Global Financial Crisis and After

Heikki Patomäki looks at the prospects of establishing the currency transaction tax during and after the global financial crisis (January 2009).

The Tobin Tax and Global Civil Society Movements: Global Financial Crisis and After

Heikki Patomäki

Professor of Globalisation and Global Institutions

RMIT University, Melbourne, Australia

heikki.patomaki@rmit.edu.au

Introduction: The rise of the movement for the CTT

The currency transaction tax (CTT) is a simple idea, a tax levied on every currency exchange, set at a level low enough not to hinder transactions needed to finance trade in goods and services or long-term capital investments. James Tobin first proposed this tax in 1972, in the wake of the demise of the Bretton Woods system of fixed exchange rates (later, Tobin was granted a Nobel Prize in economics for reasons not related to this proposal). Tobin argued for a reform of monetary markets. “Throwing sand in the wheels of global finance” by raising transaction costs of foreign exchange would make the volatile financial markets more stable and increase the autonomy of states, particularly autonomy of their monetary policy. The CTT has often been called the Tobin tax, although Tobin himself was not always happy about this association.

Tobin’s proposal was ignored in the 1970s but came up forcibly in the 1980s particularly in the context various financial crises such as the October 1987 crash. However, of the nearly hundred currency crises which have taken place since the late 1970s, the most far-reaching ones have occurred since 1990. After the Mexican (1994-95) crisis and its repercussions, the Asian crisis (1997) – which spread to Russia and Brazil (1998) – alarmed the world. The Asian crisis in particular changed the world political scene. A new transnational political movement for the CTT emerged. The CTT even gave name to ATTAC (Association pour une Taxe sur les Transactions Financiéres pour l’Aide aux Citoyens), founded in France in June 1998 around the French journal Le Monde Diplomatique and has since then spread to dozens of countries around the world.

Although the movement for the “Tobin tax” has not, thus far, achieved its main aim of a global currency transactions tax, it has successfully campaigned for the tax in various countries. The movement has raised the issue on the agenda of many national parliaments, the European Parliament and a number of international organisations, including the UN. The parliaments of Canada (1999) and France (2001) have adopted motions supportive of the implementation of the tax. In June 2004, the Belgian Federal Parliament approved a bill implementing a two-tier version of the Tobin tax. According to the legislation, Belgium will introduce the Tobin tax once all countries of the eurozone introduce a similar law. In July 2005 former Austrian chancellor Wolfgang Schüssel called for a European Union Tobin tax to base the communities’ financial structure on more stable and independent grounds. However, the proposal was rejected by the European Commission.

Three different reasons for the CTT

Following Keynes, Tobin originally argued that over-liquid and “efficient” finance is tantamount to short-termism and thus irrational investments. This also leads to the lack of states’ autonomy in determining economic policy and to general misallocation of resources. Thus the need to “throw sand in the wheels of finance”.

In the 1990s, with the exponential growth of foreign exchange markets, the CTT suddenly appeared also as a very significant potential source of revenue for various global purposes. For instance, the CTT was discussed at the World Summit for Social Development in Copenhagen in 1995. Many NGOs and politicians began to advocate the CTT because of its revenue potential. Financial crises and the need for global funds made the “Tobin tax” a key point of contestation in struggles over the course of globalisation.

However, crises have also the effect of making claims about efficiency and justice of contemporary global finance look suspect. Because of global interdependencies, financial fluctuations have far-reaching consequences to the lives of those who neither benefit from financial activities nor have any say on the decisions and developments suddenly hampering their lives. The millions bearing the consequences of recurring financial crises seem to get a punishment without doing anything wrong.

Moreover, many of those causally responsible are rescued or bailed out by public funds, that is, they do not seem to face any real hardship even when they fail. To the contrary, they can continue to enjoy their comfortable life-style and privileges. The principle of “individual profits, socialised risks” is not fair in the sense of equal treatment. From this perspective, it is rather plausible to maintain that the CTT would weaken these dependencies and reduce the risks of crises. Moreover, incomes could be transferred from the “speculators” to improving the conditions of those actually or potentially afflicted by the global casino.

