Heikki Patomaki, Democratising Globalisation: The Leverage of the Tobin Tax (Zed Books, 2001) paperback £14.95/$22.50

The proposal to tax currency transactions was first made by James Tobin in the early 70s. It is however only since the late 90s, when it was "adopted" by the social movements against neoliberalism, that it became something of a "battlecry", denoting not just the fight against orthodoxy, but also an alternative approach to globalisation.

Although the basic idea put forward by James Tobin is relatively simple, the world of financial markets is becoming ever more complex. Thus, a book explaining in layman's terms the politics, as well as the economics of the global, financial markets and of ways to tame them, such as the Tobin Tax, is welcome. This, Heikki Patomaki does with great skill and zest.

This is not a book written by an academic from his ivory tower. It is a book written by an activist, who is convinced about the dangers of global financial markets operating ad lib and who is proposing a particular course of action for the empowerment of society at large. In this respect, the Tobin Tax proposal is seen to represent the "utopia", which can rally support for the struggle against neoliberal globalisation.

HP's book is evenly divided into two parts. The first part (chapters 1-3) presents the political arguments for bringing the global financial markets into the orbit of economic and social policy making on the national, as well as on the international level. The second part (chapters 4-8) presents and analyses the proposal made by James Tobin, and its more modern variants, designed to take into account present developments in the financial markets. In reviewing HP's book, we shall summarize his main arguments, in the belief that this is not only fair to the author, but also useful for the reader.

We shall start from the end. In particular, HP's "Concluding Remarks" are of special interest, to the extent that they highlight the basic tenets of his approach. These are (i) his concern that inertia on the part of the progressive movement may lead to a "reactionary" Tobin tax being instituted and (ii) his belief that the institution of a "progressive" Tobin tax prepares the ground for other economic reforms and democratic changes. Even more importantly, the setting up of an organization to administer the Tobin tax on a world level may serve as a "countervailing power and a partial alternative to the Bretton Woods institutions …(while)… it can also support democratic reforms of the U.N." (p. 221). Both of these points underline HP's political realism, as well as his long-term view of democratic world governance.

The first part of HP's book sets the scene in both historical and political terms. In particular, the historical background of the growth of global finance is examined, going as far back as the 19^th century (Chapter 1: "The Economics of Financial Instability"). Special emphasis is laid on the post World War II attempt at regulating global finance, where the Bretton Woods Agreement is seen as "a partial victory of productivism over financial capital" (Chapter 2: "The Power of Global Financial Actors"). Lastly, the unilateral decision of the USA to change the rules and regulations of the Bretton Woods monetary regime in the early 70s marked the beginning of the so-called "Dollar – Wall Street" regime, signifying the global dominance of dollar-denominated financial instruments and of Anglo-American financial markets (Chapter 3: "Geoeconomics and Beyond: The Structural Power of Global Finance").

Central to the workings of the financial markets is the process of financial multiplication – that is, the process of leverage building, mutual indebtedness and rapidly inflating prices, which can easily grow into a bubble. The socioeconomic implications of the global financial markets, at 'normal' times, let alone at times of crises, are quite severe. They include increased debt-servicing costs and rising unemployment, as interest rates increase; de facto insolvency as the value of property declines; a fall in public expenditure, as public deficits rise; etc. Furthermore, the cost of crises is borne largely by those least responsible for them, that is, by the local population, while the management of crises further strengthens the neoliberal model of financial market operation. For example, it is estimated that the Asian crisis of the late 90s led to a reduction in global output by about 6% and to a spectacular rise in unemployment. At the same time, the application of austerity programmes and the flight of capital to Wall Street and to London reinforced the latter.

The types of financial instruments available to investors are increasing in variety. More specifically, spot transactions constituted 37% of all transactions in 1998, having declined from 50% in 1992. On the other hand, derivatives have been increasing in significance. In particular, swap transactions made up 48% of the total in 1998, as opposed to 40% in 1992. Other types of transactions include forward transactions (9% in 1998 from 7% in 1992), futures (1% of the total in both 1992 and 1998) and options (6% in 1998 from 5% in 1992). According to HP, these should all be subjected to taxation.

The major private actors of the global financial markets include banks, brokers, mutual funds, hedge funds, wealthy individuals, private pension funds, insurance companies, MNEs. These are linked together on the basis of orthodox economics, while the consensus between the White House, the British government, the IMF, the World Bank and the "globalising media"- the so-called "Washington Consensus" – turns orthodoxy into dogma, reinforcing neoliberalism worldwide.

In this way, the financial markets are seen to constitute a decisive element in the global context within which political agendas are set, discussed and fought over. In particular, the global financial markets influence interstate relations, as well as regional and global systems of governance, insofar as states compete against each other in trying to attract and maintain capital through offering offshore facilities, reducing the tax burden on capital and increasing it on labour and land, etc. In this respect, the term "geoeconomics" is used to denote the global domination of financial markets, with the US at the centre of the New World Order, or the overriding hegemony of the "3 Cs" – Credibility, Consistency and Confidence of the Investors". This is what HP calls the "structural power" of the global financial markets.

