This post starts with a summary of what Modern Money Theory (MMT) has to say about developing nations, centering around the concept of financial sovereignty. It also provides many sources to learn more from the experts. A primary expert on this topic is Denison University economics professor, Fadhel Kaboub. He is also active on Twitter.
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Disclaimer: I am a layperson who has studied MMT since February of 2018. I’m not an economist or academic and I don’t speak for MMT. The information in this post is my best understanding but I don’t assert it to be perfectly accurate. In order to ensure accuracy, you should rely on the expert sources linked throughout. If you have feedback to improve this post, please get in touch.
The MMT view of developing nations and financial sovereignty. A summary.
All countries can fully employ their people – and if they wish to be civilized, they must (Davidson 2016). The same is true with healthcare, housing, education, and clean water. Even the poorest nations can provide all its people with what is necessary to prevent suffering, although perhaps with less of the bells, whistles, and luxuries than in the wealthiest nations.
The more financial sovereignty a country has, however, the more options – the more fiscal space – it has (Mitchell 2013). MMT clearly defines what maximum sovereignty is and describes the great advantages it provides. It also describes the steps necessary for increasing sovereignty, and importantly, how more powerful nations try and stop it from happening. Knowing these things is therefore critical for a country to maximize its economic freedom and capabilities.
Conversely, a decrease in (or low or no) financial sovereignty makes countries especially vulnerable in downturns, at which point they can fall prey to more powerful and sovereign nations: “…the loss of financial sovereignty, even if not harmful at first, quickly becomes insurmountable and destructive with the dawn of the first major economic downturn” (Kaboub 2015).
The definition of sovereignty: From the 2015 paper by Fadhel Kaboub, A Note on Financial Sovereignty:
A financially sovereign country is defined as a country that:
- prints its own fiat currency;
- collects taxes, fines, and duties in its own currency;
- only issues bonds denominated in its own currency (not in foreign currencies); and
- operates under a flexible exchange rate regime.
(Note that Scott Fullwiler calls a country with high financial sovereignty, “monetarily sovereign” or “a monetary sovereign” [2020, pg 2].)
Trade: In general, MMT considers exports a cost (because real resources leave you) and imports a benefit. However, it is also true that an important characteristic of full sovereignty is for a nation to manufacture high-technology (such as computers, smartphones, and military and medical technology) and produce critical needs (food, energy, medical, security, infrastructure, technology, etc.) within its own borders. It doesn’t matter if those products are exported, as much as it does for a country to not be dependent on imports for high-technology and critical needs. A related example brought up by Fadhel is a country depending too heavily on tourism which is highly profitable during boom times but grinds to a halt during, for example, an extended global pandemic.
(There is a short but helpful discussion on this topic near the end of Clint Ballinger’s 2018 book 1000 Castaways: Fundamentals of Economics.)
Finally, here is a brief comparison between countries with high sovereignty to those with low or none (Kaboub 2015):
…countries like the United States, Japan, Canada, and Australia, among others, enjoy full financial sovereignty, which gives them a wider fiscal policy space to finance domestic job creation, public infrastructure, education, public health, and social services. However, countries that have completely given up their financial sovereignty are subject to very severe fiscal policy constraints that can only be relieved by either generating substantial trade surpluses and foreign currency reserves (Germany is a good example), or through adequate access to international capital markets, IMF loans, or other bilateral loans, all of which come with fiscal austerity requirements that often forbid expansionary fiscal expenditures (e.g., Greece, Spain, and Portugal, who now use a foreign currency (the euro), or Ecuador, which uses the US dollar as its national currency). Most developing countries have limited financial sovereignty because of their substantial foreign debt, which limits but does not entirely prevent them from introducing a scaled down version of job creation programs that enhance quality of life and economic prosperity for their citizens.
- Fadhel Kaboub’s 2015 paper defining financial sovereignty and its policy implications: A Note on Financial Sovereignty (9 pages)
- A February 2020 article by Ndongo Samba Sylla: Modern Monetary Theory in the Periphery: What does MMT have to offer developing nations?
