Presentation on "Controlling Casino Capital", World Social Forum, Porto Allegre

World Social Forum - Porto Alegre - Jan 25-30, 2001

Robin Round
Policy Analyst
Halifax Initiative Coalition

We use money everyday. Money is a tool; a means to simplify transactions in an economy based on the exchange of goods and services. But the way most of us use money is old fashioned, out of date. Money is no longer a means of exchange but an end in itself. We live in the era of the commodification of money, an era where money has become divorced from the real economy it was originally designed to serve.

Money is bought and sold in a dizzying array of forms, known as instruments, in stock markets, currency markets and bond and other credit markets. Any form of debt can become a tradable commodity - anything whose value today is the value of a future earnings stream can become a tradable contract on a money market. Government bonds are issued to raise capital with no asset behind it other than a promise to pay. Speculators earn millions buying and selling contracts that will never be delivered. Stock markets don't raise capital for productive investment; they provide an arena for speculators to bet on price movements.

Money trading markets are enormous and are growing exponentially. The trade in money has eclipsed the global trade in goods and services. Global foreign exchange transactions alone rose from $4.6 trillion in 1977 to $400 trillion in 1998[1]. From 3.5 times the dollar value of world exports in 1977, foreign exchange transactions rose to 68 times the value of world exports by 1998. The daily trading on foreign exchange markets alone is US$ 2.0 TRILLION PER DAY[2]. 

Those numbers are almost beyond comprehension. A million one hundred dollar bills stacked one on top of the other would stand two metres tall. Two trillion one hundred dollar bills stacked one on top of the other would be forty times the height of Mount Everest.

The national economic security of countries is at risk when this tidal wave of capital rolls in, and more importantly, out, of their countries. Recent trends to liberalize financial flows globally led to destabilizing speculation and abrupt capital flow reversals. In Asia the sudden exodus of US$12 billion in 1997 precipitated the crisis. In Brazil, an estimated US$ 50 billion left the country within six months in 1998. Financial liberalization has meant that governments have largely surrendered their ability to control the global flow of capital.

Many countries can no longer defend themselves against speculative attack, effectively surrendering monetary policy sovereignty to investment houses and big banks. Total reserves of all the world's countries are now less than one day's trading in foreign exchange markets[3]. Government's simply haven't enough money to play in the capital casino.

This exploding market in money has devastating impacts on people. Fearing low stock prices and takeover, corporations cut jobs globally to maximize short-term profits and dividends. Thus we arrive at the perversity of soaring stock prices when employment is slashed. As the global financial crisis demonstrated, when currency values collapsed in the wake of speculative attack, prices skyrocketed, wages fell, companies unable to pay debts denominated in foreign currencies went bankrupt and joblessness and social dislocation soared. Three decades of poverty reduction and economic growth was wiped out in South East Asia; thirty million people were thrown into poverty[4]. In Latin America, poverty levels at the end of the 90's were higher than the 80's. Living standards in these countries have not recovered post-crisis. The human crisis in affected countries is an ongoing one and will take decades to reverse.

The financial crises revealed the degree to which financial markets are under-governed in the global economy. An enormous discrepancy exists between an increasingly sophisticated international financial world and the lack of proper institutional frameworks to regulate it at the national and multilateral levels.

The inevitability of future crises makes the re-regulation of capital a global imperative. Until measures are enacted to prevent systemic financial market volatility, human development will be threatened. India and China, the countries least affected by the Asian crisis, were protected from contagion by capital controls. Measures in each of these countries deter speculative attack without restricting capital flows for productive investments. Chile's 30% one year reserve requirement deterred short-term destabilising portfolio flows without impeding long-term productive investment. Even Malaysia's dramatic restrictions on capital outflows, introduced in the wake of the crisis, hastened economic recovery.

The re-regulation of capital is the first step in re-asserting public control over finance. One means to control capital is to put a tax on currency transactions.

What is the Tobin tax?
In 1978, Nobel prize-winning economist James Tobin proposed that a small world-wide tariff (.1 - .5%) be levied by major countries on all foreign exchange transactions in order to reduce the volume of speculative flows.

The Tobin tax is designed to reduce or eliminate the small margins speculators profit from. No profits, no incentive, no speculation. By reducing the volume of speculative flows, the tax is designed to help stabilize exchange rates and increase the fiscal and monetary policy autonomy of national governments.

By cutting down on the overall volume of foreign exchange transactions, a Tobin tax would reduce the volume of reserves necessary for countries to defend their currency, thus freeing capital for development. The Tobin tax would allow governments the freedom to act in the best interests of their own economic development, rather than being forced to shape fiscal and monetary policies in accordance with the perceived "demands" of fickle markets.

