Tobin Tax

1459 Words3 Pages

The Tobin Tax –A Solution to the Problems of Globalization?

1. Introduction

Recently, there is a fierce academic and political discussion about chances and risks of globalization. Especially globalization of financial markets not only enhances the allocation of capital and support trade in goods and services through lower transaction costs and higher liquidity. Moreover, international asset diversification and hedging opportunities lower risks, and free international financial markets make it easier to reach foreign capital, especially for emerging economies. Therefore, international financial markets raise efficiency and profits due to international division of labour. Economic growth in emerging countries is not only enhanced by the availability of foreign capital but also by developing local financial centres that pave the way to international business. On the other hand, low transaction costs encourage speculation, which is said to destabilize markets, especially speculation on foreign exchange rates. High fluctuations of asset prices and exchange rates are a source of uncertainty for the real sector and cause misallocation. Hedging those risks is costly and in some cases not or only partly possible. Another crucial point against free financial markets is the loss of independence of economic policy. Under free convertibility of the currency and free capital markets, autonomous economic policy is only possible with free floating exchange rates but not with fixed ones. Therefore, if a country's objective is currency stability, it will have to give up the independence of its economic policy. Thus, governments lose their sovereignty over financial markets. Globalization of financial markets has been raising global foreign exchange transactions far faster than the growth of official reserves. In the 1980s, daily turnover was about 600 billion US-Dollar and exceeded 1,5 trillion US-Dollar before establishing the Euro. Today, daily transactions in the foreign exchange market are about 1.2 trillion US-Dollar (BIS (2001)) . Speculative runs can now rule out the financial resources that central banks can mobilize to counter such runs. The question arises whether it is not better to regulate or to restrict international financial markets. In December 1999, the German Parliament set up a commission with the task to examine chances and risks of globalization. It calls for regulations of international financial markets, since these markets bear some systematic risks due to huge volume of transactions and high capital mobility. The suggestion is to implement a transactions tax on all foreign exchange transactions – the so-called Tobin tax.

Open Document