Last year, five Republican senators made a political move unprecedented in a formally democratic country like the United States: they introduced a resolution calling on the US Senate to condemn an economic theory the implementation of which would “pose a clear danger to the economy of the United States”. They were talking about Modern Monetary Theory, or MMT. But what was so outrageous about the incriminated economic theory that it deserved the rejection and anger of right-wing politicians in the first place?
MMT postulates many things that appear rather obvious when we think about them seriously, but are often hidden from the broader public. It states, for example, that money can never run out, that governments with a sovereign currency are not limited in their spending by the taxes they collect, that unemployment is neither inevitable nor a necessary evil in order to achieve price stability (as monetarily sovereign governments are able to pursue a policy of full employment preserving price stability), and that the size of both the deficit and debt of a monetarily sovereign government such as the US matters less than the essential economic objectives they serve.
Ndongo Samba Sylla is a development economist at the Rosa-Luxemburg-Stiftung’s West Africa Office in Dakar, Senegal, and co-author of the forthcoming book, The Last Colonial Currency: A History of the Franc CFA (Pluto Press, 2020).
MMT is a macroeconomic approach that a number of heterodox economists have developed over three decades, describing how the monetary system and government fiscal operations work in countries that issue a sovereign currency. It is increasingly gaining media attention, not least because of the inspiration it provides to proponents of a Green New Deal in the US, Europe, and other rich countries. According to its main authors, MMT is not “ultimately” about money. Money is just a prerequisite for addressing the more important issue of mobilizing domestic resources for the full employment of the labour force and other public endeavours.
MMT’s emphasis on domestic resource mobilization is what makes its exploration worthwhile for developing countries, i.e. countries that often have abundant resources but fail to mobilize them effectively. Although most MMT literature focuses on rich countries, and although MMT is not a theory of development, it can be used as a heuristic lens through which to examine economic problems in peripheral countries. Before we can consider the relevance of MMT in economically dependent countries with limited monetary sovereignty, however, we must first discuss what monetary sovereignty really means and what some of the objections to MMT are in developing countries.
What Does It Mean to Be Monetarily Sovereign?
According to L. Randall Wray, one of the main figures behind MMT, a country is a sovereign currency issuer if it meets the following conditions:
- “the National government chooses a money of account in which the currency is denominated;
- the National government imposes obligations (taxes, fees, fines, tribute, tithes) denominated in the chosen money of account;
- the National government issues a currency denominated in the money of account, and accepts that currency in payment of the imposed obligations; and
- if the National government issues other obligations against itself, these are also denominated in the chosen money of account, and payable in the national government’s own currency.”
The latter condition means that the government does not incur debt denominated in foreign currency. According to Wray, “a fifth, important consideration” is to have a floating exchange rate, as it provides more fiscal leeway for the government.
MMT makes a key distinction between currency users and currency issuers. Households, for instance, are currency users. As such, they face budgetary constraints: they have to balance their income and spending. A sovereign currency issuer, by contrast, has no intrinsic financial constraints, meaning that it can never “run out of money”—it can never become insolvent in its own currency, and can thus in principle finance anything that can be purchased in that currency. Moreover, in principle it has the ability to set the interest rate on the obligations it issues. That said, monetarily sovereign governments may choose to restrict their fiscal room for manoeuvre—for example, by capping the permitted level of government deficit and debt.
MMT contradicts the “sound finance” perspective, which wrongly equates sovereign currency issuers with households. This theoretical mistake obscures the real meaning of the public deficit and often leads to disastrous economic policies. Indeed, the sectoral balance approach shows that the government’s financial deficit—government spending in excess of its revenues—corresponds exactly to the financial surplus of the non-government sector. In other words, the government deficit represents a surplus for the non-governmental sector. If for whatever reason the government is forced to run a financial surplus—government spending less than its revenues—the non-governmental sector will necessarily have to run a financial deficit. In the absence of strong external demand (i.e., a current account surplus), this will generally translate into lower growth and net job creation.
From an MMT perspective, there is therefore little point to sovereign currency issuers trying to cap the public deficit and debt. Instead, they must, within the limits of the real resources at their disposal, deficit-spend in order to tackle the most pressing “deficits” as expressed in real terms: unemployment and underemployment, lack of access to healthcare and education, lack of housing and infrastructure, etc. Contrary to hasty interpretations, MMT does not argue that governments can run deficits as they see fit. It acknowledges that sovereign currency issuers have a real constraint: inflation. Their ability to run deficits is limited by the real resources at their disposal. If additional net government spending cannot stimulate the domestic economy due to supply-side rigidities, inflation will be the result. However, unlike the neoliberal approach that achieves price stability (of goods and services) by maintaining high unemployment, MMT instead proposes a “job guarantee” as an instrument faciliating both price stability and full employment.
