Global Policy Forum

Introduction

The International Cooperation for Development and Solidarity (CIDSE) and Caritas Internationalis (CI) networks have been working together for several years on the issue of social justice. These networks believe that the question of social justice is closely linked to the respect for human rights and to satisfying the basic needs of all social development. These are essential conditions to bring about development which is both equitable and sustainable.

By working together, our networks, representing large sectors of Christian civil society, intend to play the role of "watchdog" with regard to decision-making centers and, on the basis of evangelical principles, promote an ethical approach to socio-economic problems. Thus, our networks are seeking to advocate the notion of the preferential option for the poor, the question on the redistribution of wealth, and the need for solidarity and cooperation.

In order to regulate the negative effects of globalization which are neither under social nor political control, our networks consider good political governance both on national and international level indispensable. Their wish is to promote global means for regulating the world economy politically.

Our two networks reiterate their view of social justice based on the social doctrine of the Catholic Church and present practical recommendations on how to enhance social justice between now and the special session of the United Nations General Assembly, which, in the year 2000, will be making an assessment of the 1995 Summit.

Implementation of the Copenhagen Commitments

Our networks welcome the commitments adopted at the World Summit for Social Development in 1995. Nonetheless, it should be pointed out that the concrete measures taken since Copenhagen to tackle the root causes of poverty have been very insufficient. The debt of Southern countries has only been marginally reduced for some countries assisted by the HIPC 'initiative, and financial speculation is not subject to any regulations. Furthermore, the financing of the Programme of Action is far from being secured.

One way to evaluate the results of the Copenhagen Summit is to attempt to establish whether or not poverty has decreased or worsened world-wide in the past few years, and to find out the reasons why.

It is very unlikely that the trend which prevailed before Copenhagen has been reversed. All the evidence which CIDSE and Caritas Intemationalis receive from their partners in these countries indicates that inequality is on the increase. The marginalisation of entire populations continues to increase. In its 1997 report, UNDP estimates that the poorest 20/o of people in the world today have to share a meagre 1.1% of world revenue (as against 1.4% in 1991), and this percentage is still diminishing. As a result social exclusion, for which poverty is a key indicator, has worsened. Today, not only Southern countries but also Northern and Eastern countries are witnessing the development of cultural exclusion. Natural resources are monopolised and wasted by the few, making them unavailable to those who live in poverty as well as to future generations.

Social justice, the key to equitable development

Social justice policies at a national level are called into question. We notice that governments which invested in education and health and which were able to implement social security systems and pension schemes have witnessed a significant decrease in their country's poverty rate.

But development now highly speculative, has proved fragile in many parts of the world. Once again, it seems that the most vulnerable will be the first to suffer as a result of development models focusing on short-term profits being adopted and speculation of the elite.

Necessity of political will

Many governments and international institutions profess that they are powerless in the face of the negative effects of economic globalisation. CIDSE and Caritas Intemationalis believe, however, that it is possible to reverse the logic of exclusion. We are convinced that only political decisions taken at national, regional and international levels can compensate for the unfair effects of the dominant economic system, where the poor benefit little from development and suffer most from crises.

Our networks are of the opinion that the implementation of the Copenhagen recommendations involves the urgent implementation of public policies to promote social development and a just redistribution of resources. This also requires producing a definition of fairer worldwide trading rules and taxing excessive speculative operations on international capital currencies. Finally, implementing the Social Summit Progrannne of Action requires supervision by international and national institutions in a transparent and democratically controlled way.

Way forward

Therefore our agencies see an urgent need for re-regulation of the global financial economy with a particular attention to the impact on impoverished populations. We would encourage a debate about new ideas for alternatives which can work, in practice, if there is the necessary political will to implement such mechanisms.

One of those new proposals, which could be discussed, has been worked out by Bemd Spahn, professor of public finance at the University of Frankfurt/Main consultant to the International Monetary Fund (IMF). He proposed a two-tier "Currency Transaction Tax" (CTT), levied as a national tax but introduced through an international agreement. This tax would not prevent the positive effects of the functioning of the market mechanism.

It is the hope of our networks that the responsible international organisations will discuss such proposals and issue concrete recommendations to tame excessive financial speculation, thus preventing social crisis.

Would taxation stabilise world financial markets?

