Applicability of the Tobin Tax in East Asia

Abstract

This paper develops a basis for the better understanding of the Tobin tax and provides a set of guidelines for East Asian countries with respect to the adoption of restrictions and regulations on international currency and capital transactions. The East Asian region varies considerably in terms of economic, political, social, and religious differences. As such, the Tobin tax will need to be applied to East Asian countries in a different manner, in line with such differences. In this paper, we classify each country into one of five different categories according to its national characteristics. The categories areas follows: (1) Frequent and destabilizing short-term currency speculation, (2) Capital exporting with trade surplus, (3) Capital importing with trade deficits, (4) High frequency of political unrests, and (5) High levels of foreign debt. In this paper, we argue that each country in East Asia is able to decide on the degree and timing of capital account restrictions. In addition, we examine the applicability of the Tobin tax in East Asia. If a two-way capital transactions tax faces political and ideological resistance, a one-way tax, i.e., a capital exit tax can be used as an alternative. As such, we provide guidelines for countries, particularly developing and emerging countries as to the adoption of the Tobin tax. In classifying countries according to national characteristics, we examine the costs and benefits of implementing the Tobin tax. In this paper, we argue that developing and emerging economies may find a capital exit tax, which is a variation of the Tobin tax, to be suitable.