Owing to its iconoclastic nature and its renewed media attention, MMT is increasingly debated and criticized by both mainstream and heterodox economists. Surprisingly, the case of developing countries is sometimes used to argue against MMT. Two frequent but contradictory criticisms, expressed mostly on social media and in non-academic works, are levelled at MMT: that MMT cannot be “applied” in developing countries, and that its “implementation” in developing countries would lead to hyperinflation.
Is MMT Relevant Outside of Wealthy Countries?
The view that MMT cannot be “applied” in developing countries is so unspecific that it is necessarily false. What exactly could not be “applied”? MMT theoretical insights or MMT-inspired policy prescriptions? Accepting this view implies endorsing the questionable assumption that each of the theoretical pillars of MMT—chartalism, endogenous money, sectoral balance approach, functional finance, and the job guarantee—has no relevance in terms of empirical analysis beyond the context of wealthy countries. As a descriptive tool, the sectoral balance approach is valid in both rich and peripheral countries. As a guide for economic policy, functional finance is no doubt much more useful for developing countries than sound finance principles.
It is somewhat ironic that one of the best-performing analytical frameworks for understanding the monetary and fiscal dimensions of colonialism is considered to be irrelevant for most of the former colonies we now call “developing countries”. In fact, MMT is much better placed than rival approaches to account for the transition from indigenous to colonial currencies.
The history of monetary colonialism in Africa offers many illustrations of the chartalist principle that “taxes drive money”. In most cases, economic exploitation of the colonies presupposed monetary unification and centralization in the hands of their respective metropolis. The prohibition of indigenous currencies went hand-in-hand with the obligation of the colonized population to pay taxes in the currency defined by the metropolis.
For the colonial powers, taxes—especially direct taxes—were not intended to “finance” the colonial enterprise, but rather to create demand for the metropolitan currency and thereby reorient the structures of production, consumption, and exchange according to metropolitan needs. In order to be able to pay taxes and thus have access to metropolitan currency, African populations had to work, willingly or unwillingly, in the sectors on which the colonial administration was ready to spend. This was the case in Nigeria and in most African colonies, as Toyin Falola and Matthew M. Heaton observe: “The imposition of direct taxes made it virtually impossible for Nigerians to avoid participating in the colonial economy to some degree. In order to pay taxes and keep individuals and their families on the good side of the law, many Nigerians found themselves engaged in the wage labor force at least part-time.”
Colonial powers such as Great Britain and France therefore faced no intrinsic financial constraints in their colonies. They could afford all of the goods and services that could be purchased in their own currency. But they did face a real constraint in terms of resources: initially, most workers simply did not want to get involved in the colonial economy.
MMT = Hyperinflation?
The criticism that MMT’s “implementation” in developing countries would lead to hyperinflation is also unfounded. It is based on a simplistic conception that wrongly equates MMT with an approach unconditionally promoting large public deficits financed by “printing money”. Above all, it is based on an ignorance of the nature of hyperinflation, the causes of which are often wrongly confused with those of inflation.
Hyperinflation as a phenomenon has been extremely rare in modern history: based on a monthly definition (monthly inflation rate above 50 percent for thirty consecutive days), 57 episodes have been recorded since 1900. Venezuela is the latest case to date. The first two “waves” of hyperinflation occurred in the wake of each of the two World Wars. The majority of other hyperinflation episodes were observed between 1973 and 1990 following the collapse of the Bretton-Woods system, and in the early 1990s with the fall of the Soviet bloc and state socialism in Eastern Europe. In Africa, despite the many experiences of monetary mismanagement, only three countries out of 55 have experienced hyperinflation: the Democratic Republic of Congo (formerly Zaire), Angola, and Zimbabwe.
Three factors have generally been necessary to trigger a hyperinflationary spiral: internal political instability (e.g. civil conflicts), a fraying of the economic fabric (decline in production, disruption of supply chains, etc.), and a hostile external environment (wars, economic reparations, trade and financial embargoes, etc.). Of the three factors, the hostile external environment has generally been the most decisive.
In most episodes of hyperinflation, recourse to the “money printing press” was not the initial cause but rather a consequence of economic decline and lack of external assistance. In fact, hyperinflation is never primarily a monetary phenomenon. Rather, it is often a geopolitical phenomenon that emerges in countries facing considerable political and economic difficulties when the international community fails to provide adequate support. Hyperinflation is therefore more indicative of a major flaw in the multilateral system than a simple tale of monetary mismanagement or fiscal irresponsibility.
In any case, the hypothesis that hyperinflation is ipso facto the result of government fiscal activism is not backed up by the facts, as He Liping underlines in Hyperinflation. A World History: “as long as a government has the ability to borrow either domestically or internationally at reasonable cost, a budget deficit—no matter how large it is—should not necessarily lead to hyperinflation or even result in significant inflation. It is a government’s inability to borrow that leads to adoption of inflationary policy and eventually causes hyperinflation amidst policy and institutional failures during anti-inflation programs.”