Summary of CIDSE/Caritas Internationalis background paper on "Taving Excessive Currency Speculation to Prevent Social Crisis and Finance 61obal Challenges" by Dr Danny Cassimon *

Globalisation of the world economic system is proceeding at a very rapid pace and is even promoted as welfare improving. However, the presumed virtues of globalisation are far from being materialised. No orderly or stable financial system has yet been implemented as recent currency crises in South East Asia, Russia and Brazil painfully demonstrate. Furthermore, the current financial system does not channel sufficient funds to finance crucial world problems such as adequate social development 'in poor countries. A proposed solution is to use a straightforward mechanism designed to tax the currently undertaxed (international) financial flows. Specifically, this proposal calls for the implementation of a tax that is levied on international currency transactions, i.e. a 'Currency Transaction Tax' (CTT).

Speculative transactions: a game with huge costs

In principle, large-scale speculation is triggered because the underlying 'fundamental' economic and political indicators worsen or necessary reforms are not carried out. Traditionally it has been the central bank of a country which developed mechanisms and implemented measures to mitigate excessive speculation. However, such a stand-alone defence of a central bank cannot succeed for very long against market forces. Alternatively, a country could try to (re)install controls on international transactions to make a currency attack more difficult; this might be more effective.

Speculative transactions are not just zero-sum games, where one party gains what the counterparty in the transaction loses. Because of their potential to trigger a financial crisis, these 'games' can have large social costs: for the countries involved, especially on their most vulnerable groups; through spin off effects for other countries not directly involved, which in its turn provokes a global chain of reaction of financial panics and crashes (the so-called 'systemic risk'). In the 1995 Mexico peso crisis, the impact spread to countries such as Argentina. The Asian currency crisis had direct contagion or spin off effects on countries such as the Philippines and Singapore, and ultimately, to the whole world. The direct costs are huge: the Asian currency crisis lowered current world growth projection for 1998 by about 1%, amounting to a decrease of at least US$300 billion. The International Labour Organisation (ILO) in its 1998 World Employment Report estimated that unemployment increased by 10 million people worldwide, solely due to the Asian financial crisis.

Liberalisation of capital flows: increased vulnerability to currency attacks

The increased danger for destabilising currency is caused by the worldwide liberalisation of international capital flows, including the trend towards complete abolition of capital controls; it is seen as the virtuous twin sister of liberalised trade flows. This has facilitated global financial speculative behaviour: large sums of money can move largely uncontrolled - and untaxed - around the globe in search of the highest possible return in the shortest amount of time.

It is essential that an effective sanctioning mechanism, e.g. through taxation, is developed in order to eliminate this behaviour that is driven by individual short-term profit. It is not only essential from an economic viewpoint, but especially from a social justice perspective.

According to financial experts, a transaction levy on financial flows, such as a 'Currency Transaction Tax! (CTT), could indeed be effective, as it discourages and/or punishes undesired speculative behaviour.

The simple 'Currency Transaction Tax' (CTT) proposal

The traditional Tobin-type tax proposal calls for a tax that would be payable every time a currency is converted. The original proposal in 1972 calls for an internationally uniform tax (set at 1%) on all spot conversions of one currency into another, proportional to the size of the transaction. This proposal has a large intuitive appeal since it kills two birds with one stone:

1. It offers a mechanism to discourage speculation by making currency trading more costly. It would consequently penalise especially short-term speculative behaviour, which in turn would supposedly lead to greater exchange rate stability.

2. This globally-raised revenue (figures range from tens to hundreds of billion US dollars), largely out of the control of sovereign states, would create a truly global revenue base to be (partly) used to meet global challenges, such as maintaining a stable international financial system or addressing world-wide poverty alleviation. An added benefit is that countries do not have to spend scarce resources of IMF-lending to restore financial stability after the crisis. Moreover, to the extent that part of the revenue could be used nationally to solve national problems, this increases the attractiveness of it to budget-constrained (also industrialsed) countries.

The appeal of the proposal is even greater since it could correct other existing distortions, such as uneven distribution in global wealth and wealth creation. From an ethical point of view, there is no good reason why financial transactions - as opposed to all other transactions - should not be taxed. Here, such a tax could act as a surrogate for a more general capital income tax.

Despite this appeal, the proposal was never seriously considered in the major international decision-making fora; not even in periods of financial crises. Apart from the political aversion to international tax measures that are perceived to threaten national tax sovereignty, the proposal is strongly criticised by financial economists.