An argument for the Tobin tax may also start, however, from the shared ideal of democracy. For instance, Tobin’s defence of the autonomy of national economic policies is an argument for democratic self-determination. Similarly, if the main worry is that those whose lives are transformed by the consequences of financial outcomes do not have a say on financial developments, the argument is really about democratic self-determination of citizens in an interconnected world. Democratisation also concerns empowerment of the powerless, to realise equal, practically effective – although not necessarily actualised – rights of every person to take part in global collective self-determination. Attempts to tackle global power relations give rise to novel questions about democracy. Whether acknowledged or not, the CTT seems to open up a discussion about global democracy, too.

To summarise, the tax has three main aims:

(1) To curb foreign exchange markets and reduce and slow down transnational flows of short-term capital. Thereby the tax will stabilise financial markets and increase the economic policy autonomy of states.

(2) To create funds for global common goods; this may include aims such as worldwide alleviation of extreme poverty; preventive and compensatory mechanisms for financial crises; global social policy programmes; and global-Keynesian economic policies.

(3) To gain some global-democratic control over global financial markets and the social forces they have helped to unleash and strengthen.

The emancipatory potential of the CTT depends on the way it will be realised. Many visions of the CTT focus on only one of the aims of the tax, thus excluding other concerns. James Tobin’s original proposal was only about stability and autonomy of states (1), leaving (2) aside as an uninteresting by-product. Tobin had virtually nothing to say about (3). Some economists have followed Tobin in this regard. Many later proposals have only been interested in creating global funds (2) for limited purposes and imply such a low rate of taxation that the volumes and functioning of foreign exchange markets would be left practically intact.

Also many recent proposals to establish a stand-alone CTT by the European Union would not achieve the three basic goals. There would be no global fund or global democratic control of financial markets. If developing countries were invited to join the regime subject to acceptance of the control of the European Central Bank, the CTT regime would come close to reproducing (neo)colonial structures of finance.

Post-Asian crisis re-assessment

The Asian crisis of 1997-8 did not lead to a significant regulatory change. The New International Financial Architecture (NIFA), the official response to the crisis, was a set of policies and regulations that aimed at making financial liberalisation and deregulation more stable and legitimate. NIFA was not an attempt to reverse or transform these processes or their guiding principles, but to strengthen them.

In fact, the Asian crises provided an opportunity for the US, the IMF, and advocates of the Washington Consensus to impose their preferred model on the Asian tigers. The accusation was that the Asian form of capitalism has been “crony”, that is, it is corrupt and based on intimate and illegitimate networks of close friends. This was claimed to be the cause of the Asian crisis. The solution was, of course, to replace the Asian model of “crony capitalism” with “free markets”, in order to make also financial markets work properly. This was also the condition of the IMF rescue loans. Simultaneously, the Western corporations and banks had the opportunity to buy Asian means of production at a great bargain (e.g. the dollar-valued price of Indonesian factories and enterprises in 1998 was only about 4% of their previous value). As a result of the Asian financial crises, these countries came under neoliberal domination more strongly than ever. Until the crisis they had formed the key exception to the rule of slackening global conditions, since then the key exception has been China.

While the Asian crisis strengthened the grip of the Washington Consensus over the countries facing the crisis, it also led to a new phase in the development for the alter-globalisation movement trying to establish alternative principles of global regulation. As a reaction to the alarming situation created by the Asian crisis, a more systematic and organised global campaign for the CTT emerged. This reactive scheme of political mobilisation was reinforced by general frustration with the mainstream Western politics of neoliberal globalization.

The main momentum for the CTT was lost by 2003 or so and, moreover, the global CTT campaign is divided. One part of the campaign would be content to use a minimalist version of the tax to raise fresh funds for the eradication of extreme poverty and conventional development aid, leaving global relations of power and regulatory principles intact. The hope is if the CTT is compatible with neoliberalism, its chance for success improves.

The Lula-Chirac Report vs. the Draft Treaty

In 2004, the neoliberal version of the CTT gained support in the form of the Lula-Chirac Initiative by the Presidents of Brazil and France, joined by the Presidents of Chile and Spain, and the UN Secretary General (and United Nations University - WIDER). The Lula-Chirac report “Action against Hunger and Poverty” does not exclusively focus on the need to generate global funds, but it seems to assume, by and large, the validity of prevailing economic theories and policies. It tries to avoid “distorting” free markets and would like to exempt a large part of all currency transactions from the tax (the so-called “market making transactions”).

Moreover, the Lula-Chirac report assumes that the CTT can only be implemented if all the major financial centres are within the system from the outset. In other words, the US or any other major financial centre would have veto-power over establishing the tax. Effectively, the same is true for any attempt to realise (even a neoliberal) version of the CTT through the UN system. Even in its neoliberal form, the CTT would be, after all, a tax that a few financial corporations (mainly banks) should pay. Moreover, the CTT might be seen as a precedent for other global taxes; at least the US will continue to oppose it.

The solution of some NGOs, such as War on Want, has been to turn the CTT into a series of independent national taxes, united only by a voluntary global developmental fund based on a one dollar/one vote principle. Instead of a global tax, the CTT would merely be another form of development aid. The real effects of this model would be limited and context-preserving.

The Draft Treaty on Global CTT outlines an alternative model, more in line with the aspirations of ATTAC and many organisations and movements participating in the World Social Forum process. The basic assumption of this model is that global financial markets are unstable and undemocratic. As explained by James Tobin already in the 1970s, well before the numerous financial crises that we have seen since, “national economies and national governments are not capable of adjusting to massive movements of funds across the foreign exchanges, without real hardship and without significant sacrifice of the objectives of national economic policy with respect to employment, output, and inflation”.

According to the Draft Treaty, the tax is set at a sufficiently high level to curb the power of transnational financial flows. Global finance constitutes also structural power. The CTT should thus be a multilaterally agreed global tax controlled by a new democratic body, capable of mitigating the effects of the power of finance. Any sufficiently large grouping of states can establish the tax regime. The Treaty on Global CTT also has the potential to act as an “icebreaker” in international law, by setting an example of post-sovereign global regulation and taxation that can be applied also in other fields.

The new CTT Organisation must be capable of learning and self-transformation. The CTTO must be open to different points of view; react rapidly to unexpected changes; and be qualified to assume new tasks if needed. Moreover, there must be a fair, transparent and accountable process whereby decisions concerning the allocation of funds can be reached. Only an efficient and open democratic organisation can meet these essential requirements. A CTTO could stimulate the development of new forms of democratic participation and accountability in global economic governance, by virtue of its exemplary structure and initiatives.

The consequences of the 2008-9 global financial crisis

The possibility to realise the CTT as a truly global tax, also implying a democratic change in global regulatory principles, is dependent on the possibility of enrolling a sufficient number of states to support the model, and organizing an international conference to discuss a possible treaty. In 2006 I concluded that it will take further crises before this will happen even in the neoliberal form. However, I also warned that since the political consequences of a major crisis are always hazardous, it does not seem particularly wise to stand passive and just wait for a new disaster.

As I anticipated in my new book The Political Economy of Global Security, the new financial disaster arrived duly in 2008. This time the crisis is truly global. What matters is that, from a global point of view, the exchange rate system is closed. Up and down of any particular value is always in relation to the value of other currencies. Overall the system is zero-sum, i.e. changes cancel each other. If all states – including the EU – are simultaneously facing a banking crisis, triggered by a burst of the housing market bubble, and a collapse in stock values, the crisis may not involve any acute problems in foreign exchange (forex) markets.

Yet, there has been a lot of volatility in forex markets, also preceding the 2008-9 crisis. Most importantly, this volatility has concerned the position of the US dollar, which is dependent to a large extent on the political decisions of various central banks and governments, in addition to the private decisions of especially Asian investors. Since its introduction, the euro has been the second most widely-held international reserve currency after the US dollar. With more than €610 billion in circulation as of December 2006 (equivalent to US $802 billion at the exchange rates at the time), the euro has already surpassed the US dollar in terms of combined value of cash in circulation. In August 2005, the euro/dollar exchange rate was at 1.22, standing at above 1.34 in May 2007 and 1.41 on 31 December 2008.

