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.
Most economists predicted that a currency crisis was unlikely to damage China’s economy or trade; its macroeconomic fundamentals were healthy and it had the extra insurance of capital account controls. However, surrounded by neighbors in trouble, China could help but be somewhat effected by the larger, regional situation. The rest of the world continued to watch and worry about how much longer China would be able to defend its overvalued currency and still remain internationally competitive on an export basis (Song, 1998).
The Federal Reserve is the main hub of all the nation’s money while also doing the 5 main tasks we need in order for effective operation of the country’s economic stability. The 1st task is to manage the unemployment rate , create standard prices for goods & seeing where to invest long term interest rates to promote economic growth. Secondly is the minimization of systematic risk due to active monitoring as well as foreign engagement with imports and exports ; this is important because if we invest resources in creating ties with the wrong country , we could end up in economic or even political deficit. The 3rd is to promote & insure the safety of individualized financial institutions & how to properly mentor the effects of their actions on
Eichengreen, Barry. Globalizing Capital: A History of the International Monetary System. Princeton, NJ: Princeton University Press, 1996.
...countries can create financial problems for a new business owner in the global market. Dealing with two or more monetary systems can also complicate international business operations.
The foreign exchange market is a worldwide decentralized over-the-counter financial market for the trading of currencies. It determines the relative values of different currencies. A local currency is a currency not backed by a national government, and intended to trade only in a small area. Currency is used as a medium of exchange in goods and services. It has vital role in the economy. Because devaluation of a local currency makes its goods relatively cheaper; it increases the capacity of exports. With the decrease in demand for local country’s goods and services, its local currency devaluates and reverse is the case if its volume of exports increases.
In the integration of Indian financial market with international markets, the Reserve Bank of India to market development has been that of cautious and informed by the experience of other developed and developing countries. Even within the constraints imposed by this approach, the Reserve Bank and the India Government have taken steps that include progressive liberalization of capital flows, calibrated increase in investment limits for Foreign Institutional Investors in government and corporate debt, introduction of Qualified Foreign Investor as a separate investor class, expansion of the menu of risk management instruments,
The theme of this essay outlines two things. One, the key elements of Bretton woods system and second, the characterisation of Bretton woods system by Ruggie as ‘embedded liberalism’, and how far he succeeds in it. The Bretton woods system is widely referred to the international monetary regime, which prevailed from the end of the World War 2 until the early 1970s. After the end of the World War 2, the need of international monetary framework to boost trade and economic; growth and stability, was important. Taking its name from the site of the 1944 conference, attended by all forty-four allied nations; the Bretton Woods system consisted of four key elements. First, to make a system in which each member nation has to fix or peg his currency exchange rate against the gold or U.S. dollar, as the key currency. Secondly, the free exchange of currencies between countries at the established and fixed exchange rate; plus or minus a one-percent margin. Thirdly, to create an institutional forum, so-called International Monetary Fund (IMF), for the international co-operation on money matters: to set up, stabilize, and watch over exchange rates. Fourth, to remove all the existing exchange controls limiting (protectionism) policies by the members, on the use of its currency for international trade. In practice the first scheme, as well as its later development and final demise, were directly dependent on the preferences and policies of its most powerful member, the United States. According to John Gerard Ruggie, 1982, this Bretton woods system of monetary co-operation represented the type of liberalism which characterise “domestic social economic stability along with a liberal trading order.” He referred this system as ‘embed...
Financial liberalization is a process whereby restrictions on financial markets and financial institutions are eliminated which involves the removal of controls by the government namely, credit and interest rate controls. In the early 1970’s, the research on financial liberalization was initiated by McKinnon and Shaw (1973) who argued that state control of credit, interest rate and other financial variables was responsible for the retarding economic growth in the world economy (Abiad, Detragiache & Tressel, 2008). McKinnon and Shaw (1973) emphasized that allowing market forces to determine economic variables
Other participating countries of the international forum will cut trades and other foreign exchange, causing a major loss in that particular country. Not only is it harmful to their financial stability, it can also damage their relationships with others. Under the pressure of other nations, many governments will feel that they have no other choice but to join and adapt to this policy.
In an increasingly connected and interdependent world, global institutions play an important role in promoting stability and guiding developing countries towards becoming market economies. This process and the importance of this role was never more clear than during the 1990s. In Eastern Europe, a host of new countries appeared on the world map franticly began running towards capitalism and prosperity. The premier international institution, the International Monetary Fund, was given the difficult task of crediting emerging economies and providing the western know-how to build strong market economies. Alas, in many cases, it failed. Possibly, the most tragic example was that of Russia. Some argue that the fund had modest desings and was fundamentally uncapable of this great project. This essay will explore why the fund failed, how its decisions were made, and what must be done in an ideal institution that would be able to accomplish the task.
Political economy is not a new word for us because of the close relationships between politics and the economy. The development in politics is due to the development in society and the development in society is mostly driven by the economy. The parallel existence and mutual interaction of ‘state’ and ‘market’ in the modern world creates ‘political economy’; without both state and market there could be no political economy (Gilpin, 2003, P9). Market allocates resources to a particular group, class or region where conditions are most favorable. As a consequence, market economies result in the uneven development both domestically and internationally. As our issue is about international political economy, the connection is the uneven development in different economic systems of nations lead to the uneven status of countries around the world. The struggle among groups and states over the distribution of benefits and costs has become a major feature of international relations in the modern world (Gilpin, 2003, P21, par.2). It is sure that market or economy has a big influence on sovereign states. The changing market is very likely to change states. So the economy is crucial for a country, in a globalizing world with vast of interactivities among countries, to get a place. As a part of globalization, the globalization of finance, arguing that it has fundamentally altered the traditional monetary relationship between states and markets, ultimately undermines national monetary sovereignty (Cohen, 2003, P215).
International banking is now a days becoming backbone of any economy. It plays a vital role in the development of financial system of country. International banking activities has been grown-up speedily due to increased international trade flows and foreign direct investment activities, the globalization of capital markets, and the liberalization of domestic financial markets since 1960s. International banking activities may involve cross-border activities and activities of banks outside their home country (i.e. foreign banks). Banking has gradually become more globalized, which leads towards advances in communications and technology, economic integration. Especially, foreign bank entry has increased sharply in the last few decades, which helped different nations in the development of their financial system. Foreign banks also helped the economies in financial crisis to deal with it and also helped in the establishment and restructuring of their financial system after that crisis.
An emerging market can be defined as a nation with business or social activity which it is on the process of industrialization and fast growth. The prime global economic story of the last years is the introduction and rise of emerging markets in the world economy. Emerging countries are mainly the countries which belong to the N-11. More specifically there are the MINT countries too, which belong to the N-11. MINT countries are consisted from Mexico, Indonesia, Nigeria and Turkey and they are currently the most promising emerging countries in the world. Due to precautionary and mercantilist reasons, the emerging markets are accumulating reserves for the past 30 years. This point puts the emerging countries in a position of being the larger reserve holders and simultaneously in a position where they can be saved from a crisis situation, like the one that they are experiencing now. The purpose of this essay is to determine the impact or impacts of the rise of emerging markets to the world economy. As the years passes a new world order is coming, with emerging markets being at the top of the list.
Ferguson et al. International financial stability. Geneva: International Center for Monetary and Banking Studies, 2007. Print.
LeJeune, A. T. (2010). Risks facing financial institutions: Liquidity, foreign exchange and sovereign risks. International Journal of the Academic Business World, 4(2), 31-37. Retrieved from http://jwpress.com/