Memorandum submitted by War on Want
The Monterrey UN conference on Financing for
Development was a disappointment for the world's poorest, but
it has delivered on one front: it has helped to concentrate some
minds. There is new money, but it is not enough. The conditions
attached to the US money in particular means it is very dubious
that much will go where it is most needed. Ultimately, Monterrey
has to be seen as a failure of multilateralism. The US has been
unwilling to accept the true consensus that is needed to end povertycountries
working together for global action and redistribution in favour
of the poor.
The main "side-issue" has been the
Currency Transactions Tax (CTT) or Tobin tax, which is the area
in which War on Want has a specialisation. The issue is emblematic
of the type of international action that is needed if the Millennium
Development Goals are to be met.
The increase in US aid still leaves the US floundering
at the bottom of the aid league table. However, the US pledge
is significant in money terms. The US is now at least engaged
in the aid debate. Nevertheless there are a number of outstanding
1. Why will the aid not be targeted at the
2. Why will the aid only "reward countries
with open markets and encourage private enterprise"?
3. The aid will decline over time as a percentage
of GDP and will leave the US at the foot of the table of donor
countries in real terms.
4. The US rules out its aid going to any
countries that are unstable or having problems of governancethese
are often the countries that need help most.
5. The aid package may not get past Congress
and anyway will not come on stream fully until 2006.
The EU struggled to find its voice at the conference
but did manage to come up with a significant aid package before
amounting to an average of 0.39 per cent of GDP. This means more
money but the EU has done little to strengthen its hand and remains
deeply divided over a number of development issues, including
the untying of aid.
At Monterrey a number of side issues were given
profile despite the limited official agenda. The CTT was the source
of considerable interest with the German development ministry
launching a report saying the tax is feasible and desirable. The
issue had arisen in FFD Prepcoms but was vetoed by the US and
is likely to re-emerge during the Earth Summit at Johannesburg
later this year.
The Nobel-prize winning economist James Tobin
first put a proposal for an international tax on foreign currency
transactions forward in the 1970s. He suggested it as a means
of decreasing exchange rate volatility by putting "sand in
the wheels of international finance". The proposal involves
the levying of a small tax on foreign currency exchange transactions
that would act as a major disincentive to short-term transactions.
It would also make considerable sums available for development
War on Want, among many others, has argued that
such a tax would act to deter short-term transactions by making
the rapid movement of large sums of money between countries more
expensive. This would lead to a decrease in the volume of destabilising
short-term capital flows, which would provide greater exchange
rate stability. In this way the tax would make exchange rates
more reflective of long-run fundamentals rather than of short-range
expectations and risk. The imposition of such a tax would thus
give governments greater control over their own macroeconomic
policies and encourage longer-term investment in the production
of "real goods".
To make the proposed tax more effective against
speculation, another economist, Paul Bernd Spahn, has suggested
that the tax could have two-tiers. This system would involve a
target rate for currency levels and an admissible band for each
currency. When the currency value changes within the admissible
band, a low-level underlying currency transaction tax is charged.
However, an additional level of tax (an exchange surcharge) would
be applied automatically whenever the currency value breached
the limits of the band.
Recent currency crises have hit Asia, Latin
America and Africadisproportionately affecting the most
vulnerable in those societies. War on Want works in some of these
areas and has witnessed the devastation. Some estimates suggest
that in the first few months of the East Asian crisis in 1997-8
more than 10 million people lost their jobs. Millions more were
caught up in the aftermath, pushed into poverty and debt. Governments
had to divert resources from social programmes to propping up
their currency. Long-term investment also suffers. In Brazil,
in 1999, $30 billion in capital fled the country in just a few
There have been various studies of the effectiveness
and feasibility of the introduction of a CTT. For example, one
IMF study on financial transactions taxes was sceptical of the
ability of a CTT to reduce volatility but was optimistic about
the ease with which a framework for administering the tax could
Rodney Schmidt's paper "A Feasible Foreign
Exchange Transactions Tax" examined whether the imposition
of such a tax was feasible, bearing in mind the increasingly formal,
centralised and regulated settlement infrastructure of foreign
exchange trades, and concluded that it was.
Recent work by Paul Bernd Spahn for the German
development ministry suggests that a Currency Transactions Tax
is feasible in one time zone and could be applied more or less
immediately in the Euroland plus the UK and Switzerland. Lieven
Denys, professor of Tax Law at Brussels University, has shown
that the proposal is perfectly legal under EU law.
Estimates vary, but most agree that the tax
would raise considerable sums, depending on what rate it is set
at and how many countries are part of the zone. Economists estimate
that a global tax of 0.1 per cent would raise $50-300 billion
a year. Spahn calculates that a low-level European tax set at
0.01 per cent would raise 20-30 billion Euros a year.
War on Want believes very strongly that any
money raised should be hypothecated for international development
purposes. In the accompanying report "The Robin Hood Tax"
we argue that the funds should go into a central pot controlled
by a new treaty-based body that comes under the auspices of the
UN General Assembly. We believe that this body should be democratically
accountable and transparent on a global basis.
The main obstacle to the CTT or Tobin tax in
the past has been a lack of political support but this has changed
rapidly in recent months.
In August 2001 French Prime Minister, Lionel
Jospin, said that he supported the idea and France passed legislation
by the end of the year. Jospin also said he would push for a common
EU position, following the lead of the Belgians who raised it
as an issue for their 2001 Presidency of the EU.
In September 2001 France and Germany announced
a move to explore ways of controlling international currency markets
that would include serious assessment of the tax's potential.
Most recently legislation published in Belgium is likely to be
passed following the French law and the German development ministry
have published the aforementioned study that is very supportive.
Other support has come from another G8 member,
Canada, whose parliament passed a motion in favour of the tax,
with government backing. The G77 have supported the proposal,
and individual government leaders from Brazil, India and Cuba
have voiced encouragement recently.
Having initially been sceptical about the idea,
the British government has become much more positive in recent
times. In a landmark speech given to the Federal Reserve Bank,
New York, Chancellor Gordon Brown said he had an "open mind"
about the idea. Clearly the UK is a key figure in the international
debate about the CTT.
Progress at the UN has generally been prevented
by US aversion to the idea of an international tax. The tax was
discussed behind the scenes within the context of the World Summit
for Social Development held by the UN in June 2000 in Geneva and
a study was promised. It seems, however, that the matter was delayed
and then "diverted" into the UN High-Level Panel on
Financing for Development. The panel, headed by Ernesto Zedillo,
the former President of Mexico, fudged the issue, but left the
door open for further studies. Two current UN studies are due
to report to the Earth Summit (Rio + 10) in Johannesburg.
Ultimately Monterrey has been a failure of process.
The long, drawn out and often-bloody negotiations, underline the
fact that many countries do not have the stomach for taking the
sacrifices necessary for beginning to end poverty. The US in particular
has confirmed fears that, far from being a consensual nation in
international fora, it is an obstacle to agreement, acting as
spoiler and wrecker.
The fact that proposals like the CTT are still
on the fringes at events like FFD means that other fora may prove
more useful strategic opportunities. There does, however, appear
to be a growing core of support for the issue, which may soon
form the basis for multilateral alliances in the medium term.
The questions that remain about the CTT are of a political rather
technical nature. The UK is pivotal to this debate and can no
longer remain agnostic.
War on Want