Memorandum submitted by War on Want
War on Want is a development charity that works
with partners in a number of countries to eradicate poverty and
injustice. We recognise that the actions of governments and businesses
in the developed world have a profound effect on the lives of
people in the developing world. We campaign to ensure that these
responsibilities are recognised and respected.
War on Want does not believe that the IMF is
a qualified organisation to serve the interests of the world's
poor. We believe they would be better served by an organisation
that more fully represents them and that takes poverty eradication
as its starting point. For the purposes of this submission we
will look at the role the IMF has in setting the agenda for much-needed
new financial architecture, with particular reference to currency
speculation, volatility and currency crises.
The liberalisation of financial markets means
that up to $1.5 trillion a day in foreign exchange is traded globally.
It has been estimated that as much as 95 per cent of these transactions
are "speculative" and thus do not contribute to the
real economy. With such massive speculative flows the economies
of whole countries can be undermined. Instability in these markets
is a function of the current in-built bias towards short-term
speculative flows rather than long-term investment. This tendency
is potentially threatening to the system as a whole, and in particular
to emerging markets. Least equipped of all to deal with it are
poor countries and poor people.
Evidence of this tendency was seen in the South
East Asian financial crisis and in the crises in Mexico, Brazil
and Russia, when governments did not have enough resources to
defend their own currencies. In these circumstances it is the
poor who are most badly affected. When investors withdraw as the
result of a currency crisis, the poor lose their jobs. When prices
rise, due to currency movements, the poor cannot afford to eat.
By way of example, when investors began to sell
the baht, in July 1997, speculators gambled on the likelihood
of an imminent devaluation. Exchange rate depreciation gave rise
to further outflows, as panic set in among international investors.
The most severely affected currency was the rupiah, which suffered
a decline in value between January 1997 and July 1998 of 80 per
cent. Banks and businesses were heavily exposed to unhedged foreign
loans, and therefore heavily damaged by the increased debt repayment
burden caused by currency devaluation. There was a high level
of domestic bank lending to the private sector.
The devaluation of currencies pushed up inflation
and increased the price of imported goods. These developments
caused a sharp fall in output, consumption and incomes, and led
to a massive rise in the number of unemployed, and in the incidence
of poverty. Businesses closed, laid off workers, or reduced costs
by cutting wages, benefits and working hours.
The IMF does have a role in facilitating global
economic stability and there has been progress in terms of the
way it carries out that role. The IMF has adopted some proposals
that make stability more likely. In particular, they have accepted
that capital controls may be useful in some situations. However,
we believe that these proposals do not go far enough. The overriding
aim of the IMF is still Capital Account Liberalisation. The IMF
also aggravates instability through bailout packages. Such measures
are usually too late for the country concerned and often add further
indebtedness, thus sowing the seeds of future instability. Furthermore,
many of the adjustment packages exacerbate the problem by cutting
the social safety nets that the poor rely on. We believe that
the Treasury Select Committee should look carefully at these issues.
A CURRENCY TRANSACTION
Since the 1970s there has been a proposal in
existence that would calm financial markets, reassert the right
of the government to govern its own economy, and generate a phenomenal
amount of money for international development. Named after US
economist James Tobin, a "Tobin tax" or Currency Transaction
Tax (CTT) on all international currency transactions would stop
most speculation, but would not inhibit genuine movements of the
market. The Canadian Parliament supports such a tax, as do the
Brazilian and Finnish governments. We believe that the TSC should
look carefully at the introduction of a CTT.
The CTT could be used in one of two ways: (a)
as a sophisticated form of capital control used by specific countries
to reduce speculative attack on their currency, (b) as an international
mechanism to lengthen the horizons of financial markets in relation
to currency trading. The latter would have the effect of reducing,
but not stopping, global currency flows. This would diminish the
likelihood of volatility in financial markets in general, by decreasing
short-termism, and by reducing the volume of trading and number
The "Spahn Mechanism", basically a
two-tier CTT with a minimal tax rate on all transactions (basic
rate), and a higher rate (surcharge) which is only activated in
times of exchange rate turbulence, would help to prevent most
crises. The surcharge would only come into action when the level
of currency trading passes a certain threshold or safety margin.
Once trading enters or passes this margin, traders will be taxed
heavily, thus dissuading trading and dampening excessive currency
movements. Once the danger has passed, the rate will fall back
to the standard level.
At present, 84 per cent of all foreign exchange
transactions occur in just nine countries. Introduction of the
CTT in these and a few other countries may initially provide a
workable tax regime. We recommend that the tax be instated through
an international agreement, backed by national legislation. It
should be applied where the transactions occur or where the deal
is made, making collection of the tax the responsibility of the
national central bank. The establishment of a global settlement
bank, The Continuous Linking Settlement (CLS) Bank, will make
identification and taxing of currency transactions much simpler.
The CLS Bank will track settlements of all deals around the clock
and thus facilitate the tax. Collecting the tax in this way would
make evasion and avoidance of the tax very difficult. It would
also make "CTT havens" in any given currency a virtual
What is the role of the IMF in reducing volatility
and currency speculation in the global economy:
Does the future potentially hold
more speculation-led financial crises and, if so, what measures
is the IMF taking to guard against them?
Is the IMF exacerbating the likelihood
of future crises by encouraging reckless capital account liberalisation?
Could a CTT be part of the solution
to prevent financial crises?
Has the IMF considered the CTT proposal
as part of its review of financial architecture?
Could part of the funds from a CTT
be used as a "Global Intervention Fund" to boost currencies
under speculative attack? and
How would the IMF react to the introduction
of the two-tier CTT by one state to protect itself from speculative