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James Tobin: "The antiglobalisation movement has highjacked my name"

Der Spiegel

September 3 2001

Nobel-winning economist Tobin speaks of the surprising rediscovery of his tax on speculation, of his controversial relationship with the adversaries of globalisation and the mistakes made by the European Central Bank.

Question: Mr Tobin, here you are in Wisconsin, calmly sat beside a lake while the critics of globalisation in Europe are leading a revolt in your name. Don’t you want to get up and join them?

Answer: Not at all. I have absolutely nothing in common with those antiglobalisation rebels.

Q: The protest organization Attac took your name and the demonstrators are shouting for the Tobin Tax. Doesn’t it make you at all happy that thirty years after you invented this idea of imposing a tax on speculation in financial transactions that finally you have supporters?

A: Of course I am pleased; but the loudest applause is coming from the wrong side. Look, I am an economist and, like most economists, I support free trade. Furthermore, I am in favour of the International Monetary Fund, the World Bank, the World Trade Organisation. They’ve highjacked my name.

Q: This movement wants a tax on international financial transactions. Thus the capital markets would be tamed and the additional revenue released could be diverted to development. Does this not sound the same as your proposal?

A: I had proposed that the revenue be put at the disposal of the World Bank. But this was not what concerned me. The tax on foreign exchange transactions was devised to cushion exchange rate fluctuations. The idea is very simple: at each exchange of a currency into another a small tax would be levied - lets say, 0,5% of the volume of the transaction. This dissuades speculators as many investors invest their money in foreign exchange on a very short-term basis. If this money is suddenly withdrawn, countries have to drastically increase interest rates for their currency to still be attractive. But high interest is often disastrous for a national economy, as the nineties crisis in Mexico, South East Asia and Russia have proven. My tax would return some margin of manoeuvre to issuing banks in small countries and would be a measure of opposition to the dictate of the financial markets.

Q: ‘Frighten off the speculators’, ‘dictatorship of the financial markets’: aren’t these the terms that the critics of globalisation use?

A: What matters to them most of all I think, is the income from the taxes with which they want to finance their projects to improve the world. But for me raising revenue is not really the most important thing. I wanted to put a break on the foreign exchange trafficking; fiscal income for me is a by-product.

Q: So what do you have against this by-product being used for good works?

A: Nothing, I would be happy if this income were to reach the poor of the world. But its the governments who have to decide about that.

Q: What led you in 1972 to develop the Tobin tax?

A: I am a disciple of Keynes, and he, in his famous chapter XII of the General Theory on Employment Interest and Money, had already prescribed a tax on transactions, with the aim of linking investors to their actions in a lasting fashion. In 1971 I transferred this idea to exchange markets. This was when the USA was breaking from the Bretton Woods system of fixed exchange rates and at the same time the first electronic money transactions by computer were happening, promising a gigantic increase in the number of transactions. I wanted to slow down this process so that there would be less speculation and so that exchange rates did not fluctuate so much. Now that at any time anyone can trade on the shares markets from their personal computer, this problem has become much worse.

Q: Wouldn’t the introduction of this tax on speculation have to be applied everywhere simultaneously to avoid tax havens and offshore hideouts? Who will direct this? An international Tobin Tax Authority?

A: The IMF could do this. It has experience with the international monetary system: virtually all countries are members.

Q: The IMF? It is not only opponents of globalisation who consider it the handmaiden of global capitalism and that in fact it would be better to eliminate it.

A: On the contrary I believe that the IMF has to be strengthened and broadened. Of course it has made many mistakes, undoubtedly. But just as with the World Bank, it has too little resources at its disposal to help particularly the poor and underdeveloped economies. The World Bank and the IMF are not part of a conspiracy called globalisation.

Q: Is this also true for the World Trade Organisation?

A: Naturally. Already its predecessor GATT, did many good things to open up the world market.

Q: Not everyone has such a positive vision. In 1999 tens of thousands of opponents of globalisation attacked the WTO Ministers’ meeting in Seattle.

A: The WTO needs more power, also over the USA. The WTO ought to be able to prohibit the industrialised countries from blocking the imports of developing countries by putting up obstacles to trade.

Q: The fact is that the industrial countries supply the Third World with products and use it as a source of cheap labour.

A: I think that to see the IMF, World Bank and WTO as the enemies of the developing countries is the wrong approach. The problems of globalisation will not be solved by halting it. All countries and their inhabitants benefit from the free exchange of goods and capital.

Q: In that case why has poverty increased in the world today?