The Spectrum of Monetary Sovereignty
To argue that MMT could be policy-relevant for developing countries does not imply that policy recommendations for developed countries would apply to them fully and evenly. Owing to the specific constraints faced by developing countries, the claim has to be more modest. As Randall Wray writes: “MMT can offer useful advice even if it cannot offer a magic wand to wish away all the problems faced by developing nations.”
With the exception of countries in currency unions (such as countries using the CFA franc) or that are dollarized, developing countries are formally sovereign in monetary terms—in the sense that they have a national central bank that issues the currency in which they collect domestic taxes. However, they are almost never monetarily sovereign in an MMT sense. This has less to do with the nature of their exchange rate regime than with the fact that they are often obliged to be indebted in foreign currency. Africa is an excellent example of this predicament. According to the World Bank, in 2018 Algeria and Nigeria, both hydrocarbon-rich countries, were the two African countries closest to meeting the zero foreign currency sovereign debt requirement, with a government external debt/GDP ratio of about 0.7 percent and 6.6 percent, respectively.
Developing countries’ structural indebtedness in foreign currency is a symptom of their multifaceted dependencies. While developed countries can finance their external deficits in their own currencies (either directly or by converting them into appropriate currencies through foreign exchange markets), this option is generally not available to developing countries whose currencies are not in demand on foreign exchange markets. In addition to this monetary asymmetry, developing countries are dependent on developed countries as outlets for their exports and as sources for imports of intermediate and capital goods. In these circumstances, foreign currency indebtedness—as well as the promotion of foreign direct investment—seems unavoidable for developing countries, as it enables them to obtain foreign exchange reserves to pay for essential imports and previously contracted debt. Even a “success story” like South Korea could not do without foreign debt.
Owing to their monetary, financial, technological, economic, and military subordination, the governments of developing countries clearly do not enjoy the same fiscal leeway as those of developed countries. This point is acknowledged by some MMT researchers who describe a “spectrum of monetary sovereignty”, a continuum along which countries are ranked according to their government’s degree of financial independence. Although the “external constraint” faced by developing countries actually acts as a severe “inflation constraint”, its existence does not suffice to oppose MMT. After all, from an MMT perspective, the question is how, given this external constraint, to maximize fiscal leeway for governments in developing countries? It is unclear to what extent MMT critics have provided an alternative and more satisfactory theoretical account on this specific issue.
Mobilizing Existing Resources for Change
Despite their limited monetary sovereignty, developing countries do not lack real resources—land, workers, raw materials, etc. The problem is rather that these real resources are not used (especially the labour force) or not used in a way that benefits the vast majority of the population. In this context, MMT’s main recommendation for developing countries is to do their best to mobilize local resources by giving priority to financing in local currency over external financing (see here, here and here) as much as possible. Indeed, external financial flows—particularly aid, foreign direct investment, and debt—only appear to “finance” developing countries. Often, they are mechanisms for draining the economic surplus from developing countries.
Jan Kregel, a renowned economist and MMT fellow-traveler, recommends a development strategy for developing countries based on mobilizing their labour force. The objective would be to achieve full employment through a job guarantee or “employment of last resort” programme that would be financed with local resources in order to avoid external debt. It could be designed in such a way as to stimulate local production of imported goods (such as food products) so as not to increase the import bill and thus, indirectly, the need for external finance. According to Kregel, this strategy can only be successful if governments in developing countries run budget deficits.
The difficulty is that international financial institutions are sound finance enthusiasts who are not really interested in development. They ensure that developing countries are able to pay their external debts and open more of their economies to international trade and finance. This helps to explain why developing countries finance the rich countries through net resources transfers, rather than the other way round.
While MMT authors like William Mitchell acknowledge that developing countries’ “specific problems cannot be easily overcome just by increasing fiscal deficits”, their framework makes it clear that the latter must “choose” the sector in which they want to run a deficit, keeping in mind that the three sectors (government, private, external) cannot be in surplus at the same time. A sustained private sector deficit is undesirable because it means impoverishment of domestic households and enterprises. An external surplus is not necessarily desirable, either, because it means a net resources transfer to rich countries. A budget deficit is often desirable and necessary because developing countries cannot all be in a situation of external surplus (or deficit) at the same time.
These sectoral balance considerations are relevant in light of the discussions on a Global Green New Deal. In the absence of net resource transfers from rich countries—especially technology transfers—the Green New Deal in the Global North might translate into a “Grey New Deal” in the Global South: a further outsourcing of ecological damage and economic costs from the Global North to the Global South.
In a nutshell, the adoption of an MMT perspective helps to highlight the inadequacy of the macroeconomic management framework in developing countries, which is oriented towards the preservation of financial balances rather than the mobilization of domestic resources, but also that of the global economic system, which works in the direction of polarization. This is not a new finding, but it is not without interest to reiterate it from a new point of view.