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
