipient."
Haiti is a country that has seen unfathomable suffering; one that has been at the epicenter of natural disasters in recent years. The poverty and powerlessness that is so widespread (even before the earthquake, three-quarters of Haitian people lived in poverty), left the people defenseless against the horrific events of January 12. It’s no wonder people are asking whether this nation is cursed.
Across the world there arose an extraordinary spirit of generosity and solidarity in the wake of the earthquake, but sadly this tenderness is unlikely to last. Tearful comments projected onto our television screens at night have by now ceased, and as the coverage starts to diminish so too will the plight of the Haitians fade from our minds and our consciences.
But what if events took another course? What if the momentary sorrow we felt led to some deep searching about why this Caribbean nation has been so unlucky? If we did indeed do this thoughtful analysis, we would find that the story of Haiti, even from the earliest decades of its independence, is one of a downward spiral into debt and underdevelopment. As a nation, it has been at the short end of the stick, time and time again, in its relationships with richer and more powerful countries. Haiti, it turns out, never stood a chance.
The story of Haiti
Until the late eighteenth century, Haiti was a French colony used to produce food, principally sugar, for a prosperous France. In 1803 the Haitian people staged the only successful slave revolt in history, defeating Napoleon’s French army and winning freedom for themselves and their nation. But the cost was high. The fighting destroyed infrastructure and killed thousands of the country’s people. And Haiti was punished for its ‘rebellion’ - not by God, as some have dared to posit, but by the European colonisers who were angered by the dangerous precedent that the Haitian liberation movement had set.
In 1825, with warships positioned off the coast, France threatened to reinvade and re-establish slavery unless Haiti compensated slave owners for the loss of “property”. With other western powers also threatening an embargo, Haiti agreed to pay a sum of 150 million francs in return for recognition of sovereignty. The new debt, equivalent to US$20 billion in today’s currency, was fourteen times larger than Haiti’s annual export revenues, so instead of spending its income on infrastructure and public services, the government was forced to divert up to 80% to western banks for the right to self-govern.
The freedom won in the previous century didn’t last, and in 1914 a marine expedition from the US landed on Haitian soil, at least in part to facilitate the establishment of US plantations. For twenty years the US illegally occupied the country, only withdrawing when the Haitian Government agreed to remove the constitutional provision prohibiting foreigners to own and run businesses.
The military occupation was followed by more of the same. For nearly three decades, between 1957 and 1986, the infamous father/son dictatorship of “Papa Doc” and “Baby Doc” Duvalier ruled the country. With the US, international institutions, and other western donor governments turning a blind eye, the Duvaliers used foreign aid to pay for Manhattan shopping excursions, fur coats and government death squads. Despite widespread reports of the brutality, corruption and mounting foreign debt, the loans and political backing continued to flow so long as the dictators remained ideological allies in the Cold War. When the reign of the family ended, Haiti was left with an external debt totaling more than one billion dollars, while 900 million dollars worth of expropriated funds awaited the Duvalier’s in French and Swiss bank accounts.
Even at the end of the dictatorships, foreign powers continued to exert strong influence over the political and economic scene of Haiti. In the 1980s and 90s the IMF was used to bail out the commercial banks who’d lent more money to developing countries like Haiti than the countries could ever afford to repay. The IMF, which claimed to be helping countries like Haiti fight poverty, began to dictate policy to ensure that repayment of foreign debt continued. Spending on public services was cut, tariff protections on export industries were removed, and new ‘aid’ loans were diverted almost directly back to the banks in wealthy countries. The government was left with little to no capacity to invest in nation building.
In just one example of this phenomenon, the IMF forced the Haitian government to drop tariffs on agricultural production. As a result, the USA began to dump their own subsidised agricultural production on the Haitian market, putting most local rice farmers out of business. As many as two million people relocated from farming areas to the slums of Port-au-Prince, and this desperate pool of workers become the cheapest labor in the world. The country has since become home to a booming sweat shop industry.
Does this history matter today?
The hard truth is that Haiti’s impoverishment can’t be viewed independently from a global economic system and a model of international development that is dysfunctional – one that works in the interests of wealthier countries and powerful developing country elites. Yet the real events are not reported by the popular media. To this day there has been no acknowledgement of the odious nature of the debt accrued by Haiti’s dictators, nor any recognition of bad policy advice by donor countries and international institutions. As a result it is all too easy for us to live in ignorance.
Instead, the people of Haiti have been characterised by a narrative depicting them as miserable, violent and incapable of solving their own problems. It should come as no surprise then, that recent proposals to ‘help’ the benighted country in the aftermath of this most recent tragedy offer solutions cast from the same mould. It is hard to imagine what more could be extracted from this country where half the population struggle for one meal a day, and yet the international community’s political interventions are as much about pushing its own agenda as helping Haiti become independent and self-sufficient, and the results will thus again be ineffective.
The IMF has offered the Haitian Government a new loan of $102 million: attached to which are the same harmful economic policy conditions that have to date undermined the country’s ability to chart its own development future. The private sector is preparing to seize the opportunity, with a ‘Haiti Investment Summit’ to take place in Miami soon. Corporations will be pressuring their governments to make sure they win reconstruction contracts through tied bilateral aid, or through influence in the international development banks.
