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>>> Writer : War on Want > 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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