The response was predictable. No sooner had British Prime Minister Gordon Brown expressed enthusiasm for a global transaction tax than the backlash began.
Not something we like, said the Americans. We want lower not higher taxes, said the Canadians. Too hard to enforce, said the International Monetary Fund (IMF). This is the last gasp of an ancien régime.
The banks in 2009 are the Bourbons in 1789, the Romanovs in 1917. They existed in a bubble of privilege and took the public for a ride.
They triggered the biggest economic crash since the 1930s. They now expect the state to clear up the financial mess through public spending cuts and higher taxes.
As Brown noted at the G20 finance ministers’ meeting in St Andrews, Scotland, last Saturday, this is not on. ‘There must be a better economic and social contract between financial institutions and the public, based on trust and just distribution of risks and rewards,” Brown said.
Amen to that. Let’s be clear. A global financial transaction tax was one of four options floated by Brown, and there are formidable practical problems.
Wall Street and the City will lobby hard against it. It will work only if all the major financial centres cooperate, and securing an agreement will be tough.
Angela Merkel and Nicolas Sarkozy have both backed the idea of a transaction tax; Brown’s intervention means there is now a powerful bloc challenging the status quo. Despite what the IMF says, the main obstacles to a tax first proposed by the American economist James Tobin in the 1970s are political rather than technical.
All financial trades are electronically recorded; it would be simple for them to be monitored by tax authorities. Equally, a transaction tax may not reduce business volumes. Adair Turner, chair of the United Kingdom’s financial services authority, shot that fox when he branded some City activities as ‘socially useless”.
The big hurdle for a transaction tax is, and always has been, the need to get universal backing. That’s shorthand for winning the United States over.
Tim Geithner, the US treasury secretary, was sniffy about Brown’s idea at the weekend, but Downing Street is encouraged by the Obama administration’s willingness to cooperate internationally in a clampdown on tax havens.
The political argument in favour of reform is strong.
Firstly, policymakers want to put in place measures to reduce the risks of future financial crises.
Secondly, financial institutions provide an easy source of revenue at a time when governments are counting every penny.
A study by the Austrian government showed that a 0.05% tax imposed on British financial trades would raise about £100-billion (more than R1.2-trillion) a year, even assuming an improbable twothirds drop in transactions. That would wipe out the structural part of the UK’s budget deficit at a stroke, avoiding the need for painful and unpopular spending cuts.
Brown, though, wants only half the proceeds from a transaction tax spent at home. He would like to see governments from developed nations allocate the other half to helping poor countries cope with global warming.
That’s a good strategy, because it would both assuage public anger at the banks and ensure that a global tax was used to do global good. Poor countries did not cause the crisis, yet have been badly hurt by it.
They need money to develop lowcarbon growth strategies. Without a willingness by the West to bankroll greener economic strategies in the developing world, there will be no climate change deal. The portents are bad for next month’s climate change summit in Copenhagen.
Indeed, the negotiations are starting to echo the global trade liberalisation talks, which began in Doha eight years ago this week and are still going nowhere.
Rich countries have found that the bigger developing nations are no longer prepared to be pushed around. In all previous rounds, the European Union and the US have imposed a private deal on the rest of the World Trade Organisation membership. The big change during the Doha talks has been the no-nonsense approach of Brazil, India and China.
They have refused to cave in to bullying tactics from Brussels and Washington, demanding that the developed world provide compensation to poor countries for the biased outcomes of previous rounds.
The stakes are much higher in Copenhagen. If the scientists are right, then the international community cannot afford a decade of delay in concluding a deal on climate change.
Developing countries say — with some justification — that the West has been responsible for the lion’s share of greenhouse gases and that rich countries should therefore shoulder most of the burden when it comes to cutting emissions. India has more people without electricity than live in the EU.
Rich countries — particularly the US — argue that there can be no deal unless the larger developing countries participate. They, too, have a point.
The flow of new emissions will come from the fast-growing emerging countries, where demands for energy are increasing exponentially. Four-fifths of the growth in emissions between now and 2030 will come from those nations. The way for the impasse to be broken is for the West to take the lead.
One way it could do it is sketched out in a new paper, Avoiding Dangerous Climate Change: Why Financing for Technology Transfer Matters, by Arunabha Ghosh and Kevin Watkins for the Global Economic Governance Programme at University College, Oxford.
Ghosh and Watkins say we need an immediate programme of technology transfer to provide India and China with clean coal plants. Although both countries have been expanding their sources of renewable energy, they are far too small to allow them to hit their targets for poverty reduction.
The immediate choice is not between coal and renewables but between dirty coal and cleaner coal. Clean coal technology is expensive, which is why there is very little of it.
The paper estimates that improving thermal efficiency levels would cost between $5.2-billion and $8.4-billion a year for India alone. The West needs to learn the lessons of Doha and use transfers of money to kickstart the Copenhagen process.
That’s where a transaction tax — the transfer of resources from the socially useless to the socially disadvantaged — comes in. Governments should grab it with both hands. —