Japan is mentioned at the third pole of the financial system, in its capacity both as a net lender to the US and as a rival in the Asian region. In this sense, although the hegemony of the US is not questioned, the latter becomes increasingly vulnerable to Japanese decisions.

Overall, the first part of HP's work presents a powerful argument for the so-called 'geoeconomics' of global finance, although the author admits that a "systematic, empirical analysis is beyond the scope of the book". Instead, he draws some tentative conclusions. (1) The global financial markets aggravate global disparities. They create high net worth individuals, while worsening life conditions for many people. (2) They imply a declining global demand for goods and non-financial services, through the imposition of high real interest rates, the occurrence of systemic crises, the implementation of policies of austerity. (3) The lack of research into the socioeconomic consequences of global finance – the "absences and silences" observed – can be explained on the basis of the prevailing ideology.

The second part of HP's work presents the case for the Tobin Tax. Chapter 4 (“The Case for the Tobin Tax and Global Re-regulation”) sets out the principles of the proposed tax, while the question of feasibility is dealt with in Chapters 5 and 6 ("Feasibility? Overcoming the technical problems" and "Politically possible? A two – phase proposal"). Lastly, Chapter 7 sets out the principles "Towards a democratic politics of global governance".

James Tobin's original proposal was based on three principles – securing market stability, increasing national autonomy and improving the allocation of resources. To HP, however, the greatest virtue of the Tobin Tax is its emancipatory potential. Hence, he defines three more principles – achieving (redistributive) 'justice as fairness', increasing global democracy – through the reduction of powerlessness and vulnerability - and securing human emancipation, through the transformation of power relations. It is in fact these principles which distinguish the proposed tax reform from other attempts at re-regulating the international financial system, known as the 'Post-Washington Consensus', following the crises of the 90s.

Such attempts –whether originating in Britain (the Blair-Brown proposals for a new 'code of conduct') or in the USA (the Clinton administration view of 'hegemonic stability') – aim at reinforcing orthodoxy and gaining greater legitimacy for the global financial markets. Similarly, in April 1999 the Financial Stability Forum was set up by the G-7 under the auspices of the BIS in order to (I) enforce the implementation of already existing national standards and (ii) to improve existing regulations. While not denying the usefulness of the work carried out by the FSF, HP clearly finds these attempts lacking, insofar as they share a common assumption. Namely, that the ever-growing pace of the global financial markets is acceptable under 'normal' conditions. According to this view, in case of a crisis, it is usually the victims who are to blame ('blame the victim' approach).

It is against these attempts at re-regulation that HP makes the case for the Tobin Tax, based on the principles mentioned above. Even more than that, HP regards the Tobin Tax regime as signalling "a concrete, practically realisable Utopia, which informs hope and political action". In particular, "Regarding the power of global finance, it would address some of the essential problems and bring about some of the desired or needed outcomes. Obviously, it would not solve all the problems, not even those of the global monetary system. … A Tobin tax regime would none the less have leverage over many far-reaching issues of global governance. If appropriately implemented, it will mean global democratization" (p. 130).

Having established the political and ideological basis for the proposed tax regime, HP goes on to look into the technical aspects of implementing it. In particular, he proposes the following:

·         What is to taxed - All types of currency transactions, including spot transactions and the various types of derivatives, OTC (over-the-counter) instruments and off-balance sheet items.

·         How are transactions to be taxed – HP favours the administrative approach, whereby a licensing system - run by national governments - specifies legitimate counter-parties and instruments.

·         Who pays the tax – Both sellers and buyers.

·         Where is the tax levied – At the booking/dealing site.

·         Administering the tax – This is to be done by a supranational authority, which has the task of following developments in the currency markets, enforcing the implementation of the relevant rules and regulations, collecting the tax proceeds and allocating them to various uses.

HP perceives the main 'technical' problem of the proposed tax regime to be one of tax evasion, whether by way of financial or of locational substitutes. In this respect, he looks at four different scenarios – of a low, global tax (less than or equal to 0,05%); of a high, global tax (greater than 0,05%); of a low, non-universal tax; and of a high, non-universal tax.

Generally, HP favours a low, non-universal tax. Such an approach avoids the liquidity dangers associated with the introduction of a high tax, while the opposition of major financial centres, such as New York and London, is in this way circumscribed. However, HP stresses the fact that a Tobin Tax Zone has to include at least 30 states and 20% of the global forex markets. Furthermore, since the effectiveness of a low rate of taxation in curbing forex volatility may be questionable, HP introduces the idea of a two-tier tax (proposed by Paul Bernard Spahn in 1995). That is, a currency band needs to be fixed, within which a low tax rate is applied. In case of a run on any currency, pushing its foreign exchange value outside the band, an exchange rate surcharge comes automatically into effect, in this way penalising the relevant speculatory activities. Furthermore, part of the tax proceeds go into a Global Intervention Fund, which is called upon to support the currency in difficulty, through standard market operation procedures.

