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World Finance and Economic Stability

Selected Essays of James Tobin

James Tobin

Nobel Prize winner James Tobin has made outstanding contributions to modern macroeconomics. In this final collection of his work he examines the economic policies of the United States and its relations with other major economies after 1990. In James Tobin’s view, the welfare of populations depends uniquely on these policies and it is important to be aware of their impact.
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Chapter 7: Why we need sand in the marketÂês gears

James Tobin


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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