While this may sound crude, it is not unprecedented. Most Australians remain unaware that 50 percent of our Government’s one billion dollar ‘Tsunami package’ to Indonesia post-Tsunami was in the form of reconstruction loans which must be paid back. When the Coalition Government was putting the bill through Parliament early 2005, the Greens attempted to have it amended, arguing for the full amount to be made in grants. However concessional the terms of the loans, they said, in the medium to long term this would worsen Indonesia’s debt problems and further impair the Government’s ability to manage its own budget. Even Kevin Rudd, who was then spokesmen for the Labor opposition, cautioned the Coalition against thinking that in extending the $500 million in loans they would be buying some political advantage for Australian contractors.
In terms of foreign debt, Haiti’s deficit still stands at over one billion dollars. The G7 nations have agreed to cancel 100% of the bilateral debt owed to them in response to massive public pressure. Now we must put weight on the international financial institutions, particularly the IMF, to do the same.
People will be asking whether cancellation of this debt will simply reward a corrupt government and continue a cycle of dependence. But playing the corruption card is all too often a convenient way of avoiding some uncomfortable truths. If Haiti’s elites were corrupt and venal, it would only be because we in the West taught them to be that way, and more often than not supported them because it served our interests to do so.
In fact, a more profitable line of questioning would be – who is holding the international community accountable for its role in Haiti. Beyond the immediate relief, how will aid money be spent in Haiti? Will big donors and international institutions continue to dictate how the money must be spent, giving preference to those parts of the reconstruction process which benefit foreign companies the most, and which encourage the exploitation of cheap labor in foreign owned export industries? Or will the aid money be spent in a way which puts the people’s basic needs first: to build a system of efficient free public education, a new public health system and a sustainable local agricultural industry?
Most of us wish greater democracy for Haiti. But authentic democracy cannot be imposed from the outside. It must be home-grown. We should be asking how we can support self-empowerment of Haitian people and public institutions. This means listening to the voices of grassroots groups and civil society movements who for decades have been on the front line of the struggle for democracy and the fight against their nation’s underdevelopment.
In an open letter to international NGO partners, the coordinating committee of Haiti’s progressive civil society movements made its desire clear: ‘We are advocating a humanitarian effort that is appropriate to our reality, respectful of our culture and our environment, and which does not undermine the forms of economic solidarity that have been put in place over the decades by the grassroots organizations with which we work’.
One thing is certain: the people of this embattled nation are facing the challenges with courage and optimism. Days after the earthquake, at a public gathering in the Court of Human Rights to honour the victims, those present declared in solidarity that they are not a people cursed, but a brave people who will rise from the ashes. As for me, I’m choosing to be on the side of the brave.
Published Inside Story: http://inside.org.au/whats-not-to-like/
NEARLY forty years ago the eminent macroeconomist James Tobin proposed a tax on foreign exchange transactions as a means of “throwing some sand in the well-greased wheels” of financial speculation. The idea attracted little attention at the time, and it wasn’t until twenty years later that I first learnt the detail of Tobin’s proposal. In the meantime he had been awarded the 1981 Nobel Prize for economics.
By the early 1990s I was deeply concerned by the power of international financial markets to dominate national economic policy. When the Parliamentary Research Service listed an article Tobin had published in the Financial Times in December 1992, I wrote to him and he sent me his original proposal. I was persuaded by his argument and started advocating that the idea be studied more closely. At the next Labor Party national conference the party platform was amended to include support for a study of the Tobin proposal, and with ministerial support I was able to speak about the idea at preparatory meetings for the United Nations Social Summit in New York in 1993 and 1994.
The concept was generating great interest at the United Nations. Tobin had suggested that the revenue could be used to finance development, and the UN Development Program’s Human Development Report for 1994, edited by Inge Kaul, included a short contribution from Tobin explaining his idea and proposing a tax of 0.5 per cent. Dr Kaul organised a conference of leading economists in 1995, where I met Tobin, and the papers were published as The Tobin Tax: Coping with Financial Volatility. The UN secretary-general, Boutros Boutros Ghali, publicly supported the idea.
By then, however, Republican senators in the United States had started misrepresenting Tobin’s proposal as a “UN tax.” This was nonsense, of course: taxes can only be collected by governments. Yet that fact didn’t prevent the Republican-controlled Senate from including in the bill authorising payment of US dues to the United Nations a clause prohibiting payment if Tobin’s idea was even discussed in the UN.
So when the book on the Tobin tax was launched the UN editors couldn’t speak. As one of the contributors I appeared in their place at conferences on the proposal at Yale and in London. In Washington I discussed the tax with Lawrence Summers, who is now Barack Obama’s economic advisor. At the beginning of the nineties Summers and his wife had published an article showing that financial markets are not fully efficient because they overshoot; by the end of the decade, about to become Secretary of the Treasury, he did not feel able to restate that opinion in public.