The basic flaw of the Tobin tax is the difficulty of determining the magnitude of the tax rate: If it is set at a high rate, it would indeed be a strong instrument to penalise speculation, but it would also seriously impair the more desirable currency transactions, e.g. related to international trade. Yet if the tax were to be set at a low rate, it would not impair normal transactions but the deterrence effect on speculation would be low. Tobin tax's proposal of a uniform rate is incapable of reconciling the promotion of desirable currency transactions with penalisation of speculative behaviour.

One realistic way out: a two-tier 'Currency Transaction Tax ' (CTT)

Fortunately, there is a solution to the basic flaw in the original Tobin tax. A CTT proposal was suggested by Bernd Spahn, a professor of public finance at the University of Frankfurt/Main and a consultant to the IMF (International Monetary Fund). Spahn proposed a two-tier Tobin tax, levied as a national tax but introduced through an international agreement, with a minimal-rate transaction tax on all transactions (the 'basic tax') and a high tax rate (an exchange 'surcharge') that, as an anti-speculation device, would be triggered only during periods of exchange rate turbulence and on the basis of well- established quantitative criteria. The international financial establishment, as well as a number of political decision-makers (especially in the US), might continue to oppose the tax because of the expected negative consequences of an additional distortion of financial markets. However, the counterarguments are:

It would act as an effective monitoring device: administration of this tax will allow for automatic statistical reporting of market behaviour, allowing for the easy follow-up and monitoring of movements in the market;

The Spahn tax would not prevent normal functioning of the market mechanism: characterised by an exchange rate with a steady loss of value, the changing target rate, unlike capital controls, will not impede normal market reactions and permits the sanctioning of policy failures. Changes in value of the currency would be less drastic, avoiding the social costs of a strong and sudden currency crisis and allowing the government more time to execute the necessary policy corrections;

The small minimal-rate tax would not act as a substantial distortion; it would not change market behaviour;

The tax would not necessarily require world-wide approval: to the extent that the mechanism is, in essence, a national tax and is administered nationally, political resistance against loss of national fiscal sovereignty is lessened. More importantly, as a start, the Spahn mechanism could be successfully implemented unilaterally by a few countries, without necessitating global consensus in the beginning.

The mechanism would not require costly monetary action from the central bank: exchange rates would be kept within the target range through taxation rather than through central bank intervention. Instead of depleting reserves, it would generate revenues.

Remaining issues of implementation

Studies on the technical feasibility of this global tax proposal have shown that a practical way of implementing the tax is through an international agreement though revenue collection would be a national responsibility. Therefore, tax collection would be delegated to the central banks of each country.

While revenue considerations should always be secondary to the prevention of devastating impact of excessive speculation, the tax proceeds could provide an important additional base, calling for a fair scheme of distribution. Two main issues regarding revenue distribution must be addressed: one is redistribution caused by the disproportionately high revenue collected in countries with major financial centres (London, New York, Tokyo); the other is the distribution of total revenue between the national and international level.

A fair distribution mechanism could be to allow lower and middle-income developing countries to keep the total revenue resulting from the basic tax. For high-income countries (generally also those with important financial centres), a case could be made to make them transfer most of the basic tax revenue, e.g. 80%, to the global level.

A case could also be made to allow those countries that experience excessive volatility in exchange rates, consequently triggering the surcharge mechanism, to keep the full proceeds in order to tackle the consequences of excessive volatility. However, it could be restricted to uses linked to the problem itself, i.e. investment in the sectors of regulation and strengthening of control of the financial sector and the monitoring of (especially short-term) capital flows, on the one hand, as well as investment in social safety nets and social development, in general, to reduce vulnerability to the social impact of economic and financial crises.

The recent currency and other crises in a number of developing countries and Russia have proven that one international organisation alone cannot adequately tackle these immense problems. The recent surge of criticisms, especially of the IMF, has resulted in a large stream of proposals for reform. Most of the proposals seem to share the elements of closer concentration of activities; closer collaboration or the merging of different organisations, and an increased role to be played by the representation of developing countries themselves. The delicate issue of administration should be tackled in light of further debate on reforming these international organisations.

*Dr. Danny Cassimon is an Assistant Professor of Finance at the University of Antwerp and consultant of CIDSE/Caritas Internationalis.

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