Select Committee on International Development Minutes of Evidence

Examination of Witnesses (Questions 80-97)



Ann Clwyd

80.  I did have a researcher who was obsessed by the Tobin Tax. He worked in the City and, Steve, I think you know him. He talked Tobin Tax morning, noon and night. I wonder what sort of support you feel you have got for it in the various European Governments? Is there anybody who is particularly enthusiastic or anyone who has completely turned their face against it?

  (Mr Tibbett) I will let Professor Spahn talk about the German Government in a moment. In terms of the wider picture, the French Parliament has passed a Bill which makes the Tobin Tax law only if the rest of the European Union also does the same so they have said politically that they are in favour. So that is one country. The Belgians have also published legislation and people expect that it will be passed in Belgium as well. There have been a number of other supporters around the world. We have had the Indian Prime Minister, the G77, the UNDP, and a range of actors and players giving support. You may know that Gordon Brown recently said that he is open-minded about this idea, which is a change from before when he was close-minded so we quite like that. There is a gradual movement and you can see it in the sense as well that people two years ago were saying this idea was completely unworkable and now you have people like Martin Wolf in the FT saying it is feasible. We have got past that stage now of people saying it will never happen. But perhaps Professor Spahn would like to talk about the German Government's position.
  (Professor Spahn) The German Government is split. The Chancellor made a remark which has been interpreted as being in favour of the Tobin Tax. Immediately the two ministers were discussing it. The Minister of Development is now in favour. She is the one who commissioned the study I did for the Government. However, the Minister for Finance is very much against the tax. The Chancellor has recently withdrawn from the debate. He has an election campaign in front of him so I think we will have to wait until September when there will be a new government.

81.  Is the Development Minister Heidemarie Wieczorek-Zeul?

  (Professor Spahn) Yes.

Mr Robathan

82.  I am interested in this. I have to say I find the concept of this taxation slightly difficult. It seems to me more than anything else that the two reasons that were put forward—the first reason to reduce currency instability to stop speculation, which was the original reason, and the second reason which is to fund development—whilst not necessarily incompatible, are somewhat contradictory. It seems to me if you want to fund development you get countries to do it through taxation, not necessarily through the Tobin Tax but through other taxation you get countries to put more money into development. As regards currency speculation, if you wish to see money moving into developing countries to support good, growing economies, it is rather counter-productive to put a taxation on that movement because people then think twice about putting it in. Whilst it may come in at one per cent, taxation has a habit of growing. It does seem to me that these two objectives are very separate and therefore do not sit well together in this tax.

  (Mr Tibbett) We will both have a go. I think you are right to say that the tax is trying to do two things but the primary objective for both of us—certainly for War on Want—is greater stability in exchange rates giving, from War on Want's point of view, developing countries more room for manoeuvre in terms of their domestic policy so they are not at the mercy of currency markets so much, but also because there are a whole variety of ways in which currency instability leads to greater poverty. We have done a study on this.

83.  Can I pick you up on this. The Asian crisis is a very relevant example. Some of us (who are not experts in currency markets, I hasten to add) would say that the fundamental problem in the Asian crisis in 1998-99 was that too much money had gone into fundamentally unsound economies. Let's take as an example Indonesia. The problem with Indonesia was that a lot of money had gone into a fundamentally deeply unsound economy in a very corrupt country. The reason they got their money out of it was they suddenly saw through it and they suddenly realised they were not going to get any money. The money that was coming out was not floating round in the ether, it was the money that supports the pensioners on the old age pension in my constituency who are not necessarily particularly well off.

  (Mr Tibbett) I would not disagree with you that there are huge problems with the Indonesian economy.

84.  And the government?

  (Mr Tibbett) And the government certainly at the time, but the key here is that the currency markets poured petrol on the flames of the crisis. The Indonesian rupiah lost something like 80 per cent of its value in six weeks. I visited the country in 1998 and met people who had been put out of work simply because their businesses ceased to be able to exist.

85.  0.1 per cent is neither here nor there.

  (Mr Tibbett) This is where we will get to the two-tier variant. The two-tier variant is very useful in acting as a circuit breaker in those circumstances. When there are these huge swings, of course, a 0.1 per cent tax will not make any difference, although I would argue it would take away some of the players who are acting in the market who are acting in this herding way. Perhaps it is a good time to go on to the two-tier version.

  Chairman: Before we go on to the two-tier version, we have still got one or two questions on currency and tax which we would like to sort out in our own minds.

Mr Battle

86.  How would the Tobin Tax differentiate between short-term speculation and longer-term investment? At what point would you do it and how would you distinguish? They could make an excuse and say, "It is long term, we just did it today."

  (Professor Spahn) That is part of my two-tier argument.

87.  You could reduce the value of currency transactions but that is not the same, is it, as reducing the volatility day-by-day. How would you address that?

  (Professor Spahn) Absolutely. The reduction of volume does not necessarily mean that you reduce volatility. On the contrary, the less liquid the market is, the more prominent is—

88.  —is the spiking?

  (Professor Spahn) Yes.
  (Mr Tibbett) I would like to come back on that. My contention is, in fact, that although that economic theories suggest that is true, that the less liquidity there is in the market, it is not necessarily true. In fact, if you look at the currency market, it is characterised by a huge amount of liquidity, but the problem is what is the quality of that liquidity and what is the information in that market that drives the actors in that market towards doing a particular thing at a particular time. My contention is by having even the low rate tax you take out some of those actors that, for instance in the Indonesian example, just followed the market blindly and got out. That is the bad characteristic about too much poor quality liquidity in the currency market, as I see it.


89.  What would be the knock-on effect on long-term investment and trade of a currency transaction tax? Is it going to suppress trade? Is it going to suppress investment?

  (Professor Spahn) No, if I come back to my one basis point argument I do not think this will frighten any investor in the long run. This is just a small charge which will, by the way, reduce the rate of return for international financial investors such as life insurers, portfolio funds, and so forth. The maximum I have calculated is seven and a half basis points, which again is not very much.

90.  A last question before we get on to the two-tier variant. Just going back to the discussion we had about the German Government, the French Government, the French Parliament and so forth, if the argument is really about mobilising political will for the Tobin tax—you were talking about a campaign—would it be easier to get that political will to devote more money to development aid through normal taxation?

  (Mr Tibbett) We need to do both. We are right behind the campaign for 0.7 per cent. One of the reasons War on Want was set up in 1951 was to campaign for one per cent of GDP. We may have reduced our aims slightly there but, of course, we need to campaign on that issue. That is why I emphasise the reason that we are interested in the tax is not for the revenue, but of course you cannot ignore the revenue side. It is going to produce revenue and what are you going to do with the revenue? We are a development organisation, we want it to go towards development. Can you think of a better use for the money?

  Chairman: Let's move on to the two-tier variant. Tony?

Tony Worthington

91.  I must be missing the point somewhere. Why are we stuck with having two purposes for the tax? Why do you not just go for a source of development funding?

  (Professor Spahn) That is a difficult one. The original proposal of Tobin was designed to curb speculation and I am convinced that he may drive a few actors out of the market, day traders, what we call noise traders, people who do some charting techniques and live on very small margins so that even a small tax can drive them out of the market. This gives the market a better performance as to how to define the equilibrium value of the exchange rate, but it does not cope with large-scale speculation as we had against the British pound in 1992 or Indonesia or Brazil or Mexico, for that matter. As Steve just said, if a currency is dwindling by 80 per cent in a matter of weeks this is an abnormal situation. It has its fundamental causes and I fully agree that you have to address these fundamental causes. I do not want to lecture here but part of these causes is the bail out guarantee given by these governments. In Indonesia, of course the President gives you a bail out guarantee if you give a loan to his son-in-law and he will address his central bank to bail you out in hard dollar terms. If something happens and the central bank runs out of money, there is the international community, in particular the IMF as the lender of last resort. So we are all guilty, we are all part of game to the extent that we bail out. Argentina, the same thing, the Currency Board is a guarantee for a bail out. You can do it as long as there is some commitment to do it and if the fundamentals become too apparent the whole things breaks down. I am not saying that the tax can address these fundamental issues but it can avoid high speculations. The speculation starts with the in-flow of capital. So I want to fend off very short maturities. If the tax fends off those who think they can make money in a matter of weeks, this is good news. So please distinguish capital in-flows with a short-term maturity from those that are assigned to investment priorities. The long-term investor will probably not be frightened by my second tier tax. Perhaps I will sketch it very briefly because there was one question on how do I distinguish between short-term and long-term investment. My idea is the following and it is borrowed from the European Monetary System which we had to keep exchange rates within Europe within a band. The idea is give me the last 20 business days of the peso- US dollar rate. I then calculate the target rate for tomorrow's peso rate in dollars on the basis of a moving average, so I have a target rate for tomorrow. Then I have an empirical daily fluctuation also based on studies which gives me a plus/minus one per cent or two per cent, whatever it is, which defines a corridor, and as long as trading is within this corridor there is no tax at all, it is dormant. Once there is some irregularity in the market, speculation in other words, and some people try to push the price out of the corridor in a matter of minutes or hours, that is immediately detected and through software incorporated in the settlement system I take away the difference between the traded price and the margin of the corridor which I consider a speculative gain. Here the tax rate can be very high, 50 per cent. The Belgian legislation, which Steve mentioned, wants to introduce a tax rate of 80 per cent. It could even be 100 per cent. I would take away 100 per cent of the difference between the traded price and the margin of the corridor, not the value of the full transaction. The larger the deviation, the higher the effective tax rate. Of course, the idea is to frighten them off trading outside the corridor and to bring them into the corridor. And, of course, there is an adjustment of the target rate. The next day of course the target rate will be a bit lower or a bit higher according to the new information that goes into the game. This is a formalised way of distinguishing speculation from normal trading, because if we formalize a tax we have to think of the tax lawyers wanting to have a legal basis which is clear, not arbitrary, and this is the way I do this distinction.