Since then Tobin’s idea has gained widespread support among non-government development agencies and a strong network of advocates – including the France-based Association for the Taxation of Financial Transactions for the Aid of Citizens, and Britain’s Stamp out Poverty campaign – have used imaginative campaigns to keep it alive. Political support for the idea endured in a number of countries and reached the United Nations again during the Special Session of the UN General Assembly on Social Development in Geneva in June 2000 (for which the division of which I was by then director had responsibility) when Canada officially proposed a study of the plan and its implications. Following opposition from the United States and some other countries a compromise proposal – for a study of “innovative sources of funding for development” – was agreed on, and the UN University’s World Institute for Development Studies was commissioned to do the work. Professor Sir Anthony Atkinson agreed to lead the project and the papers were published as New Sources of Development Finance by Oxford University Press in 2005.
Political momentum was nurtured through the formation in 2006 of the Leading Group on Innovative Finance for Development, of which about fifty-five countries – including Belgium, Chile, South Korea, Finland, France, Germany, India, Italy, Japan, Mexico, Norway, United Kingdom, South Africa and Spain – are now members. In mid 2009 the group appointed an expert group to report on a financial transaction tax.
Meanwhile, quiet work was continuing among scholars. Professor Anthony Clunies-Ross succeeded in raising £60,000 from an anonymous British donor for a study of whether a tax on currency transactions would cause increased exchange rate volatility as a result of the expected fall in volume. The modelling was undertaken by Dr Rodney Schmidt of the Canadian North-South Institute, and the result was encouraging. He found that “a currency transaction tax [CTT] of 0.5 basis points [0.005%] in the major currency markets would reduce transaction volume by 14 per cent. Post-CTT spreads and transaction volumes would be well within the range of recent observations and would not be disruptive. A 0.5-basis-point CTT would raise at least $US33 billion every year, probably more.”
WHICH BRINGS us to the aftermath of the global financial crisis and growing support for a financial transaction tax – an extended version of Tobin’s idea – among European governments and public policy economists in the United States. Before Christmas the European Council joined Gordon Brown in encouraging the International Monetary Fund to include a “global financial transaction levy” among the options it is examining to raise revenue from banks and the rest of the finance industry. This followed the request from the G20 meeting in September that the IMF evaluate “how the financial sector could make a fair and substantial contribution toward paying for any burdens associated with government interventions to repair the banking system.”
To be imposed almost universally, a currency transaction tax would need only the active cooperation of the authorities that oversee the principal reserve currencies, the US dollar, the euro, the pound and the yen. Because the tax’s small direct costs would be concentrated in financial sectors, its impact would be redistributive in a progressive way across nations. It would also be a source of funds for “global provenance,” which means that all or a substantial proportion of the revenue should be allocated under global authority. The national authorities collecting the tax would keep a share, but the revenue would have to be distributed globally in proportion to each country’s financial transactions.
The global financial crisis has transformed this debate. The Bush and Obama administrations and many European governments were compelled to launch massive rescue strategies for financial institutions, so electorates are demanding ways of making financial institutions pay the cost. Chancellor Merkel, President Sarkozy and Prime Minister Brown have all spoken in favour of looking seriously at a financial transaction tax.
On its own, a tax of this type would not resolve the crisis, of course. But it could play an important role in raising funds to pay for the bail-outs. Unlike a currency transaction tax or a Tobin tax, which just covers currency transactions, a financial transaction tax would cover all kinds of financial assets such as shares, bonds, securities and derivatives, both domestically and for cross-border transactions. Technically a financial transaction tax could be levied easily and at very low cost since all such transactions occur through electronic platforms. A simple electronic tag would automatically collect the tax, and such taxes already exist in a number of countries.
In the mid-nineties the Labor government in Australia supported a study of the Tobin tax, but the Rudd government does not seem to have taken the issue up yet – despite the fact that the prime minister attending the G20 meeting in Pittsburgh that agreed to refer the need to raise funds to pay for the bank rescue packages to the IMF. It would be timely for the government to take a serious look at the proposal and participate in international discussions. It would be entirely appropriate for Australia to apply to join the Leading Group on Innovative Finance for Development and to attend its next meeting, in Santiago, at the end of January at least as an observer (four other countries are already observers). Ministers and public servants need to become familiar with the issues and to prepare a position.
The proposal does generate opposition from many bankers, though not all. When I asked Marshall Carter, CEO of Boston’s enormous State Street Bank, in 1995 what he thought of the idea he was unfazed, saying “Oh, we would just pass it on to our customers’. But there is strong support and it is growing. Adair Turner, Britain’s top financial regulator, called last August for a tax on financial transactions as a way to discourage ‘socially useless activities’.
American Nobel economics laureate Paul Krugman argues that a financial transaction tax “would be a trivial expense for people engaged in foreign trade or long term investment; but it would be a major disincentive for people trying to make a fast buck (or euro, or yen) by outguessing the markets over the course of a few days or weeks.” “What’s not to like?” he asks. Critics claim that it would be avoided, but the centralisation of such transactions makes them relatively easy to monitor – if there is a will to do so. The tax is one way of shrinking bloated financial sectors and of raising revenue from those who have benefited most from the explosive growth in the volume of international financial transactions.
John Langmore is a Professorial Fellow at the University of Melbourne. He is a former federal member for Fraser and was a divisional director at the United Nations.
John is also advisor to Jubilee's Australian campaign in support of a Financial Transactions Tax.Find out more
Yesterday, the largest resources project in Papua New Guinea’s history
moved a step closer, with the PNG government approving the
Environmental Impact Statement for the vast PNG LNG project.
