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 from the experts, especially Denison University economics professor, Fadhel Kaboub (Twitter) and Senegalese development economist Ndongo Samba Sylla (Twitter).
With thanks to Warren Mosler and Derek Ross for feedback and assistance.
|Related post: The MMT view of the reserve currency, or petrodollar.|
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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 the MMT project. 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.
important note: This post is largely correct (referring only to my summary) but is missing an important piece as discussed in this Facebook post. It will be updated to reflect that piece soon as I have time to do so.
Any nation that is financially sovereign can fully employ its people.
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. Poor nations have fewer resources than rich ones, but all can choose to distribute what they have equally or unequally among its citizens.
However, a prerequisite to providing full employment (and healthcare, etc.) is attaining and maintaining control over your own currency and destiny. This means having sovereignty, or freedom from interference by other governments (who wish to make decisions for you) and foreign speculators (individuals and corporations wishing to profit at the expense of your country and its currency).
To prevent this interference, there are two minimum requirements:
- A freely-floating (or flexible) exchange rate. This in turn requires that your nation taxes in its own currency. (Here is the Wikipedia entry on floating exchange rates.)
- Enough real goods and services within your own borders as are required to provision the government and population in real terms, such as with food, energy, military, infrastructure, and etc. If this requirement cannot be met, then it must be met via imports – which means you must pay that other country in their own currency. This in turn means that you are dependent on that currency – which you don’t issue or control. In other words, even if you domestically control (and tax in) your own currency, it is essentially fixed to that of the country you import from. This is called a fixed exchange rate. (There are exceptions, such as when you have so much to offer for export, on a consistent basis, that you retain some level of control. An example is China, which holds a large amount of US dollar reserves.)
Here is MMT founder Warren Mosler from a 2007 talk:
If a government chooses a fixed exchange rate policy, and simultaneously attempts to achieve full employment, it could very well lose its foreign exchange reserves. […] With a floating rate currency, interest rates are set exogenously and fx reserves are not at risk. Therefore full employment policy can achieve full employment with no risk of loss of fx reserves. […] With full employment as a national goal, I think a floating rate currency is the only hope of sustaining success.
To express the above concepts, several MMT economists use the term financial sovereignty or (in this 2020 paper by Scott Fullwiler) monetary sovereignty. Warren Mosler, however, strongly prefers to express these concepts without using the terms at all. Financial independence is a more generic way to refer to it. (Here are the Webster definitions for sovereignty, independence, and autonomy.)
Only by achieving and maintaining this minimum level of control (ideally full financial sovereignty) can a nation maximize its economic freedom and capabilities, or fiscal space (Mitchell 2013).
For those with less resources and control, it is also necessary to understand how to increase one’s sovereignty, and also how more powerful nations try and stop it from happening. A decrease in (or low or no) 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).
For some poorer countries this is clearly a difficult path, but it is the reality.
The definition of financial sovereignty
From the 2015 paper by Fadhel Kaboub, A Note on Financial Sovereignty:
A financially sovereign country is defined as a country that:
- [issue] 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.
A note about 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.)
Comparing high-sovereignty countries to those with low or none.
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.
- A 2020 lecture plus Q&A with John Harvey on capital flow and controls, centering around his book Currencies, Capital Flows and Crises: a Post-Keynesian analysis of exchange rate determination. This subject is closely related to how foreign actors can use speculation to sabotage other economies.
- 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: