Select Committee on International Development Minutes of Evidence


Memorandum submitted by War on Want

INTRODUCTION

  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 poverty—countries 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.

AID INCREASES

  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 concerns:

  1.  Why will the aid not be targeted at the poorest?

  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 governance—these 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.

AN INNOVATIVE "SIDE ISSUE"—THE CURRENCY TRANSACTIONS TAX

  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.

WHAT IS THE CTT?

  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 aid.

HOW EFFECTIVE WOULD IT BE?

  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.

CURRENCY CRISES HIT THE POOR

  Recent currency crises have hit Asia, Latin America and Africa—disproportionately 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 weeks.

IS IT FEASIBLE, LEGAL AND APPLICABLE?

  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 be created.

  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.

HOW MUCH COULD IT RAISE AND FOR WHAT?

  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.

DOES THE PROPOSAL HAVE POLITICAL SUPPORT?

  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.

MULTILATERALISM AND THE CURRENCY TRANSACTIONS TAX

  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

April 2002


 
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