In May last year, automated share-trading systems caused a “flash crash” on the New York Stock Exchange: share values fell by nearly 10% within minutes because computers spotted the market falling and went into overdrive, buying and selling shares in milliseconds.
Some traders in the United States now hold shares for an average of 11 seconds before selling them again — not exactly a long-term investment. Meanwhile, the global economic crisis has created a “global public-goods resource gap” in the range of $400-billion a year. The governments of industrialised countries need $100-billion to meet the payments on their public-sector deficits and developing country governments have a budget hole of $65-billion.
The world needs $156-billion to tackle climate change and $180-billion to achieve the United Nation’s millennium development goals. There is a connection. The finance sector — the proximate cause of the global economic crisis — is under-taxed.
One way to rebalance the global economy would be to tax this sector in the same way manufacturing and other services are taxed. And the best way to do that is to introduce a tax on financial transactions: the selling of shares, the swapping of currency and a host of complex, exotic financial derivatives.
The revenue we could release by taxing these transactions is huge: conservative estimates suggest $400-billion a year at a tax rate averaging about 0.05%. It is a lower rate than that for any sales or income tax — which ordinary people pay every day — and it would fall predominantly on the very rich.
Releasing that money would help pay for social protection, health and education, the budgets of which are now being slashed by governments. It would pay for drugs to treat HIV/Aids, more nets to prevent malaria, more teachers to educate the young.
It would help tackle climate change by supporting the farmers whose crops are failing to adapt to changing weather patterns, and by helping industries that cause pollution to switch to greener technologies. And it would do much more. This month the United Nations Conference on Trade and Development published a report on the speculation that has caused huge price increases in staples such as food and oil.
It said such speculation, which benefits rich traders while further impoverishing the poor and the hungry, could be controlled by a financial transactions tax. Such a tax would make speculation and high-frequency trading unattractive by raising the price of trading, which is only profitable when the volume is huge.
But, because it would be set at such a low level, it would not have much impact on the long-term investment in stocks and shares that we need to produce growth, or on the small amounts of currency transactions that people do to import and export goods, travel internationally or send remittances back home.
In the wake of the global financial crisis, the idea of a financial transactions tax has gained widespread support from leading economists such as Joseph Stiglitz, Paul Krugman and Amartya Sen.
The International Monetary Fund accepts that such a tax is technically feasible and would be more effective (and lucrative) if more countries sign up and more financial transactions are covered. More than three-quarters of the countries in the G20 major economies have a tax on some financial transactions already, although revenue raised may not be reserved for development and climate finance.
Now governments such as those of France and Germany support a multinational financial transactions tax and will be raising the proposal in the European Union and in the G20 meetings later this year. These countries do not meet their obligations under the UN proposal that developed economies pay 0.7% of gross national income in overseas aid, but a financial transactions tax could change that.
South Africa’s government could play a pivotal role in making this happen. This week the G20 Development Working Group was meeting in Cape Town, and in December the UN climate-change conference takes place in Durban.
Trevor Manuel co-chairs the Green Climate Fund, which is tasked with devising a system to fund developing countries’ adaption to climate change. The financial transactions tax is on their agendas.
Our government, with other progressives such as the Brazilians — former president Luiz Inácio Lula da Silva introduced a similar tax to prevent speculation damaging his country’s currency — should demand that the countries that host the world’s financial centres (New York, London, Frankfurt) introduce this tax.
If these countries act and use the money raised for critical work on poverty alleviation and climate change, South Africa’s people stand to benefit. A financial transactions tax is feasible, fair and vital — and its time has arrived.
This is a joint appeal by four non-governmental organisations operating in South Africa.