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The Asian Crisis : Need for the Tobin Tax The globalisation of financial markets has led to a succession of financial and economic crises. The events of the last decade suggest that these crises can be expected to recur with increasing frequency, and that they will prove progressively more costly to deal with, in social and economic terms. A central factor in the financial crises of the 1990s has been the role of currency speculation. Speculation can be defined as "the act of buying and selling with the aim of benefiting from price movements, rather than to finance international trade, or to acquire interest-bearing assets". These crises have had devastating consequences for the developing world, and a disastrous impact on the poor. Populations have been hit by rising unemployment, wage cuts, inflation and reductions in public spending. Vulnerable sectors - women, children and the elderly - have been particularly hard hit. The progress of human development is being thwarted by the failure of governments and international institutions to regulate the global economy. The new financial crises reflect the changing nature of financial flows from north to south. Formerly official loans to governments comprised a larger part, and crises were caused by the inability of governments to service these loans. In the 1990s, these flows have comprised mainly foreign direct investment, portfolio investment in bonds and shares, interbank flows and commercial loans to companies. The crises of the 1990s have been precipitated by an abrupt loss in market confidence, leading to large outflows of capital. This loss of confidence was not accounted for by any substantial change in the country's economy. Currency speculation turned these localized shocks to the market into major financial crises, the effects of which then spread to other emerging markets through a process of contagion. Currency speculation may occur when the devaluation of a currency is deemed probable. Local and foreign investors borrow local currency and then convert the loan into a stronger currency. If the devaluation occurs, the speculator will be able to buy back enough local currency to repay the loan, and still make a profit. Speculation makes devaluation more probable: it increases the demand for foreign currency, depressing the value of the local currency. The expectation of a devaluation can therefore be self-fulfilling. Even if a small number of speculators take the lead, this may produce herd behaviour on the part of other investors. The Asian Crisis Asian countries had been the recipients of large quantities of foreign lending and portfolio investment. These capital flows increased the vulnerability of the so-called 'Asian Tigers' to changes on the financial markets. The Thai economy was the first affected following turbulence in the currency markets in July 1997; the effects then spread to neighbouring countries, with Indonesia and Korea particularly severely affected. Large numbers of companies went bankrupt or retrenched, leading to massive job losses and wages reductions These financial crises have destabilised the lives of millions. The human costs have been severe, perhaps incalculable, and the effects of the crises continue to unfold. The poor have been affected by unemployment, cuts in wages, rising prices of essential commodities, and reductions in social services. Children have been taken out of school, food has been in short supply, and levels of violence and prostitution have risen. Unemployment and the increased competition for survival have led to community breakdown. There has been a rise in political instability, with food riots and ethnic tensions in Indonesia, farmers protesting in Thailand and worker discontent in Korea. While economists infer evidence of a recovery in Asia, citing improved figures for GDP growth (4.8% in Asia in the first quarter of 1999), their figures do not take into account the plight of those who have been thrown out of work and into poverty by the crisis. Banks and businesses were heavily exposed to foreign loans, and therefore severely affected by the increased debt repayment burden caused by currency devaluation. There was a high level of domestic bank lending to the private sector, and many of these loans were shown to be risky. The banking crisis, combined with rising interest rates, resulted in a contraction of credit and difficulties in obtaining capital which put otherwise viable firms under pressure. The devaluation of currencies pushed up inflation and increased the price of imported goods. These developments caused a sharp fall in output, consumption and incomes, and led to a massive rise in the number of unemployed, and in the incidence of poverty. Businesses either closed, laid off workers, or reduced costs by cutting wages, benefits and working hours. Under-employment : The ILO estimated that the number of unemployed around the world rose by 10 million directly as a result of the Asian crisis. Increased under-employment and falling wages are perhaps more commonly experienced than open unemployment. The loss of formal sector jobs has been accompanied by an increase in under-employment and an influx of new workers to the informal sector, further depressing already low earnings. Divergent estimates of the unemployment rate in Indonesia, the country most dramatically affected by the crisis, are due to disagreement as to the proportion of displaced workers absorbed into informal sector employment. It is unlikely that this sector was able to absorb the huge numbers of the newly-unemployed (up to 5 million according to ILO estimates), combined with