CHAPTER FIVE - REFORMING THE INTERNATIONAL MONETARY AND FINANCIAL SYSTEM:
TOWARDS STABILITY AND THE GLOBAL GOOD

3. LINKING GLOBAL MONEY, STABILIZING MEASURES, AND PUBLIC INTERESTS

During the Committee's hearings, attention has been drawn to the problems of asserting some conscious democratic control through public policies capable of operating effectively in an increasingly globalized economic system, and, furthermore, of supporting the ability of that system to ``deliver the goods'' in terms of the broadly-shared international purposes of stability, efficient resource allocation and equitable development. The issues here are several but intertwined: both the growing role of markets in relation to the intergovernmental institutions of the classical Bretton Woods period; and the need for publicly accountable institutions that can provide not only what democratic societies demand but what well-functioning global markets require. The idealistic liberal internationalism which gave birth to the IFIs has, perhaps to an extent never anticipated, been strikingly successful in creating an open transnational economic space that, with the advent of futuristic technologies, is virtually borderless. As the noted international relations scholar Stanley Hoffmann observes, however, this "new transnational economy has not merely, and beneficially, constrained the power of states . . .[it has] also deprived them of their ability to perform necessary tasks''. Furthermore, the ability of governments to define their own monetary policies and to orient investments, employment and growth has been seriously curtailed." In effect, economic "globalization" has engendered a crisis of governance from the domestic to the global level which in turn threatens to undo the benefits from progressive liberalization. 58

This is in line with the warnings from a number of witnesses that failure to act to prevent larger systemic crises, and to attend to a growing "democratic deficit" in the institutions available to manage common interests at the international level, could lead to more destabilizing consequences in the form of social breakdown, disintegration, and resistance against globalizing forces. We have to have democratically effective public institutions that can in turn oversee the private instruments - just as in a domestic economy. Beyond these questions of public authority and control, or lack thereof, there are also the important issues of finding adequate funding at the international level for activities that are in the global public interest: peace maintenance and preventive diplomacy; poverty alleviation and human development; environmental programs. For example, the UNDP 1994 Human Development Report estimates that a sum of US$30-40 billion annually could eliminate the worst forms of poverty. The brief submitted to the Committee by Oxfam makes the point that: "As the architects of the Bretton Woods system realized, private capital markets are not very good at transferring financial resources to where they are needed (as opposed to where they can make a profit). There is still a need for market regulation to assure equity and environmental survival. There is still a need for governments to intervene." 59

The Committee has heard some discussion, albeit quite inconclusive, of ambitious proposals such as the "Tobin tax" which might serve both a global anti-speculation and a public financing objective. Finance Minister Paul Martin found the latter prospect attractive but considered the first primary aspect to be ``unworkable''. The current distress over volatility in currency and money markets, and the desire to reduce the disruptive effects of speculation, has been an important factor in helping to revive interest in this controversial tax on international foreign exchange transactions. It was first proposed in the 1970s by Yale University professor and Nobel economics laureate James Tobin, and subsequently updated by him for the 1994 Human Development Report - where he points out that a worldwide tax of 0.5% would yield an immense potential revenue of US$1.5 trillion. 60 Other variations have also been put forward, some quite explicitly viewing such a levy as a global fund-raiser for purposes like United Nations activities. A number of witnesses expressed support in principle for such ideas. They tend, however, to be dismissed by the financial community, whose views are essential because of the expertise they represent, but which is also subject to the observation that it derives much of its revenue from current arrangements. Other witnesses, while sympathetic to doing something about the problem of speculation (and given that only a tiny fraction of the daily turnover on exvhange markets is actually required for trade and investment purposes), raised difficulties with implemetation. Michael Webb observed that such a tax, which would have to overcome evasion to be effective, could not distinguish between speculative and beneficial transactions. 61

It would have to be imposed by all countries and it would face enormous political opposition in all countries. Perhaps even more important, if it was set low enough not to interfere with trade and foreign direct investment then it would also be too low to deter speculation. [23:7]