92.  Our theme is investigating funding for development. We are saying that we believe there needs to be more funding for development through 0.7 or whatever mechanism. Were there to be an additional mechanism such as, in shorthand terms, a Tobin Tax or one of the variations on it, that would be very helpful. To do that we have to build up a consensus. What I am trying to get a picture of is if we try to build up a consensus for development and at the same time we are seeing this tax as a way of curbing currency transaction, is there another consensus having to be built up at the same time and are they in conflict, people who see it for currency or people who see it for development? Would it be more sensible to be looking for a currency transaction tax that is simply geared to development?

  (Mr Tibbett) I think that you are right in a way, that it would be neater to have a method by which to raise development funding. However, the method of controlling currency speculation that we are talking about did come up in early drafts of the financing for the development process because it was recognised then that unstable exchange rates means that it is very difficult, for instance, to invest in a country if you do not know what the exchange rate is going to be in the future. This is a disincentive to investment. Even in terms of private sector investment unstable exchange rates are bad for financing further development. You have asked us here to describe the Tobin Tax to you. I realise it is in the context of FfD but it is first and foremost a way of stabilising the market and it raises some money as well. That is not unusual for a tax. We have taxes on pollution, on smoking, on petrol, and all those are taxes that attempt to do two things at once. They attempt to reduce consumption in those cases and produce some revenue.
  (Professor Spahn) We should make an a sharp distinction between the revenue raising function on the one hand, which is probably our task, because only the industrialised world can mobilise new resources for development. I think of the classical Tobin Tax with a very low rate as the appropriate instrument to finance development. And stabilizing exchange rates on the other hand. We do not have the problem of stabilising the euro against the dollar so my second tier is probably not appropriate for the euro, but it is appropriate for the Mexican peso and the Brazilian real. This could be done on a unilateral basis. Maybe we have to separate these two, leaving it to the developing world to implement each on its own, each with its parliament a system of a second-tier tax. But the discussion is confused by the argument that the Tobin Tax also wants to curb speculation and I want to get rid of that and concentrate on the financing of development, the function which is our business. Let's face it, 99 per cent of currency transactions involve currencies of industrialised countries. If we talk about the smaller developing countries it is less than one per cent of the market.

Mr Walter

93.  Very briefly, there are two points I want to pick up on, particularly one to which Professor Spahn has alluded. The first point I wanted to pick up on is that your long-term investors rely on efficient markets and an efficient market means there is somebody there making a market. You are calling those people "speculators". They are there to provide markets. I am more concerned about Professor Spahn's increasing tax, that he is going to predict what he thinks the market will do and if you trade outside that range you are going to be taxed up to 50 per cent of the differential. Let us look at it from the other side. A country is going down the tubes, let's say, which is a major problem, but I may be an investment banker looking after pension fund money and I have to be prudent in the way I manage that money and if that market is sinking I want to get out of the market. If you are saying I can only get out of the market by paying your 50 per cent tax because the market has already fallen, but if I care to wait until tomorrow to see if it gets better, it would be better, I would be sacked as the manager of the pension fund.

  (Professor Spahn) You have to present the correct alternative. My solution says there is a guarantee that the exchange rate will not fall by more than 1 per cent a day. Because of this tax traders will move back into the corridor. The alternative is that in Indonesia or Argentina you have a fall in the exchange rate by one-third, or two-thirds in the case of Argentina now. I think it is a better proposition for the long-term investor to go into a country which guarantees a daily fluctuation within bands than into a country where you do not have such guarantee. I even think it should be attracting long-term investors into those countries that have established such a scheme. It would not fend off long-term investors. It would fend off short-term investors, those who go in today with the intention of going out tomorrow, yes, but this is intended.

Mr Khabra

94.  What sort of countries should impose the additional second-tier tax which Professor Spahn calls the Exchange Rate Nominalisation Duty and why? Should this be done by all countries or only those outside of the major currency blocs?