A: It has not. Take South Korea that in 1960 was an incredibly poor country. Now it is one of the industrial nations of the world. The same is true for the other Asian tigers, despite the crisis in South East Asia four years ago. These countries continue to be more prosperous than three decades ago. And this is thanks to the market and foreign capital.

Q: Maybe some countries benefit, but from a global perspective, the rich are getting richer and the poor, poorer.

A: Poverty may have many causes: most are down to the countries themselves. They are not going to improve their situation with the measures like those recommended by the adversaries of globalisation, like implantation across the world of western employment standards. This reduces the competitiveness of poor countries’ exports to rich markets.

Q: Are you accusing Attac of being a bad advocate for the poor?

A: I do not know exactly what Attac’s proposals are. Recent protests are quite contradictory and disparate, I don’t even know if all this reflects what Attac is. Their positions are well intentioned and poorly thought-out. I do not want to see my name associated with this.

Q: Have you ever spoken for Attac?

A: The president, Bernard Cassen called me once and invited me to Paris. I was to appear in front of thousands of enthusiastic supporters.

Q: So what did you say?

A: I said no. For family reasons and because I did not want to be identified with Attac’s aims. Since then I have not heard anything from them. Attac has not communicated to me what it is doing in terms of propaganda about my tax.

Q: How do you explain the fact that your idea has so many supporters among political activists yet economic experts criticise it?

A: Not all of them. Most economists simply ignore my project. But there are certainly a series of books and articles on the Tobin Tax. Some are in favour, others criticise it, and there are others who are undecided.

Q: Professor Rudi Dornbusch at M.I.T. is critical of your tax; Robert Mundell, like you an Economics Nobel prizewinner, even considers it a ‘daft’ idea.

A: I am confident that they are referring to Attac and their accomplices, not to my tax.

Q: George Soros himself, the most famous speculator in the world, praises your scare-off-speculators tax. Applause from the wrong quarter again?

A: The man knows what he is talking about. Soros has made a lot of money on financial markets and this is not a sin in itself. Actually he has some very heterodox ideas about the world monetary system. The Finance Ministers of the world need to watch out for him more than me - they should be more afraid of him because he has the means to put his plans into practise.

Q: Do you think your Tobin tax will become reality one day?

A: I fear there will never be an opportunity. The decision-makers on the world financial stage are against it.

Q: The European Ministers of Finance are going to debate the Tobin Tax in their meeting in late September in Liege.

A: It will probably only be for show – I doubt if they are really going to reflect seriously on the issue. At the end of the day, they will not want to burden the financial sector with yet another tax.

Q: So why don’t we return to a fixed exchange system to protect currencies?

A: This was tried and it failed. Speculators like Soros leave the issuing banks out in the cold with their manoeuvres. Look at Argentina, which has linked its peso directly to the US dollar. What's happening there is a disaster, a complete disaster. These exchange rates are open invitations to speculation. Traffickers bet on whether the issuing banks have the will and capacity to defend the exchange rates agreed upon. No, fixed exchange rate systems are outdated.

Q: Why not avoid monetary crisis by simply suppressing currencies? Wouldn’t a Euro model make sense in Asia and in the Americas?

A: As I see it the Euro is not exactly the great success model to be imposed on other regions of the world.

Q: But the Euro is gaining ground against the dollar.

A: I am not referring to its value. Euroland has the problem of the general European economy not doing so well and the European Central Bank is to blame because it has not pursued a policy like that of the American issuing bank.

Q: Which would be what?

A: Wim Duisenberg, President of the European Central Bank said to me once that it had nothing to do with the real economy, growth and employment; that his real mission was to fight inflation. If this is all that European monetary policy can offer then it is not surprising that the European economy is weak.

Q: How did Duisenberg explain his position?

A: He has a very ideological position. For him, price stability is a sort of religion, as happened in the past in the USA with the monetarists. Of course, the President of the American Federal Reserve Alan Greenspan was not one. The Federal Reserve does not limit itself to maintaining price stability. It also takes responsibility for growth and job creation. Greenspan has always said that the Federal Reserve makes every effort to achieve both things.

Q: Was that the crowning achievement of the longest economic boom in the history of the United States?

A: The boom did not come about by chance. Greenspan has a lot to do with this, as does the Clinton Administration. Undoubtedly, Greenspan was lucky, but also he was brave. In 1994 it was holy writ for the issuing bank that inflation would be triggered if unemployment dropped below 6%. When we reached that threshold and inflation continued to behave properly, Greenspan resisted pressure and did not intervene: he did not reduce the quantity of money. We dropped to 4% unemployment, and nevertheless inflation did not rise, only because Greenspan was brave enough to challenge conventional doctrine. Duisenberg would never dare do something like that.