THE CRYING need to strengthen global economic co-ordination and governance was thrown into sharp relief over the last year by the scale and reach of the post-Lehman crash. And so at Pittsburgh in September out stepped the emerging Group of 20, representing 85 per cent of world output, as the self-declared new “premier forum for our international economic co-operation”. Over the weekend in St Andrews in Scotland G20 finance ministers followed up with discussions on approaches to putting manners on international financial markets, on when to ease stimulus measures and on funding developing countries’ efforts to deal with global warming.
Little substantive progress was made but the meeting will be remembered for the surprise advocacy by British prime minister Gordon Brown of the idea of a tax on international capital transactions, known as a Tobin tax after its champion, James Tobin, a US Nobel prize-winning macroeconomist. The idea has been canvassed by the French, Germans and recently by the Austrians but scorned as impractical by the US and Britain, itself long opposed even to any idea of EU economic governance.
British officials were on Sunday rowing back slightly in the face of opposition from US treasury secretary Larry Geithner, the IMF’s Dominique Strauss-Kahn, and Jean Claude Trichet, president of the European Central Bank. It was, the officials suggested, just one of four options including insurance levies on banks and funds to finance future bailouts. The IMF has been tasked to report on them by April.
But the Tobin tax does deserve serious consideration. As well as providing new revenue, Tobin argued that a small tax on individual transactions – as 0.1 per cent – could act as useful sand in the machine, providing just enough friction to slow the global flow of short-term speculative international currency transactions. In doing so, it could reduce excessive exchange rate volatility while being small enough not to threaten investment-related transactions.
With average daily turnover in the global foreign currency markets running at just under $4,000 billion, Tobin tax advocates argue a 0.05 per cent levy could raise several hundred billion annually. Aid NGOs challenged by “donor fatigue” have argued that such cash could be an important source of development aid or could help developing countries cope with global warming. Others see its potential to insure against future banking crises.
The main problem with a Tobin tax – a fatal and insuperable flaw, some say – is that it would have to be introduced and levied globally because of the extreme mobility of capital and the opportunities otherwise for avoidance. This essentially political challenge to the tax’s viability reflects precisely the problem that the G20 has sought tentatively to address, the absence of institutional means on the world stage of co-ordinating approaches to management of the financial system. If any lessons have been learned from the experiences of the last year it is surely that, Tobin tax or not, we must begin the process of creating such means.