the 2.8 million new entrants into the labour force, and the 5 million already unemployed in 1997. The collapse in output also resulted in a drastic fall in the demand for goods and services produced by the informal sector. The effects of the crisis have not been confined to urban areas. It was estimated that a million people throughout the region had returned to their villages. However, traditional institutions facilitating labour absorption in rural areas have been eroded by the commercialization of agricultural production and the reduction of the role of family-based farms. Traditional welfare mechanisms, such as the support of the extended family or community, have been weakened by modernisation. As a result of the economic slump provoked by the financial crisis, prices have increased while public spending has decreased. A severe fall in incomes has been accompanied by massive job losses as a result of bankrupt cutbacks in production.Meanwhile, the price of essential commodities such as food and fuel has risen. Rising inflation has led to a drop in the level of real wages, and large numbers of people have fallen into poverty. Virtually all groups were affected, although the poor and other vulnerable groups such as women and children disproportionately so, since the poor spend a larger percentage of their income on basic goods, and therefore are harder hit by price increases and falling wages.Rising poverty causes parents to withdraw their children from school in order to send them out to work, compromising their future. It may never be possible to recover these students for the educational system, causing a permanent loss to these societies. The performance of those students who do remain in school is likely to be affected by poverty and malnutrition. meanwhile, were suffering from a liquidity crunch due to uncollected tuition fees. New entrants to the labour market and young workers have been more severely affected by unemployment than older workers. Families may attempt to economize by spending less on food and health. Malnutrition has a particularly severe impact on the health and development of children: it may cause lifelong impairment. Children are likely to have been most severely affected by cuts in health spending: a study concerning the effects of the Latin American economic crisis on the health sector found that child malnutrition and infant mortality increased more appreciably than mortality among the population at large. Women have been disproportionately affected, although accurate statistics on the subject are hard to obtain. The gender impact is complex and varies from region to region. Women were concentrated in the most precarious forms of low-skilled wage employment The effects of the crisis have not been confined to Asia, but have also spread to other emerging markets, particularly Brazil and Russia. There has been a general fall in investor confidence in emerging markets, leading to capital outflows, devaluation and stock market collapses Many poor countries are suffering lower export prices due to shrinking world demand. Petroleum exporters have been hit particularly hard, and the impact on African countries, dependent on primary commodity exports, has been severe. World Bank projections of GDP growth in Sub-Saharan Africa for 1999 have been revised downward from 4.5% to 3.2%. Bail-out Rescue packages are loans that must be repaid with interest, imposing a long-term fiscal burden on the governments concerned, and diverting money away from spending on socially beneficial strategies. They are furthermore associated with strict conditions. Countries have emerged from the crisis burdened by larger public debts and increased levels of foreign ownership of their economies, as well as diminished national control over the process of making policy. What were largely private-sector debts have effectively been transformed into public-sector liabilities. Capital flows and aid budgets A common feature of the countries affected is their reliance on private capital flows as a means of financing growth. This comes at a time of declining levels of official financial flows. Private capital flows now dominate total financial flows to developing countries, constituting 80% of all capital flows. Meanwhile, official financial flows declined from 29% in 1990 to 6% in 1994. Borrowings through commercial bank loans are also rising. The countries affected by crisis are among those which have been the recipients of the highest levels of private flows. These crises suggest the dangers of opening up to foreign short-term capital. Short-term flows may not have the same potential as long-term investments to contribute to development, and may in fact tend to impede it. International capital flows are volatile, fed by herd behaviour and inadequate information. The need for a Tobin Tax A reliance on volatile forms of short-term investment leaves the fragile economies of developing countries vulnerable to sudden changes in financial markets. One common thread in all these crises is the central role of speculative trading on foreign exchange markets. The increased frequency of financial crises must raise questions as to the desirability of pursuing policies aimed at the progressive liberalisation and deregulation of financial markets, and urge the consideration of measures instead aimed at stabilising this volatility. A Tobin tax - a small universal tax on currency transactions - could help to deter speculation by making currency trading more costly. War on Want Fenner Brockway House 37-39 Great Guildford Street London SE1 0ES www.waronwant.org stibbett@waronwant.org
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