The project is being developed by ExxonMobil, Australian companies
OilSearch and Santos, and -- notionally -- PNG’s state-owned company
Petramin. It is anticipated it will cost more than $US11 billion
($A11.9 billion), and double the size of PNG’s GDP over its 30-year
lifecycle.
The PNG government’s stake in the project is not controlled by
Petramin but instead, effectively, by Arthur Somare, the Public
Enterprises Minister and son of the Prime Minister Michael Somare.
Control of the project has been handed to the "Independent Public
Business Corporation", in which Somare is said to be influential.
IPBC’s role was underwritten by a $US1.7 billion loan from the Abu
Dhabi government, brokered by Somare.
There is a seat on the IPBC Board for Transparency International PNG
Inc, but it is currently vacant.
PNG has also refused to participate in the Extractive Industries
Transparency Initiative (EITI), a set of international standards for
publicly reporting revenues from oil, mining and gas ventures launched
in 2002.
All this is not unrelated to Australian interests. The Australian
government, in fact, has a key role. At least half, and perhaps more,
of the $11 billion development cost will be met by various export
credit agencies (ECAs), state-owned bodies that facilitate exports
through insurance and loans. The Japan Bank for International
Cooperation is providing $US4.3 billion for the project. The US and
Italian ECAs are considering support. And sometime in the next couple
of weeks, Simon Crean will take a submission from the Export Finance
and Insurance Corporation to Cabinet proposing we provide $US500
million in loans for the project.
EFIC has invested in PNG before, of course. It provided significant
support for the development of the environmentally disastrous Ok Tedi
mine.
EFIC isn’t subject to anything like the same level of scrutiny that
most public-sector agencies face. Its internal workings used to be
subject to several FOI exemptions. The government’s recent FOI reforms
have stripped some of those away, but its activities remain mostly out
of public sight. According to local NGO Jubilee Australia, EFIC has --
contrary to its own environmental policy -- refused to respond to
submissions about the environmental impacts of major projects it is
considering supporting. Jubilee has written to Crean requesting that
he reconsider EFIC support for the PNG LNG project, which is scheduled
to be approved by the PNG government before the end of the year.
The people of PNG have seen a succession of major resource projects
fail to dent widespread poverty since independence. PNG LNG, which
continues to be dogged by disputes with local landowners who are
supposed to also have a stake in the project, may well go the same
way, with foreign companies, fly-in, fly-out foreign workers and local
politicians potentially being the prime beneficiaries, all with the
generous support of Australian taxpayers.
Rowan Callick, Asia Pacific Editor, The Australian
THE biggest business investment in the history of the Pacific region, the $15.6 billion ExxonMobil-Oil Search-Santos gas project in Papua New Guinea, came under fire yesterday from a leading Australian anti-poverty organisation.
Luke Fletcher, the policy co-ordinator of the group -- whose backers include the National Council of Churches and World Vision -- said that "it is very likely that the revenues will fall down into the black hole of corruption" unless the PNG government signs up to the World Bank-associated Extractive Industries Transparency Initiative.
He said that Australia's Export Finance Insurance Corp is set to provide hundreds of millions of dollars in support for the project, requiring approval from cabinet.
But he urged the Rudd government to consider carefully whether it wished to provide such funding at this stage, because "although the project will bring money to the PNG government, corruption will undermine the long-term economic benefits, not to mention the negative social and environmental impacts."
The economic impact study for the project, conducted by ACIL Tasman, estimated very significant benefits.
Jubilee concedes that there will be "a large increase in gross domestic product". But, it says, "the extent to which this windfall will be distributed among the people is questionable.
"Looking through a larger time-scale, the PNG economy has for years been dominated by this kind of large-scale extractive industry projects, and yet the country has seen very little genuine improvement of its standard of living."
Papua New Guinea was 148th of 182 countries listed in the UN's latest Human Development Index.
Jubilee said that "of the 7500 jobs that are estimated to be produced by the contract, only one fifth are to be provided by local PNG workers -- a general problem for the oil and gas sector in developing economies.
"The large influx of foreign workers during the construction phase is likely to have severe distorting effects on the local economy, both around Port Moresby" where the gas will be liquefied, and in the Highlands.
It says that although Oil Search, which owns 29 per cent, and Santos (13 per cent) of the project, and those who work for the companies will benefit, "the strategic dividends of a more stable and prosperous PNG far outweigh" such gains.
It says that "AusAID's two main aims in PNG" -- one of its two biggest fields of involvement, with Indonesia -- "are improving governance and fighting HIV, and both are likely to be severely undermined by the project".
Anti-poverty NGO Jubilee Australia welcomed Prime Minister Rudd’s call overnight for fundamental reform of the international financial architecture, particularly the International Monetary Fund.
Speaking at the Foreign Policy Association in New York last night, Kevin Rudd said: “We would be failing in our duties as leaders at this point in history if we do not revitalize, reform and rebuild the international system”.
Mr. Rudd suggested that at the G20 Conference in Pittsburg, starting today, the IMF should be empowered and its legitimacy increased in order for it to address the problem of global economic imbalances.