  (Professor Spahn) The nice thing about it is that it can be done unilaterally. Mexico has a Parliament and can decide if it wants to peg its currency to the US currency. It can devise the mechanism, including the definition of the corridor, and implement it unilaterally without asking anybody else. This is different for the Tobin Tax. The Tobin Tax needs some international co-ordinated effort, although I do not think we have to go as far as Tobin wanted it. He wanted to have a global scheme including all countries and yet the United States is not going to co-operate for some time. My question is whether it would work as a European scheme and the answer is yes.

Mr Robathan

95.  It seems to me that there is always an easy scapegoat to find, namely speculators, and there is something distasteful, viewed in the raw, of somebody making profit out of somebody else's disadvantage. I entirely understand that and I sympathise with that. I have to say, however, that very often it is not somebody speculating, it is somebody trying to save money for not particularly well off pensioners in my constituency and elsewhere, which is my point. If I can bring Professor Spahn in here particularly. You used two examples as to why currency transactions, in this case speculation, have been so evil and that was both Argentina and Indonesia. It seems to me that you are denying the responsibility of the governments of those two countries for the management of their economies. It is not currency movements that have harmed the economies of Argentina and Indonesia; it is the behaviour of their governments and the mismanagement of the economies. Is that not the case?

  (Professor Spahn) I stress again what I said before. I think there are fundamental causes of both the Indonesian and the Argentinean crises, and we may be part of that. These have to be addressed. The tax cannot remedy it and it cannot substitute for bad governance and bad policy. I fully agree with that. What it can do is protect governments that are under pressure despite good governance, and that has happened. We have seen pressure on the British Government, on the Bank of England, on the Bank of France and we have seen it on Brazil, although Brazil is incomparable to Argentina, it cannot be the same thing. There are contagion effects which are totally irrational. These can be suppressed by the tax, but I am fully in agreement with what you say—we should not and we have no intention to protect governments who are not able to perform macro-economic policies correctly.

John Barrett

96.  The world has obviously moved on since the 1970s when the Tobin Tax was first discussed and we are now in Europe with the introduction of the euro. What impact has the introduction of the euro had on the desirability or the feasibility of a Tobin Tax being introduced?

  (Professor Spahn) First of all, it has reduced the number of transactions. We can show that this is the case. The consolidation of currencies is of course reducing this market segment and it has abolished volatility among the euro currencies, so this has brought more stability and has also created a larger currency area against which to speculate is absolutely suicidal. We had an incident on 11 September. I have spoken to insiders in the currency markets and they all tell me that , remarkably, both the Fed and the European Central Bank reacted in a very responsible way, the Fed in a matter of 30 minutes, the European Central Bank in a matter of hours, so both have reacted to avoid speculation against the dollar in this particular situation and I think this is good news for these two big currencies. This is why I do not think we need a two-tier tax either for the euro or for the US dollar. So I think the euro has stabilised the world currency market and it has allowed now developing countries and Eastern European countries to peg their currencies towards some European anchor currency. I realise that both the British pound and the Danish crone, as non-members of the European Monetary Union, try to observe what is going on in this currency area, which has again brought in more stability. Let me add one point which Steve made. We should not necessarily look at budgetary ODA only because what happened in Argentina is that through this large devaluation of the peso we had a swing of wealth back into the developed world and that was a multiple of budgetary ODA. So exchange rate fluctuation, unfortunately, can counterbalance and even over-compensate everything we pour into these countries through our budgetary initiatives. This is why stabilising these currencies is so important. With all our efforts we see them totally counteracted by these speculative developments. That is something to be of concern.

97.  We have been concentrating very much on financing for development. Are there other new and innovative ways you could be financing for development rather than concentrating what we have been looking at throughout the session today?

  (Mr Tibbett) You can think of other innovative ways of getting money for development, of course, but this is the one that has the most political will behind it. It has, as we have heard, other beneficial effects. It could raise a lot of money. Professor Spahn has estimated it would raise just on the euro alone and the Swiss franc some 20 billion euros. That is at the very low rate. There is huge potential in this market to raise money. I think the other question you have to ask yourself is if not this, then what? What other ideas are there on this? There are some very sketchy ideas on the table about airline fuel duty, arms trade tax, carbon taxes, none of which I dismiss, but this is the one that is most of the way down the line. It has got this other beneficial effect, and we are trying to stress this other effect, and we would commend this in financing terms

  Chairman: Unless colleagues have any other questions, thank you very much. We are all hopefully wiser, or at least better informed than we were when we started this session. Thank you very much and very much for having come from Germany because it has been extremely helpful. Thank you for helping us with your variant because the disadvantage of this arrangement is that it is all too easy to dismiss something and not see the other permutations there. So thank you very much.

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