By making crises less likely, the Tobin tax could help avoid the social devastation wrought by them. Analysts agree that currencies plunged to levels completely out of line with underlying economic fundamentals as currency speculators attacked.

The Tobin tax has an unintended benefit - it generates enormous revenue. A phased-in Tobin tax could yield anywhere from US$ 150 - 300 billion annually[5]. The cost of wiping out the worst forms of poverty and mitigating environmental destruction globally would be on the order of US$ 225 billion per year for 10 years according to United Nations and World Bank estimates[6].

Revenue from the Tobin tax represents a significant new source of public finance for world development. Given the declining commitment to bilateral and multilateral development assistance around the world, the tax could generate substantial resources to support environmentally and socially appropriate development.

How does the Tobin tax work?
The primary difference between speculative and legitimate trade transactions is the speed at which they occur. Investors in the productive economy have medium to long time horizons. Speculators, on the other hand, are flipping investments like pancakes, profiting by the daily, hourly and minute to minute fluctuations in interest rates and currency values. Over 80% of all speculative transactions occur within 7 days or less - 40% occur in two days or less[7].

Tobin's tax would automatically penalize the short-horizon exchanges, while negligibly affecting the incentives for commodity trading and long-term capital investments. A .2% tax on a round trip in another currency costs 48% a year if transacted every business day, 10% if every week, 2.4 % every month and so on. A Tobin tax at a rate of between .1% and .25% is a trivial charge on a long-term investments. Long term investment would further benefit through reduced exchange rate risk and hedging costs.

Who will be taxed?
The majority of foreign exchange dealing is done by one hundred of the world's largest commercial and investment banks. The top ten control 52% of the market and include Citibank/Salomon Smith Barney (US), Deutche Bank(Germany), Chase Manhattan Bank(US), Warburg Dillon Read (US), Goldman Sachs(US), Bank of America (US), JP Morgan (US), HSBC (UK), ABN Amro (Netherlands) and Merill Lynch (US)[8]. Citibank is at the top of the list with a 7.75% market share and a 1998 foreign exchange transaction volume that exceeded the GDP of the US at US$ 8.5 trillion[9].

These banks thrive in times of high volatility - 1998 was a banner year, as increased volatility yielded spectacular returns. Deutche Bank reported a trading profit of US$ 595 million[10]. These banks operate in their own interest and on behalf of clients including large corporate and private investors, insurance companies, hedge funds, mutual funds and pension funds.

Won't speculators find ways to evade the tax?
Yes, they will. All taxes are evaded to some extent and never capture the entire revenue stream they target. These arguments, however, never dissuaded governments from collecting taxes. The real question is how do you minimize evasion?

A Tobin type tax could be quite difficult to evade and easy to collect. A variation on Tobin's original proposal by a Canadian economist Rodney Schmidt utilizes an existing centralized and regulated structure through with major banks exchange balances on the wholesale market. All transactions are already tracked electronically. Monitoring systems are already in place and all major currencies participate. Because the tax will be collected at centres controlled by the central bank, non-cooperating tax havens could be refused the right to utilize the taxed currency. Using Schmidt's variation, a currency transactions tax could be imposed unilaterally. All transactions that utilize that country's currency would then be taxed world-wide.

So what's stopping us?
The biggest barrier to the adoption of a Tobin tax is not technical or administrative but political. The Tobin tax is a tax on the most powerful banks and investment institutions in the world. The tax is viewed as a threat to financial community privilege and has been met with resistance by a sector with massive political clout. The very idea of a Tobin tax, of putting people ahead of markets, challenges the heart of the dominant economic paradigm of our times. There are powerful forces that do not want their world-view disturbed.

Can political barriers be overcome?
Yes they can, if the conditions are right for change. We are at a time when economic necessity coincides with social justice. The risk of future financial, economic and social crisis, coupled with the revenue potential for a currency transactions tax, are providing political incentives opportunities unimaginable just 2 years ago.

Three factors are moving the debate forward:

The problems with financial markets are systemic. Borrowers and can never obtain sufficient information about future prices and costs to enable them to estimate risk vs. return accurately - these are inherently subjective judgements. Markets behave irrationally, driven by panic selling and herd behavior that does not arise from empirical evidence. Speculators have a vested interest in creating and maintaining volatility as profit potential increases in volatile markets[11]. Wild market swings are here to stay unless something is done to control them.