While Jubilee Australia welcomed the engagement of the Prime Minister in these issues, it believes that the Prime Minister’s analysis and solutions don’t go far enough. Jubilee Australia spokesperson Professor Ross Buckley* said: “As the report released this week** by Nobel Laureate and former World Bank Chief Economist Joseph Stiglitz demonstrated, policies pushed by the IMF have contributed to the severity of the current crisis itself”.
Jubilee Australia believes Mr. Rudd would do well to listen to Professor Stiglitz, whose report not only called for fundamental reform of IMF, but also for greater role for the United Nations in oversight of the Bretton Woods institutions. Under its current structure, the IMF is still under the de facto control of the G7 countries.
Jubilee Australia also welcomed Mr. Rudd’s renewed push for greater transparency in financial markets, and argues that one of the most effective immediate measures to reduce financial market speculation would be the adoption of the financial transaction tax (‘tobin tax’) in Pittsburg this week. ‘A financial transactions tax is a good idea whose time has come’, Professor Buckley said. ‘It can raise enough money to halve global poverty and hunger, improve the workings of important financial markets, and cost you nothing.
‘By dissuading very short-term speculative investments and thus reducing ”white noise” in the market, the tax will allow the market to react to the long-term transactions and function more efficiently. It will essentially be a win-win for markets and for the poor,’ he said.
Published The Australian Financial Review - Thursday 3 September, page 63
A Cuddly Tax: Why the World Needs a Currency Transactions Tax
Ross Buckley, professor of international financial law at the University of NSW, and Jubilee Australia policy advisor
Don’t you love a cuddly tax? You know, the sort that would raise enough money to halve global poverty and hunger, improve the workings of important financial markets, and cost you nothing. A tax that would be worth having if it raised no money at all, so that the revenue it does raise is a pure bonus.
What, this isn’t your idea of a tax?
It was the idea of a tall, spare, courtly American, James Tobin. In 1972 he had the idea of imposing a very small tax on all foreign currency transactions. He believed this tax would help exchange rates reflect long-term fundamentals over short-term expectations, and would preserve and promote national macroeconomic and monetary authority. He conceived of the tax as sand that when thrown into the wheels of international finance would actually improve their workings. A small tax of 0.1% to 0.25% is large enough to dissuade short-term speculative transactions, while having almost no effect on long-term investments. By taking the ‘white noise’ out of the market, the tax will allow the market to react to the long-term transactions and function more efficiently.
Tobin came up with his idea when neo-liberalism, the idea that unfettered markets allocate everything best, was on the rise. In that environment, as he said, his idea ‘sunk like a stone’. But much has changed in those 37 years. The Global Financial Crisis has highlighted the limits of unregulated markets and the objections to the practicality of the tax have been overcome.
In the early 1970s James Tobin had an idea that was way before its time. But with some political will, its time could be now.
This coming Friday the G20 finance ministers meet in London, and next month the G20 leaders meet in Pittsburgh. Civil society groups are pushing strongly for the inclusion of a currency transactions tax of the kind Tobin proposed on the agenda for both of these meetings.
Last week, the Chairman of the UK Financial Services Authoriry, Lord Turner, said he would consider supporting the imposition of such a tax.
The response of bankers has been predictably hostile. My favorite response, for its utter disregard for the truth, is that of Scott Talbot, from the industry organisation that represents America’s leading banks. He said, “The financial services industry is a leading sector around the world in producing jobs and providing people with goods and services they demand.” It isn’t. Financial services employs only small proportions of any population outside New York and London. The industry makes no goods at all, and the services it provides are far more sophisticated and risky that most people demand. Undaunted, he continues, “A punitive tax would unnecessarily restrict the industy, harm shareholders, and ultimately weaken a key sector in the world economy.” Describing a tax of up to 0.01%, as punitive is chutzpah on a grand scale. And the tax won’t weaken the industry. Reams of research suggests it will strengthen it. What has brought the industry to its knees, and many banks to the edge of bankruptcy, is a lack of effective regulation.
This tax is one of the best potential regulatory amendments for a presently disfunctional system. Yet extraordinarily Lord Turner has been accused of overstepping his remit as a regulator in supporting it. How dare a regulator propose to regulate us? The GFC has done nothing, it seems, to temper the hubris of bankers.
The most recent thinking supports a tiny tax, even smaller than that proposed by Tobin, of perhaps 0.005%, one-half of a basis point. The best estimates are that a tax at this rate would dissuade some 14 to 20% of total transactions (those at the most speculative, short-term end of the spectrum) and would raise between US$33 and US$60 billion each year. Estimates of the revenue from a higher tax of 0.01% range up to US$100 billion.
The foreign exchange market is, in volume terms, the largest in the world and due to improvements in technology and turnover, the bid-ask spreads in the market have narrowed substantially in the past decade. A tax at this rate would amount merely to a slight widening in these spreads.
The opponents of a Tobin tax claim it is unworkable. That its implementation would require the cooperation of every country in the world. This objection had substance when Tobin proposed the idea. Yet in the intervening decades foreign exchange trading has moved onto large scale settlement systems such as SWIFT and others. All of these systems are perfectly adapted to levying the tax. Any move to avoid such a tax would require a return to the informal proprietary trading technologies of 30 years ago and would impose costs many times higher than the tax.
