Monday, February 27, 2006

Help poor countries grow

Guardian Unlimited Business | | Fair exchange could help poor countries grow and put a damper on bubble money: A currency tax could be the best way to raise billions for the UN development goals

"Something important will happen in Paris tomorrow. Led by France, up to 10 countries will agree to impose a tax on air travel, with the money used to increase spending on overseas aid. Every passenger departing French territory will pay an airline ticket levy (ATL) of between €1 and €40 depending on the destination of the flight and the class of ticket. The amount of money raised will be modest, at least initially. At the best, the levy might raise £600m a year, but that's not really the point. Jacques Chirac believes that if the idea proves workable, a further 20 countries could sign up, making the levy a far more lucrative source of funds.

The disadvantage of the French plan is that the amounts it will raise - even with 30 countries signed up - will be modest in comparison to the sums said to be necessary to meet the United Nation development goals. The G8 is talking about boosting aid spending by just shy of $50bn (£28bn) a year by 2010; the most optimistic estimate of the revenue to be generated by the ATL puts the sum at $5bn annually. On the up side, the ATL has the virtue of simplicity and is a source of genuinely new money.

a third idea - a tax on foreign exchange transactions. This has two big things going for it. The first is that it raises pots of money, even when levied at very low rates. Estimates made by the Stamp Out Poverty campaign group suggest that a 0.005% tax on the world's most traded currencies could generate between $35bn and $40bn a year without really making a dent in banking sector profits.

The second advantage is that, in the post 9/11 world, a tax on forex dealings would be virtually impossible to evade. Such is the paranoia about terrorist financing that the authorities now use the most sophisticated electronic technology to keep tabs on flows of money. Avinash Persaud, chairman of Intelligence Capital, a specialist advisory practice for financial institutions, says that whatever validity the old argument about avoidance of a currency tax used to have, it no longer does.

the Asian financial crisis of 1997 start with a balance of payments problem in a country that previously had barely blipped on to the radar screen? The lesson of Thailand nine years ago was that the beating of a butterfly's wing can have powerful - and costly - consequences. As a result, traders took one look at what was happening in Iceland and dumped the currencies of other emerging markets - Hungary, Brazil, South Africa.

The caution was explicable and sensible. After all, it was the collapse of a bank in Austria that prompted the worldwide financial panic in 1931.

The technical term for what has been going on in Iceland - and other emerging markets - is a carry trade. Inflation and interest rates are low in the leading industrial nations, and their currencies have been moving in fairly tight ranges. Central bankers tend to like this state of affairs, because it suggests economic stability. Investors don't like it nearly so much, because it means returns are not as big as they would like. So, they have been filling their boots with money borrowed in dollars, yen, Swiss francs and euros (at suitably low rates of interest) and buying assets in countries where interest rates are much higher (including Iceland).

There is a potentially explosive mix here - bubble money and bubble think. Markets have been awash with liquidity and see nothing anomalous about their desire to have - at one and the same time - inflation rising by no more than 2% but the value of assets going up by 10% or more. In the same way that rising household debt in the US is acceptable provided bubble money is pushing up house prices by 15%, so Iceland is a oneoff from which there are no wider lessons to be learned. I bet someone said that about Credit-Anstalt in 1931."

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