Sand in the Wheels of International Finance: Revisiting the Debate in Light of the East Asian Mayhem
Published By: IPS on eSS | Published Date: April, 21 , 1999The turmoil that has characterised the global financial markets
since the 1990s, and particularly the crisis in East Asia, has generated
a great deal of support for proposals to add some frictions to the
wheels of international finance, as part of overall reforms to the global
financial architecture. With this in view, this paper explores the
economic effects of and rationale for imposing levies on capital flows
in general, and a Tobin tax in particular. It is argued that the primary
aim of such a levy ought to be to act as a measure to prevent for a
crisis from building up (i.e. a domestic boom fuelled by short-term
capital inflows), rather than as a means of countering or providing
breathing space for necessary adjustments once a crisis erupts (or
threatens to do so). The Tobin tax needs to be fairly universal in its
coverage, failing which there would be a migration of foreign
exchange flows to tax havens. Admittedly, the political will to arrive at
an international agreement on such a levy is far from assured.
However, to the extent that developing economies are most impacted
by the vagaries of the financial markets, each may find it in its best
interest to unilaterally examine the efficacy of imposing Chilean-type
measures of restraining capital flows, as appropriate and aggressive
steps are taken to enhance the soundness and transparency of the
banking and financial systems. [Working Paper No. 7]
Author(s): Ramkishen Rajan | Posted on: Jul 21, 2010 | Views(1029) | Download (708)