The tax is not a radical idea. France in 2001 and Belgium in 2004 enacted laws that will impose a currency transactions tax on all foreign currency transactions in their jurisdictions once such a tax is imposed across the EU (uniformity of application being, of course, necessary). Furthermore, earlier this year France established a study group on how the tax would work in practice.
Australia is playing a significant role today within the G20. Our voice matters; and it should be added to those arguing for a currency transactions tax. This tax will make foreign exchange markets more stable and efficient and provide a reliable, and today much-needed, source of revenue with which to reduce global poverty and hunger.
Australia and the west missed an opportunity when they largely ignored a United Nations report on the financial crisis, writes Ross Buckley, Professor of International Finance at the University of NSW, and Jubilee Australia advisor.
A DECADE AGO, in response to the Asian and Russian economic crises, the finance ministers of the seven biggest economies created a new organisation, the G20. For the next nine years the influence of the G20 grew, but slowly. Then, last year, the G7 handed it the role of coordinating the global response to the financial crisis. For the first time, the G20 was in the driver’s seat.
Made up of nineteen nations and the European Union, the G20 represents 85 per cent of global GDP, 80 per cent of world trade, and two-thirds of the world’s people. In addition to the G7 nations, it includes Brazil, China and India; Indonesia, the world’s most populous Muslim nation; Turkey, the bridge in so many ways between Europe and the Middle East; and South Africa. Even Australia gets a guernsey. The G20 is far better suited than its predecessor to the job of steering the world through a crisis.
This transfer of control is a major step forward, and our government is to be congratulated for supporting the move. But there is also another game in town, and our government seems to believe that supporting one game means raining on the other.
The alternative to the G20 is the United Nations, which in late June held a [1] conference to explore approaches to the global financial crisis. A background document for the conference was the report of a [2] UN Commission of Experts on the crisis, headed by the Nobel laureate and former chief economist of the World Bank, Joseph Stiglitz. Yet despite the eminence of the report’s main author, and the critical need to consider a range of approaches to a crisis as severe as this one, the Australian media gave almost no coverage to the UN process.
This lack of interest is strange because our government wasn’t simply uninterested in the UN process, it obstructed it. When the recommendations of Stiglitz’s report were discussed at the United Nations in the month leading up to the conference in June this year, Australia joined other rich countries in blocking and watering down most of the innovative proposals. The directive from the prime minister’s office was to support no process that would undercut the centrality of the G20. The upshot was that the UN conference issued a series of bland resolutions largely devoid of real content.
Before we look at Stiglitz’s recommendations it’s worth going back to the decisions made by the G20 nations at their meeting in London in April this year. The key decision of the meeting was a plan to inject an extra US$1 trillion into the world economy. One-quarter of this sum is to be committed to supporting trade finance, another quarter is to go into new Special Drawing Rights, or SDRs, and the remaining half into extra resources for the International Monetary Fund to lend to countries.
This looks okay. It reads even better. The G20 directives are filled with high aspirations and exhortations to enhance the “open trade and investment regimes, and effectively regulated financial markets that foster the dynamism, innovation, and entrepreneurship that are essential for economic growth, employment, and poverty reduction.” Who can be against growth, employment and poverty reduction? Surely the G20 is on the right track?
But when one reads the detail a different picture emerges. Ensuring financing is available for trade is important, but this is merely replacing private funding with public money. It doesn’t actually do something extra to respond to the crisis, it merely patches a crisis-caused hole in the system.
SDRs are a form of reserve assets for countries. They can be drawn down at very modest interest rates and are a fine source of capital. At times like these, extra SDRs are the sort of medicine that will help poor countries (which is why Stiglitz recommended them in his report). But countries can only draw down SDRs in proportion to their quotas, which means the majority of SDRs are available to the United States and European countries. So this is the right medicine and better than nothing, but in doses too small to cure the disease.
In contrast, the extra loans that will be channelled through the IMF are the wrong sort of medicine for two reasons. First, this new credit facility requires substantial conditions be met by borrowers which will exclude the countries that most need the assistance. Second, these countries don’t need loans, they need a two-year interest holiday on all their official loans (from developed countries and from multilateral agencies such as the IMF and World Bank). A halt on interest payments would give poor countries cash to direct towards domestic stimulus. More loans do the same thing, but at the long-term expenses of more indebtedness, for economies already staggering under unsustainable debt burdens. Short-term gain for long-term pain is the wrong medicine.
So why did the G20 do what it did? Well, it was cheap. Official loans and trade finance facilities are always repaid by debtors, because when times are really tough these are the only available funding sources. So the G20 nations know all these funds will be repaid. Yet a trillion dollars still has a real ring to it – promising a trillion is insulation against being charged with doing too little. And, finally, this is in part a stimulus package for western commercial banks; past experience tells us that a portion of the new money lent by the IMF will be used by middle-income debtor countries to repay due bank debt. So there is some real self-interest in these measures.
What is missing in all the G20 documents is any evidence of any thinking outside the box that brought us the global financial crisis. We need to rethink fundamentally the role of capital and financial products and the privileges and rights we, the people, confer on banks by granting them a banking licence. Financial crises of increasing severity have been the defining feature of the past fifteen years and this is to be expected, because our current financial system was designed for a non-globalised world of finance that no longer exists.
