Top of the agenda for leaders of the Group of Seven industrial countries at their annual summit in Italy must be the issue of volatile currency markets and the growing uncertainty afflicting international economic transactions. Canada, as a member of the G-7, should advocate bold measures.
Radical change is overdue, as we approach the 50th anniversary of the July 1944 conference at Bretton Woods, N.H., which put in place the postwar international economic system.
About US$1 trillion now changes hands daily on the currency markets, possibly much more during speculative crises. It is not unusual for governments to spend billions of dollars from their foreign exchange reserves to protect their currency against speculators. Equally, it is not unusual for currency speculators to earn millions of dollars within a few days. What is especially perverse is the ability of speculators acting in concert to bring about the exchange-rate adjustments they desire, earning them huge profit.
The current system is neither equitable nor efficient. To be a player in the currency-speculation game, you must be able to move large amounts of money in very short periods of time. That is why extremely wealthy individuals and currency traders in large banks play the game well.
Moreover, currency instability distorts transactions in the "real" economy. First, volatility warps the prices of international transactions, undermining profit and investments made on the basis of a particular set of exchange rates. Second, governments tend to respond eventually by hiking their interest rates to slake the demands of short-term investors. Borrowing costs rise, penalizing homeowners and discouraging investment. Moreover, investors in financial paper earn real returns far above those realized by investors in bricks and mortar, who create jobs.
So what can governments do? Some yearn for a return of the golden age of fixed exchange rates prevailing between 1950 and 1972. Get rid of the system of floating rates and we will restore stability - or so the argument goes. This is unrealistic. The globalization of financial markets, including currency markets, is here to stay. Parities between exchange rates are bound to change over time, with differences in national rates of inflation and productivity growth. This demands an exchange-rate system which is not fixed but flexible - but a lot less volatile than today's system.
In the long run, the best solution is to adopt a universal currency. Certainly, John Maynard Keynes, the leading thinker at Bretton Woods, felt this was an idea whose time had come, and he tried unsuccessfully to turn the International Monetary Fund (created at Bretton Woods) into a world central bank. Regrettably, he was wrong in 1944 and the world is still not ready for a universal currency in 1994, although some halting steps are being made toward regional currencies (for example, in the European Union).
What options are left? Canada might support a proposal first made by Nobel prize-winning economist James Tobin of Yale University. He suggested the efficiency of the world financial system would actually be improved by imposing a tax on international capital transactions.
Such a tax would be designed to discourage short-term speculation, while it would also help to generate revenue for governments and reduce budget deficits. And it would make current tax systems more equitable. If ordinary people have to pay both income taxes and sales taxes on daily necessities, why shouldn't speculators pay additional tax on the wealth they accumulate on international transactions?
A tax on currency transactions could serve these purposes. Morever, a tax averaging half of 1% on the face value of foreign exchange transactions could generate up to US$5 billion globally, each day. It would be fitting to earmark at least part of the proceeds of such a tax for international development or peacekeeping purposes. But we are getting ahead of ourselves.
The rate could be sharply escalated for transactions of more than $10,000, $50,000, $1 million, and so on, to put the burden of the tax on speculators rather than penalizing tourists and small businesses also deal in foreign exchange. If Canada's share were 2% of the world total, the tax would generate US$100 million each day or US$35 billion yearly, virtually wiping out the federal deficit in a year.
Inevitably, such a tax would be resisted by the financial community, but their criticisms will be suspect, since they benefit handsomely from the status quo. The five largest banks are among Canada's most profitable businesses. (It should be pointed out that, while some of the most active currency traders are in the banks, some of the trading is for clients rather than for the banks' own accounts.)
There are many technicalities to be worked out before such a tax is implemented successfully. Ideally, an international body such as the United Nations or the IMF should levy the tax, but agreement to give such a body taxation powers will be difficult to reach. Therefore any realistic proposal must involve the tax authorities in national governments.
Even then, there are a host of administrative details to be settled, just as there were with Canada's goods and services tax. In the case of a tax on foreign exchange transactions, there will be additional issues of jurisdiction. When transactions take place across international borders, at which end will the tax be levied? Or if there are transactions between two currencies in a third country, which country collects?
Moreover, the tax must be designed in order to place the burden on speculative profit, rather than on legitimate hedging. Of course, there are bound to be differences in interpretation of market behavior. Selling large amounts of C$s may constitute "hedging" against political uncertainties to one person, while others see it as pure "speculation" against the C$.
These technical problems may seem insuperable. But governments are desperate to protect themselves against the rising tide of currency speculation and the instability that accompanies it. Many are also desperate for new sources of revenue, but have exhausted conventional tax channels. So the potential exists for the necessary degree of political will and the high level of international co-operation required to implement a foreign exchange transactions tax.
For the "Tobin tax" to work, the major economic powers must agree on its design and closely co-ordinate its implementation. The G-7 summit in Naples is the time and place to start.
DNOTE (Ed. note) Roy Culpeper is vice-president of the North-South Institute in Ottawa.
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g8@utoronto.ca Revised: June 3, 1995 |
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