Tobin himself (as in an interview on CBC radio on 4 May 1995) contends that evasion problems could be countered by having the obligation to levy the tax made an article of agreement of the IMF. In our hearings, Manfred Bienefeld saw the imposition of a global transaction tax as also technologically possible, but he wondered "who is going to administer that money, and on what kind of political basis?" [18:32] The absence of any apparent or legitimate global governance process is clearly problematic. Moreover , our meetings in Washington indicated that any such international tax would be a very tough sell there. Nevertheless, there has been growing interest by some countries, 62 including especially France and Germany among the G-7. Canada's foreign minister, Hon. Andre Ouellet, also confirmed such interest in his appearance before the committee: "The very fact that it would be on the agenda and it would be discussed in Halifax in itslef is an immense step forward....we obviously look forward to input from groups like yours or others who will be studying how this could be dealt with in an efficient way." [18:64]

At this point, the Committee's view is that the feasibility of the concept has yet to be proved but that an attitude of openness is warranted. The objectives of a tax on currency speculation at least have sufficient merit and promise to deserve serious longer term examination within a G-7 context. We are aware of some research that has already been done, including within the Canada's Department of Finance. However, ideas of this sort are still only in the very preliminary stages of investigation, much less deliberation. As even supporters of the concept willingly acknowledge:

. . .an in-depth feasibility study is needed to analyse the highly complex mechanics of foreign exchange transactions and technical requirements of a computerized system, to estimate costs, revenues and capital requirements, to assess the options for the organization, ownership and management of the system, and possibly to design a system, including the allocation of what could be vast revenues. 63

Nor is the Tobin tax the only idea worthy of investigation. The possibility has been raised of putting in place some sort of international regulation that might inhibit the speed with which mobile investment capital, such as mutual funds, can almost instantly be withdrawn from countries, exacerbating a crisis such as occurred in Mexico. We have indicated that the contrasting experience of Chile in discouraging short-term debt inflows should also be looked at closely. Financial advisor Gerald Corrigan argues, moreover, that much could be done to improve the operations of domestic financial systems in emerging-market countries. At the transnational level, he sees opportunities to work towards: more comprehensive forms of cross-border securities regulations "extending common coverage to banks and securities firms"; cooperative steps by the public and private sectors to "strengthen the stability, integrity and reliability of national and international payment, clearance and settlement systems; and efforts by private sector financial practitioners "to exercise greater restraint and discipline while at the same time further strengthening their management, control, risk monitoring and risk management" (citing in this regard a recent report of the Derivatives Policy Group in the United States). 64 To assist private market actors, suggestions have also been made that some international public authority (perhaps a reconstituted IMF or BIS) should be charged with the responsibility of supplying, or of establishing rules for the supply of, timely information on various financial and foreign exchange indicators so that it can be continuously processed by markets. In that way, adjustments should move more in step with economic reality, thereby avoiding many investors being caught by surprise (e.g. in the case of Mexico, which was also missed by the private bond rating agencies), and the very unpleasant consequences which flow from magnified over-reactions.

Finally, another proposal put forward by financier George Soros would envisage a companion international financial institution to the IMF and World Bank, financed by an SDR issue, which would provide bond insurance. Countries using this facility would have to accept certain constraints on their fiscal and monetary policies to enable them to be insured. As with all of these ideas, the "devil may be in the details", and in finding the political will to proceed. As a committee, we do not claim to have found the answers. But, looking ahead to the world economy of the future, we agree strongly that the goals of seeking greater international monetary and financial stability, and of financing important human security and sustainable development objectives in the global public interest, are ones which demand to be pursued ¾ democratically, with practical seriousness, and sooner not later. The next opportunity starts with Halifax in June.

Accordingly, the Committee recommends that Canada propose to G-7 leaders an agreement to study innovative proposals for addressing problems of speculative turbulence and the need for increased prudential supervision, and for better disclosure of timely and reliable information to markets of the international monetary system. The anti-speculation proposals to be investigated should include possible levies, or more practically, margin requirements on foreign-exchange transactions. In addition, consideration should be given to ideas for leveraging more resources from the private international markets so as to make additional secure sources of finance available for global development purposes.