Tobin tax and Mahbub ul Haq

While Mahbub ul Haq Human Development Centre launched its annual report, Human Development in South Asia 2014, in Lahore the other day, news is coming that another of his passions may be translated into policy. In Milan, Italy, the European Union finance ministers have been negotiating to promulgate a financial transaction tax. In the backdrop of global financial crisis that led to the Great Recession and worldwide protests, Germany and France pushed the European Commission to propose this tax to check the speculators. Although the country positions have somewhat changed, but the question is no more that of ‘whether’ but of how much. With a large manufacturing base and relatively less dependence on financial industry, Germany is the main proponent. France would like a watered-down version due to a sizeable presence of derivatives. As the centre of the world of finance, the UK is opposed to the idea. It may thus have to be restricted to the Eurozone, as the UK is not a member.



The idea goes back to the 1981 Nobel laureate James Tobin, an economist from Yale. In his 1972 Janeway Lectures at Princeton, he suggested a levy on international currency transactions. This, according to him, will act as a disincentive to speculators and the proceeds could be utilised to redistribute the profits of the City of London and the Wall Street to the developing economies. In his own words, it received a ‘cool reception’ at the time. Fellow economists ignored it. Journalists would mention it whenever the currencies were in crisis, but it would disappear from headlines as soon as the crisis ended. Twenty-four years on, the idea was picked up by the international development community, led by a student of his from Yale University, fondly remembered as ‘Bob Haq’. The UNDP organised an entire conference on Tobin tax. As special adviser to the UNDP Mahbub ul Haq pioneered the now famous Human Development Report and the Human Development Index. By now he had returned to Pakistan to set up the Human Development Centre here. The proceedings of the conference were edited by him, together with Inge Kaul and Isabelle Grinberg, and published under the title of Tobin Tax: Coping with Financial Volatility in 1996. Foreign exchange transactions had grown tremendously. Also, the development practitioners, weary of the declining development assistance, were looking for alternative sources of supporting the international agenda on human development and environment.

If implemented, the yield from European Tobin tax is not likely to be used for development assistance. It will rather be a way of making the financial market players pay for any future bailouts. A global Tobin tax is sometimes supported as a means to finance commitments made in the Copenhagen Accord in 2009 and at the Cancun Summit on Climate Change in 2010. The probability of this happening is zero, considering that there is no appetite for a global Tobin tax in the United States.

Mahbub remained convinced of the need for Tobin tax throughout his life. Talking of “financial hurricanes” in an article written just before his death in 1998, Some random thoughts on globalisation, he observed that “their speed is breathtaking, their direction unpredictable, and their impact sometimes very destabilising. These financial flows are inspired both by rational expectations and irrational panic.” Tobin had proposed his tax “to throw some sand in the wheels of these panicky financial flows.” He went on: “I can understand opposition to it from Jesse Helms of this world. I have frankly never understood why the intellectual community has not taken it up seriously.”

Published in The Express Tribune, September 19^th, 2014.

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