Selected Essays of James Tobin
Chapter 7: Why we need sand in the marketÂês gears
7. Why we need sand in the market’s gears* For the peoples of Southeast Asia, the worst is yet to come. The bailouts of South Korea, Thailand and Indonesia will be more painful to more people for more months than the currency crises themselves. The International Monetary Fund (IMF) and the US Treasury are making new ﬁnancial aid for these countries conditional on their acceptance of economic austerity measures. South Korea, for example, is expected to boost interest rates, raise taxes, reduce government spending and lower economic growth from 6 per cent to 2.5 per cent. South Korea and other Asian countries – like Mexico in 1994–5 – are being punished for oﬀenses they did not commit. They have inﬂation and government budgets under control. They are not sinners, but victims of a ﬂawed international exchange rate system that, under US leadership, gives the mobility of capital priority over all other considerations. It is simply too easy for banks, governments, businesses and speculators to buy and sell huge blocks of a country’s currency in panicky moments. Such ﬂows of capital can throw a country literally overnight into a crisis. The lesson of the Asian meltdown ought to be that the leaders of the global economy need to ﬁnd ways to make the currency exchange system less volatile, so as to protect innocent bystanders from sudden economic crashes that destroy jobs and income. A global tax on currency transactions is one possible solution. Under the present system, the main priority...
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