The Group of Twenty (G20) finance ministers at their recent meeting in Washington DC, have endorsed two landmark initiatives viz. the global 15 percent minimum corporate tax on multinational companies, and the new Resilience and Sustainability Trust (RST) to channel new Special Drawing Rights (SDRs) to low-income countries. Besides acting on climate policy and its financing, the G20 Rome Summit should also support the long-pending agenda of an international financial transactions tax (IFTT).

The G20 leaders at their 2009 Pittsburgh Summit, had agreed to consider the case for IFTT especially in view of its potential to curb the volatility caused by the short-term capital flows and to raise resources for poorer countries in the aftermath of the global financial crisis (GFC). The 2011 Cannes Summit, however, failed to endorse the IFTT proposal, despite strong support by the French presidency and other European countries.

The failure to act on IFTT has cost the world dearly. The quantitative easing (QE) in the western world following the GFC led to deluge of short-term capital flows to the emerging markets, chasing good return, led to booming stock-market valuations and exchange rate appreciations. However, the boom was followed by a sharp correction in the valuations following the tapering of the QE in 2013. The once booming emerging markets soon became the “fragile five”.

There is now a sense of déjà vu! To support the government stimulus program in the wake of COVID-19 pandemic, another round of QE was announced by the Federal Reserve on March 15, 2020, cutting short-term interest rates to zero, and resuming large-scale purchases of treasury securities. The European Central Bank followed it up by a 750 euro billion (US$870 billion) Pandemic Emergency Purchases Programme.

Abundant and virtually free money in the West is once again chasing quick buck in the emerging markets and asset bubbles are building up. Over the past eighteen months, Indian Sensex has grown by 135 percent, Korean Kospi by 111 percent, Russian TRSI by 97 percent, Taiwan TVSE by 94 percent, Brazil IBOV by 79.4 percent, and Indonesian JCI by 54 percent. The stretched valuations in these markets make them vulnerable to correction once the taper starts, possibly in a few months. The threat of collapse of stock markets and widespread disruption in financial system is real!

A timely action is needed to curb the vulnerability of the emerging markets to the boom-bust cycles and the possible disruption in the global financial markets. IFTT could be one such action.  

Initially proposed by Nobel Prize-winning economist James Tobin as a small tax on foreign exchange transactions to “throw some sands in the well-greased wheels of international capital markets”, the so-called Tobin tax has been discussed over the past nearly five decades and has generated a lot of support.

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