Money on the markets

A maturing market amid the mayhem

In praise of James Tobin; India, Indonesia or Korea, who’s next?


If only James Tobin had lived to see this day. The American economist was not only a big fan of government intervention in matters economic and financial, which this credit crisis has seen plenty of, but he was also the man behind the ‘Tobin tax’ that Brazil has just introduced on foreign exchange transactions.

James Tobin believed a small tax on speculative transactions was acceptable and a reasonable means for third world countries to garner some revenues out of foreigners who wanted to dabble in their markets.
It doesn’t stop with Brazil. Indonesia hasn’t introduced a Tobin tax, but is trying to close a loophole through which corporates borrowing through special purpose vehicles could evade local taxes. Both Taiwan and Indonesia have also targeted short-term foreign investments — Taiwan has banned foreign investment in time deposits while Indonesia is thinking of banning overseas investors from central bank bills.

In an environment of low interest rates, abundant liquidity and a voracious appetite for yield, Asian and other emerging markets have had to deal with massive capital inflows. Policy makers have almost grudgingly watched their property and equity markets propelled to higher highs by these flows. In economic parlance, there’s been a jump in broad money growth and the cash in excess of what is required to finance ongoing economic activities is finding its way into financial assets.

As this chart illustrates, there’s been a rapid increase in capital flows into Asia since the middle of 2009, accompanied by a sharp spike in share prices.