Further, current proposals by the G7 and the G20 to create a "new global financial architecture" are inadequate at best, and at worst, guarantee the next financial crisis. Measures to reform domestic financial institutions and markets to better meet the demands of liberalized foreign capital flows only set the stage for future crisis.

As the frequency of crises increases, the ability of the world to ignore the problem declines. Nations can ill-afford to repeat the economic devastation, social turmoil and untold human suffering of the last two years. In the wake of the financial crises and the ensuing global economic turmoil, governments around the world are examining their former faith in unfettered free markets.

The political appeal of this tax to cash-strapped governments world-wide cannot be underestimated. Many governments face large deficits, declining income and strong anti-tax populism and are looking for new sources of revenue.

At a time when income disparity and social inequity are increasing, the Tobin tax represents a rare opportunity to capture the enormous wealth of an untaxed sector and destructive sector and redirect it towards the global public good.

Tobin's proposal sat on a shelf until the Mexican peso crisis, when it was discovered by the NGO community. The social movement has been building ever since, leading to some impressive achievements:

  • In March 1999, Canada became the first Parliament in the world to pass a motion calling for a Tobin tax by a resounding 2:1 margin with all party support;
  • In August 1999, the Brazilian parliament held hearings on the Tobin tax. President Cardoso proposed to implement a Tobin tax to stem the exodus of capital in late 1998 but the IMF would not allow it;
  • Throughout late 1999 and 2000, the UK, French, Belgian and European Parliaments held debates and votes on the tax and more are on the way;
  • Finance and Foreign Affairs Ministers from Finland and Belgium have publicly endorsed the tax;
  • June, 2000, over 160 governments agreed to undertake a study on the feasibility of a currency transactions tax at the UN Social Summit in Geneva.

Hundreds of Parliamentarians and economists from around the world have signed declarations calling for a Tobin tax. (

NGOs in over 20 countries are already campaigning for a Tobin tax and have been directly or indirectly responsible for every victory mentioned above.

The currency transactions tax is not a panacea for the world's financial ills and developmental woes. The Tobin tax must be but one part of a coordinated strategy to fundamentally reform the global financial system to place people ahead of markets.

Markets are not the best source of social regulation nor do capital and its returns constitute the ultimate criteria for defining value[12]. Citizens must re-assert sovereignty over money and financial markets. The democratization of economic decision-making, the cancellation of developing country debt and the equitable redistribution of wealth must become the central principles upon which governments act in the new millennium. A currency transactions tax is but one critical component of a new global financial order. 

[1] Felix, David. Foreign Policy in Focus.

[2] Based on Bank for International Settlements 1998 Survey.

[3] Ul Haq, Mahbub. The Tobin Tax - Coping with Financial Volatility, Oxford University Press, 1996.p292. Based on 1995 Bank for International Settlements, New York Federal Reserve, IMF and Bank of England statistics.

[4] UNCTAD.Trade and Development Report 2000.p.66 from World Bank "East Asia Recovery and Beyond", table 1.2.

[5] Felix, David. "On the Revenue Potential and Phasing in of the Tobin Tax" in Ul Haq, Mahbub. The Tobin Tax - Coping with Financial Volatility. Oxford University Press. 1996.p238. Based on a tax rate of .1% to .25%.

[6] In 1997, the United Nations estimated that the cost of wiping out the worst forms of poverty in the world and providing basic health care, nutrition, education, water, and sanitation would be US$ 80 billion a year. The 1992 Rio Conference on Environment and Development estimated that at least US$ 125 billion a year was needed to tackle the world's substantial environmental problems. Adding estimates on needs for reproductive health and basic infrastructure in developing nations provided by the World Bank, external funding on the order of US$ 225 billion a year could eradicate the worst forms of poverty and environmental destruction globally.

[7] Ul Haq, Mahbub. The Tobin Tax - Coping with Financial Volatility, Oxford University Press, 1996.p4. Based on 1995 statistics provided by the Bank for International Settlements, Bank of England and the New York Federal Reserve.

[8] Hayward, Helen. The Global Gamblers - British Banks and the Foreign Exchange Game. War on Want. 1998.p.14.

[9] Ibid. p.24.

[10] Ibid, p.3.

[11] According to Standard Chartered Bank's 1998 Annual Report, "the result from Treasury was outstanding...their ability to continue trading, during periods of high volatility in the foreign exchange markets resulted in exceptional dealing profitability." Hayward, Helen. The Global Gamblers - British Banks and the Foreign Exchange Game. War on Want. 1998.p.2-3.

[12] Petrella, Ricardo. From Enroute. September 2000.