The financial markets have crashed and world economies have been crippled by the havoc of the past few weeks. The task of restructuring the world economy is looming large before global leaders. If one sees the financial crisis in light of the already impending issue of climate change and food crisis, one wonders what fate has in store for the common man.
How can such crises be averted? Is there a need for reorientation of the principles of economics? Is globalization to be blamed? The developing world is restive about the spillover effects of the crisis. The capitalists are concerned about ruined financial institutions. Though bailouts were necessary to salvage sinking financial institutions instantly, the need of the hour is to find a sustainable solution for the long run.
Thousands of harrowed investors, who lost their money in the crisis, will tell you that mindless speculation was what caused the catastrophe. They urge to bring down the casino economy of speculation. But experts believe that speculation is necessary to maintain liquidity in financial markets Thus, economists need to find a way by which market speculation can be controlled without harming liquidity. It is time that we gave due consideration to James Tobin’s proposal of taxing currency speculation.
James Tobin, an American Nobel prize-winning economist, made a simple proposition in 1978- a levy of 1% tax on all international currency transactions. The tax was proposed to achieve economic stability, as it would effectively discourage speculation in currency transactions. A trillion dollars worth transactions take place in the currency market every day. This market is so large and volatile, that central banks can no longer protect the currency of their own nations. Even a 0.1-0.5% tax would deter short-term trading, and thus shrink the volume of daily currency trading. Such a contraction would restore the ability of countries to control their currency.
Tobin’s proposal has been accepted by economists as an innovative and efficacious policy, but little has been done towards actually implementing the tax. Only Canada and a few Latin American countries like Venezuela, Argentina and Brazil have adopted it on a small scale. Critics’ feel that the tax would “constrain globalization and dry up world liquidity”. But the tax can prove fruitful if applied selectively. Adoption by the major currency nations, like the US, would accomplish the volume-shrinking goal. Reduction in liquidity would be less in this case.
The benefits of the tax for the developing world are enormous as it can protect it from spillovers of financial crises. Currencies of Asian countries have devalued in the recent financial crisis. When currency is devalued, existing problems like unemployment and inequality of income exacerbate. Conventional economic methods like reduction of interest rates are proving unsuccessful in overcoming these difficulties.
What is needed now is political consent and initiative. The ATTAC (Action for the Taxation of Transactions for the Benefit of Citizens) association, which strives to protect the “victims of speculative capitalism and ultraliberal markets”, has continually urged the EU for the implementation of the Tobin Tax. It has also suggested the use of tax revenues towards global welfare issues like poverty and environment protection. We should be asking our elected representatives to look seriously at this opportunity to reverse the damages of the crisis. Only through a revolutionary shift in the perspective of policy makers can the world hope to recover from such a crisis.