THIS IS WHERE Stiglitz and his fellow commissioners come in. The commission, which issued a preliminary report a few weeks before the G20 meeting, divided its recommendations into two groups: immediate measures, and longer-term systemic reforms. As an immediate response, the commission proposed that $250 billion of SDRs be issued through the IMF for each year the crisis persists. It proposed that rich countries move quickly to donate 1 per cent of their own domestic stimulus packages to low-income countries, to be applied there for similar purposes, and that regional liquidity arrangements such as the Chiang Mai initiative in East Asia be used to inject extra funds into regional economies. The commission also recommended establishing a new credit facility without conditions attached, and proposed an international panel on economic policy comprised of government representatives, leading academics and others, similar to the Intergovernmental Panel on Climate Change, to advise on coherent international responses to the global economy.
As we’ve seen, the G20 adopted one of these recommendations – the $250 billion in SDRs – but only as a once-off measure. The proposals that would have been an immediate help to developing countries or would have significantly reshaped global economic relations were not taken up in London.
The Stiglitz Commission tackles the longer-term systemic reform task with many recommendations. New financial mechanisms should be introduced to mitigate risk, including international institutions lending in local currencies. The governance of the IMF and World Bank should be reformed to make them responsive to the needs of their clients, the developing countries. Highly indebted countries should be given a moratorium or partial cancellation of debt, and new mechanisms for handling sovereign debt restructuring, such as a sovereign bankruptcy court, should be introduced. A Global Economic Coordination Council is needed at the level of the UN General Assembly and Security Council, meeting annually, as well as a Global Financial Regulator and a Global Competition Regulator. And, perhaps most controversially, the US dollar should be replaced as the global reserve currency by something like a greatly expanded SDR regime.
The first four of these proposals are the most do-able. There are strong reasons why all reschedulings of rich country to poor country loans through the Paris Club (a group made up of the financial officials of the world’s nineteen richest countries) should be in local currency, as should all lending by international financial institutions such as the IMF and World Bank. Our current system places the currency risk on the party least able to bear it, the borrower. This is nuts. Lending in local currency puts the currency risk on those best able to bear it and hedge against it, the lenders.
Likewise there are strong arguments for debt relief for more countries than currently receive it, and for an orderly, rules-based approach to sovereign insolvencies.
The remaining recommendations in my summary of the Stiglitz recommendations are far more controversial. To be effective, global financial and competition regulatory authorities are going to require real power to make rules, which raises all sorts of sovereignty concerns. And the recommendation for a new reserve currency made me wince. Not because it is silly; in fact, it is sensible, essential and probably inevitable. But one suspects the United States will die in a ditch to try and keep the dollar as the global reserve currency. So this recommendation alone is likely to attract the full force of US opposition to the report.
A new reserve currency is almost inevitable because the current arrangement is leading to ever greater volatility, and because China is fed up with it. Premier Wen Jiabao has said he is worried that China holds most of its reserves in dollars, and well he might be, as the decline of the dollar in recent years has cost China a fortune. Twice this year the governor of China’s central bank has called for a new reserve currency regime focused on special drawing rights. China Inc doesn’t make such comments without careful consideration, and it is hard at work researching alternatives.
The Stiglitz Commission may have been better off analysing why the move to a new reserve currency is highly likely and highlighting the benefits of an orderly transition and the potentially devastating effects of China and other countries dumping their dollar-denominated bonds. The report presents the sound technocratic arguments for change, but giving the practical reasons to seek to manage this process may have engendered more listening, and less opposition, in Washington.
But this is just one criticism. Overall the Stiglitz Commission report is informed by a different type of thinking than that which brought us the global financial crisis. As Joseph Stiglitz wrote earlier this year, “Financial markets are not an end in themselves, but a means: they are supposed to perform certain vital functions which enable the real economy to be more productive: (a) mobilising savings, (b) allocating capital, and (c) managing risk.” The financial crisis was a direct result of treating the creation of financial products as an end in itself – as a valuable driver of economic growth independent of the products’ effects.
Stiglitz believes a financial sector exists to provide capital, a necessary input into the productive process. Just like telecommunications, electricity and roads, a financial system is an important piece of infrastructure. There’s nothing new in this thinking. Everyone thought this way thirty years ago. It is just that many people forgot it. More fundamentally, one gets the impression that Stiglitz believes economies exist to advance societies, rather than societies to advance economies. Thus he approaches the issues from a framework quite different to that of the nations that shaped the G20 response to the GFC.
We have a national history of going All the Way with foreign ideas. This time our government has committed itself fully to the G20’s response to the crisis. In doing so we have missed a major opportunity to promote the only sort of thinking that will stop recurrent financial crises. The United States is sufficiently grown up to value a friend that has its own mind. We no longer need to play follow the leader. Our financial interests are profoundly different from those of the United States and Europe. Our primary interest lies in a fair and functional global financial system. The Australian people have a right to expect bigger and better thinking on these issues from our leaders. The next G20 meeting, late next month in Pittsburgh, would be a great place to start.
If Kevin Rudd is serious about ending neoliberalism, he should front up to the UN and argue for meaningful global economic reform, argues Luke Fletcher, Policy Coordinator for Jubilee Australia
A UN conference on the global financial crisis will take place later this month, and on the table lies a set of proposals which are far more interesting and wide-reaching than anything the G20 has been able to come up with. Yet in Australia, as in other wealthy countries, neither the Government nor the mainstream media have paid much attention.