In view of the fact that a global currency transactions tax seems an unlikely prospect, HP supports the two-phase approach, whereby the new tax regime is instituted within a particular area in the first phase. Such an area however would need to be large enough – in terms of volume of forex transactions – to make an impact. Furthermore, the initiating states are expected to apply political pressure on those outside the TTZ to join. Overall, HP perceives no 'insurmountable' problems in implementing the proposed tax regime. In his view, the main problem is one of political will and in this sense subject to negotiation.

The group of countries which may take the initiative include the EMU countries, certain 'progressive' countries, such as Canada and Finland, as well as countries hit hard by financial crises in the past, such as various Latin American and Asian countries. However, the critical mass of the forex markets can only be achieved through the inclusion of the EMU countries. At this point, it is interesting to note that HP is optimistic about the needed adjustment to the Community regulatory framework being decided by a qualified majority (art. 73c of the Maastricht Treaty).

At the same time, HP is clear about the forces opposing the Tobin tax. These include the US, rejecting any initiatives on the international level, the UK, doing the same thing on the EU level, the globalising media, the financial industry, the financial ministries, as well as the central banks, which he regards as the "strongholds of orthodoxy". Overall, HP appears optimistic or necessarily realistic about the prospects of implementing a low-level, non-universal Tobin tax regime, starting with the EMU countries, to the extent that inertia – remaining inactive – only serves to strengthen free market play and the financial multiplication process.

Having made his case for a Tobin Tax regime, HP then goes on to discuss the politics of global governance. In particular, he stipulates the legitimacy requirements of an international organization administering the Tobin tax as follows.

·         It needs to apply accountable and transparent procedures

·         There has to fair and democratic representation in terms of agenda-setting and decision making

·         Outcomes arrived at have to be just.

In this sense, "the Tobin tax regime would politicize globalisation and revive the normative problems of rightful authority, social justice, democratic participation and accountability in a new global context", an important goal in itself according to HP (p. 198). The questions of participation and representation in a future Tobin Tax Organisation are discussed, as is the use to be made of the tax proceeds. In this respect, it is suggested that part of the tax revenue should be kept by the states themselves, compensating them for the administrative costs of running the tax, as well as by way of a participation 'incentive'. Thus, OECD countries may withhold 30% of the proceeds and the other countries 60%.

In the second-phase of the tax regime - that is, when it becomes universal – the question of who administers the tax arises. HP rejects the Bretton Woods institutions, which he regards as being dominated by a "technocratic elite of believers in the orthodoxy". Instead, he proposes that the UN is restructured to undertake the task. Furthermore, to this end, part of the tax proceeds could go to the UN, "to rescue it from the constant threat of financial disaster". Of course, HP accepts that there is no guarantee that the UN can be reformed, "but it is worth trying" (p. 208).

Overall, this is a highly political book. It is addressed to the politically conscious, nonspecialist, who is interested in the phenomenon of globalisation and in the role of global financial markets. It is not a book about public finance, neither is it an essay in economics. In fact, this may be one of its weaknesses. That is, comprehensive as HP’s approach is, greater attention should have been given to the actual economics of the Tobin Tax. A wealth of references is provided, so that the interested reader can pursue his search elsewhere. However, the inclusion of a chapter on the implications of the Tobin Tax for modern forex markets, summarising the briad and interesting discussion in this area, would not have been amiss. In this sense, the opportunity to convince a sceptical, albeit well-meaning economist is not taken up.

Now, as to the actual proposal put forward for a Tobin Tax regime, we would like to make some comments on a number of points. First, with regard to feasibility, reducing almost everything to a question of political will tends to oversimplify the issues. In particular, there is a danger of underestimating the difficulties posed by a global tax regime, especially with regard to universality.

Furthermore, the proposed regime would seem to rely on quite complex procedures and administrative measures, thus raising the cost of implementation, as well as creating opportunities for evasion. Also, it is not clear who is going to be the ‘watchdog’ of the system. We side with HP in his highly political/moral approach to the question of democratization. However, we feel that such an approach may take too long in realising its end, in the meantime producing uncertainty, which has never been a positive state of affairs.

Yet another point concerns the actual states to be included in the Tobin Tax Zone in Phase One. Leaving out Wall Street and London may well mean that these financial markets may gain from the losses incurred by those within the Zone! In this sense, the asymmetrical power relations touched upon by HP may well grow even stronger. In addition, those states outside the TT Zone, especially the less developed ones, may feel that this is an exercise undertaken by the rich countries and therefore of no relevance to them. In fact, some poor countries, whose experience of international organisations is a particularly negative one, may well turn away.

Generally, HP has put together a wealth of material on the subject of the Tobin Tax and on the question of global democratization. The proposal put forward may well serve as a basis for discussion, even if one does not fully agree with it. In this sense, HP’s work is recommended reading to all those interested in modern globalisation issues and active in the movement against neoliberalism.

The reviewer, Marica Frangakis, is an economist associated with ATTAC Hellas, the Greek affiliate of the international movement for a Tobin Tax, ATTAC.