- “Africa’s Pandemic Response Calls for Reclaiming Economic and Monetary Sovereignty: An Open Letter.” Located at the bottom of this page with several hundred signatories.
- A framing of MMT in the Global South, in this 2020 video: Fadhel Kaboub explains how to use Modern Monetary Theory (MMT) in the context of the Global South
- A non-academic overview of monetary sovereignty by Rodger Malcom Mitchell in a 2010 post.
- Here is an in-depth discussion by Bill Mitchell in 2019, on how MMT applies to developing nations, centering around the concept of trade: There is no internal MMT rift on trade or development
- Fadhel’s 2019 article, Why Government Spending Can’t Turn the U.S. Into Venezuela
- More related sources from Sherry Reson’s We CAN Have Nice Things
- Podcast interviews:
- Ndongo Samba Sylla and Fadhel Kaboub on Historic-ly, 9/2020: Africa Needs Monetary Sovereignty
- Ndongo and Fadhel on Macro N’ Cheese, 11/2019: The Spectrum of Monetary Sovereignty in Developing Nations
- Fadhel’s Jan 2020 interview with Historic-ly on how the IMF is a tool of powerful nations (those with full financial sovereignty) to deliberately kick the global ladder, keeping less powerful nations powerless, by preventing an increase in sovereignty.
- Fadhel on MMT Podcast: episode 35a, 10/2019: The Quest For Monetary Sovereignty In Africa
- Fadhel on MMT Podcast: episode 12, 1/2019: Monetary Sovereignty, Colonialism and Independence
- Fadhel’s April 2019 appearance on Bloomberg News’ Odd Lots: This Is How MMT Applies To Emerging Markets
2019 conference panel: Money, Imperialism, and Development
The full panel with Fadhel and Ndongo on the second day of the 2019 International MMT Conference in Long Island New York. According to original MMT developer L. Randall Wray, “This one-two punch is the best panel on MMT I have ever seen.”
(And, I have to say: the orange-black charger Fadhel is holding at the beginning, plus the blue-green “CM” logo on the top-right of the screen as the slides are being loaded, are both mine. So I’m forever part of the best panel on MMT Randy Wray has ever seen 😁.)
The quest for economic and monetary sovereignty in 21st century Africa
Here are talks by Fadhel at that conference:
“MMT, Monetary Sovereignty & Sustainable Prosperity in Africa”:
Morning keynote by professor Fadhel Kaboub: “Reclaiming Monetary Sovereignty and Sustainable Prosperity in Africa”:
Monetary sovereignty according to other MMT economists and academics
Sometimes, people ask me whether MMT applies to countries outside the United States. It does! Even though the US dollar is considered special because of its status as the global reserve currency, lots of other countries have the power to make their monetary systems work for their people. So, if you’re reading this book outside the USA, don’t assume there are no important lessons here for you and your country. On the contrary, MMT can be used to describe and improve the policy choices available to any country with a high degree of monetary sovereignty—the US, Japan, the UK, Australia, Canada, and many more. And, as we’ll see in Chapter 5, MMT also offers insights for countries with little or no monetary sovereignty—nations like Panama, Tunisia, Greece, Venezuela, and many more.
And from note four in chapter one:
We should note that MMT does not consider monetary sovereignty a binary thing. It is best to think of a spectrum of monetary sovereignty, with some countries having more and others less. Because the US dollar is at the center of the global financial system—that is, it is the reserve currency—the United States has unparalleled monetary sovereignty. But countries like Japan, the UK, and Australia have a high degree of monetary sovereignty as well. Even China, which manages the value of the yuan, has substantial monetary sovereignty.
[MMT] is a descriptive framework that discusses the implications of both having, and not having, high degrees of monetary sovereignty. A lot of the analytical work involves exploring the capacity offered by having a high degree of sovereignty, but that analysis is not only applicable to countries that enjoy sovereignty today, it is applicable to any country seeking to understand what changes will achieve greater flexibility. In the same way as a theory of human development may stress the greater capacities adults have vis-a-vis children, without making that theory inapplicable to children as well.
Finally, a 2018 talk by Nathan Tankus on monetary sovereignty: