July 15th 2000

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Articles from this issue:

Cover Story: Human Genome mapping milestone?

Editorial: Managing Australia’s interests in S.E. Asia

Canberra Observed: Defence: opportunity beckons for Howard Government

Families: The hollowing of the middle class continues

New South Wales: Follow Swedish model: drug forum told

Trade: Canberra capitulates without firing a salvo

Doctors suspended over 32 week abortion

Straws in the wind

Education: New Queensland syllabus attacked

Economics: UN to look at the Tobin Tax

Media: GST ads unchained media bias

Development: Amartya Sen: the return of humane economics

Comment: The politics of suicide

Law: Death penalty debate resurfaces in USA

United States: Rising tide leaves poor floundeirng

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Economics: UN to look at the Tobin Tax

by News Weekly

News Weekly, July 15, 2000
A special Geneva session of the UN General Assembly has authorised a comprehensive study into the possibility of a so-called “Tobin Tax”, as a means of dampening volatility in foreign exchange markets. It would involve a 0.25% tax on the on-the-spot conversions of one currency into another.

American economist and Nobel prize winner Professor James Tobin originally compared the tax to throwing some sand in the works to slow speculative hot capital flows.1

The need for such an initiative was confirmed in 1997 when there was a mass exodus of capital from Asia, causing many Asian economies to crash.

The UN proposal was strongly supported by Canada and Germany, but strongly opposed by Australia and the US, with Japan wavering, according to the UN’s social policy and development officer, John Langmore. He is a former Federal Labor parliamentarian.

Currently, hot capital flows occur as large investors seek to exploit interest rate and exchange rate differences around the world.

If the US is offering interest rates higher than Australia it is worth large financial institutions exchanging Australian dollars for US dollars and investing in the higher rate US market for three months. This is quite common. Longer investments risk seeing exchange rate changes or further interest rate shifts eroding the value of the investment.

With the Tobin Tax, the investor would have to pay when converting into US dollars and when converting back to Australian dollars, making such investments less profitable.

This would not stop all such speculative investment but it would reduce it to exceptional cases.

The effect for governments and central banks would be to immediately restore a degree of economic sovereignty to the nation state. Currently if there is a recession in Australia it would be desirable to lower interest rates so as to stimulate growth and create employment. But to do so would only result in an outflow of capital to countries where interest rates are higher. So lowering interest rates would not necessarily help overcome a recession.

But a Tobin Tax regime would mean it was not necessarily worth shifting capital out of the country because of the tax involved. Hence, governments could then lower their interest rates to stimulate growth and employment.

The Tobin Tax has the potential to put money into government coffers and for once it is a “tax on Wall Street not Main Street”, as the saying goes. The UN proposal is to have revenue raised by the tax to be used for development of poorer nations.

It has one drawback. Even if all the countries in the world introduced the tax except for say the Cayman Islands, then all the world’s currency trading would shift there and avoid the tax.

However, Professor Tobin has proposed a way around this suggesting that even one country could act alone by imposing a surcharge tax2 on the lending of their currency to foreign institutions, including foreign branches of their domestic banks.

These could not be avoided as anyone wanting to speculate say against shifts in the value of the Australian dollar has first to by Australian dollars. Even if Australian dollars are ordered in London or New York, the Australian dollars must be purchased from Australian banks which would be in a position to pass on the tax.

This would hit speculation at its source. The surcharge would hardly make any difference to trade in goods or foreign investment in industrial plant, but it would certainly affect speculative deals that are often in the billions operating on a profit margin of as little as one hundredth of one percent.

The total value of Australia’s imports and exports amounts to about $240 billion annually, while the speculative trade in currencies in Australia is about $75 billion per day.

1. James Tobin, “A proposal for international monetary reform”, Eastern Economic Journal, nos. 3-4, July-October 1978.

2. B Eichengreen, J Tobin, C Wyplosz, “Two cases for sand in the wheels of international finance”, Economic Journal, no. 105, 1995.

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