But it doesn't have to be this way. Australia could once again show global leadership and recognise that, for the first time since the global financial crisis has hit, there are some genuine and much-needed reforms to our financial system being proposed. In a recent thinkpiece in The Monthly, Prime Minister Kevin Rudd bemoaned the dire consequences of the "neoliberal" propensity for deregulated markets. If the Prime Minister really meant what he said, he would give his full support to this UN process, which is not only more determined to push for fundamental reforms than the G20, but also to do so in a global forum that will bestow legitimacy on the decisions that are taken.
How did the UN suddenly become a vehicle for such potentially significant global reform?
Last November, as the global financial crisis deepened, delegates at the UN Financing for Development Conference in Doha agreed to meet at the UN this year to discuss the effect of the crisis on developing countries. The result is this month's UN Conference on the Financial and Economic Crisis and Its Impact on Development. The meeting has been dubbed the G192 and will be held in New York from 24–26 June.
The real action started a few weeks ago when the President of the General Assembly, a priest and former Minister in the Nicaraguan Government, Miguel d'Escoto Brockmann, tabled a strong statement calling for fundamental reforms of the global financial system and of global governance.
Mr d'Escoto's bold move has been widely criticised, for example in an article in the New York Times, which basically paints him as an out-of-control clergyman trying to Sandanista-ise the world economy. Moreover, citing a dissatisfaction with the President's failure to adhere to proper UN consultation processes, a number of countries had threatened to pull out of the conference altogether. After negotiation, a new watered-down interim draft of the outcomes document was adopted as a basis for further negotiation. The disagreements meant that the conference had to be rescheduled from its original date in early June.
Did a serious breach of etiquette really occur? Or was this in fact a convenient pretext for developed nations to stymie a process which they saw as threatening the status quo? In reality, the kerfuffle over UN etiquette is a sideshow. The real issues are, firstly, what the conference can actually deliver in terms of concrete outcomes, and secondly, what level of buy-in developed countries will have. Developing countries have shown more interest in it because, unlike other global fora, their voice actually matters.
D'Escoto's document was strongly influenced by a more detailed and thorough analysis prepared by a UN appointed Commission of Experts chaired by Nobel Prize-winning economist Joseph Stiglitz. Central to both analyses is the acknowledgement that advances in economic theory — pioneered by Stiglitz, among others — have revealed the folly of hasty and comprehensive deregulation, underwritten by the belief that market mechanisms can overcome all obstacles. Stiglitz and his colleagues have demonstrated that "deregulation at all costs" policies will consistently run aground due to the market failures that are inherent in any non-perfect economic system. A markets-only system is simply unstable, as recent events have shown us.
Some of the practical changes that both the President of the General Assembly and the Stiglitz Commission call for in the preliminary version of the report include: a new global reserve currency; debt relief and the creation of a sovereign debt and default restructuring mechanism; a much tighter regulatory structure for the financial system; a more just resolution of the global trade round; closer international cooperation on tax reform; the creation of a new Global Economic Coordination Council, run through the UN; and genuine (rather than piecemeal) reform of the Bretton Woods Institutions (the World Bank and the International Monetary Fund).
Reforms are being proposed that would once again embed the global economy within global social structures — steps that would place the paper economy in service of the real economy, not the other way around. Not only has the UN finally got its act together around economic matters, but the support of such a high-profile and well respected figure as Joseph Stiglitz adds credibility to this process. However, the only way for this process to have a chance of reforming the global economy is if governments like ours take it seriously.
The UN may not be perfect — and it is certainly unwieldy and inefficient — but it is at least representative, and for now it is the least-worst solution to the problem of global governance. Moreover, three decades of the World Bank and IMF bullying developing countries and enforcing a problematic globalisation model has been a disaster. The UN is the only entity capable of wrestling the baton back from the out-of-control Bretton Woods twins that have both overstepped their mandates.
The World Bank and IMF are nervous, as they should be. They realise that for the first time in 30 years the UN is challenging their hegemony as the controllers of globalisation. Rumours from New York are that the Bank and the Fund have been wining and dining developing country ambassadors in an effort to moderate their support for the UN process. The feeling among campaigners is that if China and the US — and Australia — send high-level representation, the UN Missions will advise their governments that it is appropriate that their heads of state attend, thus bestowing on the conference the legitimacy it will need to succeed
Australia's Parliamentary Secretary for Overseas Development Assistance, Bob McMullan, was due to lead the delegation when the conference was scheduled for early June. The date change affords Kevin Rudd the opportunity to do what he always should have done: either join McMullan himself or send the Treasurer in his place. And he should be encouraging his G20 colleagues to do the same. Kevin Rudd — who is supposed to be a multilateralist by disposition — should be able to pursue this course of action with ease.
Meanwhile, the Prime Minister's responsibility here needs to be seen in context. The Government's failure so far to take this UN process seriously is slightly more understandable amid the deathly silence from the mainstream press on such an important issue. Australian civil society groups could also be doing more to use this opportunity to push for real change.
Now, will the supporters of a more just global economy please stand up?
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