From the point of view of many central banks, the decision to hold dollars as part of their reserves is based on balancing their dependence on the US consumer markets with hedging against the risk that any currency, including the US dollar, contains. For instance, China is not willing to risk a trade conflict with the US (or EU), or the possibility that it will suffer systemic problem assignment through a collapse of the dollar (and thus the value of its holdings of foreign currency and of Bonds). However, with growing surplus capacity and internal economic problems looming, China is tempted to try to export its problems, also with the help of devaluing yuan renminbi. The temptation – which is broadly in accordance with the neoliberal belief in relative competitiveness and emphasis on export markets and transnational investments – is strongly reinforced by the example of US unilateralism.

For private investors, the decision to invest in currencies is a matter of maximizing short-term profits, and the private investors’ anticipations and expectations also play a role in central bank calculations. It is thus possible that a turning-point will be reached despite the intentions of central bankers to move slowly in diversifying their reserves, and despite the attempts of the US to use its political or even military leverage in defending the position of the dollar as the main currency of the world economy. The collapse of US dollar would constitute a global currency crisis.

The CTT is meant to do basically two things. Firstly, it would slow down and curb speculative financial flows across currencies by increasing transaction costs. Numerous financial transactions involve two or more currencies, so this would have an effect way beyond forex markets. Secondly, the Tobin tax would help to prevent sudden collapses of (or speculative surges on) particular currencies.

Given the nature of 2008-9 crisis thus far, the CTT would have only contributed to the avoidance of the crisis by reducing, indirectly, volatility is stock markets. In addition, the global fund could have been used for financing bail-outs and for counteracting consequences of the crisis. However, whether that is the wisest way of using CTT-fund is open for debate. At any rate, without other regulatory measures, the CTT alone would not have sufficed for preventing the 2008-9 crisis.

Given these considerations, and the politically far-reaching fact that private financiers, central bankers and most economists oppose the idea, it should not come as a surprise that the on-going global financial crisis has not sparked a new round of debate on the CTT. At least not yet. A quick web-search confirms that the global movement has not regained the post-Asian crisis momentum for the CTT. There is a continuous, even if slightly marginal, discussion on the CTT as a potential source of revenue for development aid and poverty eradication, but hardly anything on the CTT in response to the current crisis. Even in global civil society discussions, its role in establishing democratic control and re-regulation over global financial markets, and its global-Keynesian rationale, remain marginal topics.

By the end of 2008, the crisis has hit hard on financial capital, corporations and some homeowners, but for most ordinary citizens the effects of the crisis are still to be felt. So far, the impact on unemployment rates has been relatively small; some people have lost savings but mostly this has affected the well-off; and some people have lost their homes, particularly in the US. More misfortune and suffering will ensue in 2009-10, but – given the general decline in associative activism and democratic participation across the OECD world, and the deeply entrenched relations of structural power in the global political economy – will that amount to generating a new momentum for global civil society movements?

I think it is likely that if (a) the negative per capita growth rate remains, on average, at the level of less than one percent per year, and (b) if the crisis can be contained and a recovery starts in 2010 or at the latest in 2011, we will see another round of business-as-usual “reforms”. The illusionary idea that financial markets can make wealth out of nothing has of course experienced a major setback, but people’s memory is short and open to media-manipulation. However, if the crisis proves deeper – as now seems probable – two things are likely to happen:

the tendency towards beggar-thy-neighbour policies will become stronger, reinforcing neo-imperial competition over resources and markets and accelerating the already on-going armament race
demands for global reforms will become stronger and more radical and are likely to include the CTT and other global taxes

This implies a dialectics between two opposing tendencies: (i) a general tendency towards a repetition of the mistakes of the eras 1871-1914 and the 1920s; and (ii) a tendency towards a rise of global ethico-political imaginary and new globalist movements that focus on global sustainability, justice and democracy. Ultimately, some of the new globalist movements will form global political parties and, in all probability, start talking about establishing a democratic world state.

In the absence of spectacular catastrophes, however, moderate compromise reforms – such as the Draft Treaty-version of the CTT and other global-Keynesian proposals, including a global greenhouse gas tax – are likely to enter the centre stage of global politics. If the basic contours of this rather optimistic scenario are actualised, and if the global tax movement gains sufficiently wide popular support across the planet, the CTT is sure to become reality at some point in the late 2010s or 2020s. A lot is at stake: democratically organised global taxes would set the 21^st century world history onto a much healthier track than the current one.

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