Is a « Tobin Tax » the right solution for addressing the food crisis?

 

 

The article, published in today’s “La Libre Belgique” addresses a question that no one can ignore either the pertinence or the urgency. Drawing attention on the food crisis affecting those in greatest need, the number of which has literally exploded following the sharp rise in food prices, underscores a real societal problem of global scope. Taking account of this problem must become an overriding priority.

 

The author is right to draw attention on the incapacity of developed countries, and in particular those of the European Union, to meet their commitments, undertaken long ago, to devote an amount, modest as it may be, of 0.7% of GNP to development aid.

 

To put things in perspective, and referring to the figures mentioned in the article, the amount of additional resources required by the United Nations Food Programme (USD 500 million) to continue to feed 73 million beneficiaries, represents barely 0.001% of the capitalisation (USD 51.400 billion) of listed companies world wide. Compared to the daily fluctuations of stock prices which average around .5% or their long term increase of some 8% annually, it amounts to a sum that is so trivial that no public or private person can, in good faith, pretend that it is not achievable by those who are lucky enough to eat to their hearts content.

 

I don’t contest either the incidence of climate disturbances, of inventory fluctuations, the recycling of some agricultural staples to produce fuel or of demographic factors including the increase in world population and the welcome news that hundreds of millions of citizens have escaped poverty in emerging markets in particular in China and India increasing demand. Up till here I fully share the author’s analysis.

 

On the other hand, where I disagree with him is the central role he assigns to “speculation” playing on the emotional reaction that such a reference is bound to create. It is undeniable that amid transactions on food staples carried out in markets – which are nevertheless subject to a more or less efficient regulatory framework – there is a proportion of speculation if one defines it as positions taken by persons who have no direct interest in the production, the transformation or the distribution of the underlying products. As in any “free” market this can create excessive fluctuations, in particular in periods of volatility created by the convergence of objective factors such as those mentioned in the previous paragraph.

 

A number of points should be considered:

 

In the first place it is extremely difficult to define, and even more difficult to identify, what constitutes a “speculative” transaction, because the format of trades that are carried out in the market is identical, whether they constitute a sound management technique (such as the forward cover of future deliveries or purchases of physical goods) or simply bets on the future evolution of prices that many would consider as fully legitimate “alternative investments” on par which investments in other classes of assets.

 

Furthermore, the participation of external intermediaries and investors in these markets brings also advantages, in particular regarding liquidity. It is not necessary to emphasize the importance of this latter factor in the middle of the “subprime” crisis where the evaporation of liquidity in the inter-bank market was the main factor in the disaster leading to the necessary massive intervention of Central Banks to avoid a systemic collapse. The fluidity of (regulated) markets, including those trading raw materials, and therefore the need of a diversified base of well capitalised counterparties, is a precondition for the management of a global economy in which producers, transformers, distributors and consumers have become irreversibly interdependent.

 

Thirdly, the collection of a “Tobin Tax” creates a series of fairly insurmountable problems. The Belgian legislator was fully aware of this when, in 2004, it suspended the implementation of the tax to its generalised adoption which meant effectively for the foreseeable future. It amounted to nothing more than gesticulation aimed at giving the Parliament a good conscience. Let us not forget that the “Tobin Tax” was aimed exclusively at foreign exchange transactions and that its implementation would have penalised far more countries producing raw materials than either the United States or Members of the Eurozone as the percentage of economic and financial transactions that involve a foreign exchange operation is far higher in the former countries compared with the latter.

 

Conclusion:

 

Addressing the food crisis must become a universal priority and identifying the necessary financial resources is a matter of urgency. The use of a “tax” can indeed be a solution to this important challenge to the extent that its collection is simple, transparent and exempt of perverse consequences.

 

For example levying a minute and painless fee (0.01% or less) on the value of all transactions carried out on regulated markets (stock exchanges, commodity markets, derivative markets etc.) but also on transactions that require a degree of formalism that are easily identifiable such as real estate transactions or public auctions, would yield enormous sums without impairing in any way economic activity, including its speculative manifestations.

 

 An alternative, which is not mutually exclusive, would be an equally minute and painless levy on telephone and electricity bills, the collection of which is simplified by the limited number of easily identifiable suppliers.

 

There would remain the problem of organising in a transparent manner the distribution of this manna for the benefit of the neediest, which will not be the least of the challenges involved.

 

Short of manifesting a minimum of political courage and solidarity, those who enjoy today a reasonable standard of living should not be surprised to see an exacerbation of geopolitical tensions which would put their well being into jeopardy. It is pure wishful thinking to expect to shield oneself from such developments by implementing protectionist measures.

 

I join Olivier Derruine in forming the hope that the European Union will not only wake up to the challenge ahead but will resolutely take the leadership of the initiatives that are required.

 

 

Paul N. Goldschmidt

Director, European Commission (ret.)

 

Brussels, 30th April 2008

 

 

Attach. : Article published by Olivier Derruine on 30/04/08 in the Libre Belgique.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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