Many people think that modern monetary theory does not apply to developing countries. That's because many such countries borrow in currencies other than their own, or have second currencies in use in their economies, or have weak and unenforced tax systems. As a consequence it is said that they cannot 'do MMT'.
This, however, is a misunderstanding of what MMT is about. MMT describes how economies work but does not prescribe the policy choices that they should make, whilst admittedly showing the way to full employment. So, MMT is wholly relevant to developing countries precisely because it can say what the focus of economic policy should be if these countries want to take control of their macroeconomies is for the benefit of the people who live within them. In this video I explain this in more detail.
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Very sensible advice here.
We have watched long enough failed IMF/world bank policies for developing nations. There has been the odd voice of late admitting that past international led economic policies have been damaging so maybe all is not lost for developing nations, but progress cannot happen quickly enough. Thnakfully the likes of yourself and the Tax Justice Network are helping this cause.
This is a really good example to use for explaining what MMT is in real terms, instead of getting bogged down in explaining western policy decisions – keeps it simple – and I really like the description that MMT informs the economic management system of a country – which in turn can inform policy decisions. I think I got that right – about economic management – a good distinction to use.
Thanks
A lot of serious errors with the content of this video.
1. I understand that one of the basic concepts of MMT is that there will be little or no inflation until full employment.
In a great number of emerging markets we see consistently high unemployment at the same time as sustained high inflation.
This alone should give cause to suspect MMT’s claims.
2. Most emerging markets have their own central banks, their own currencies and issue the majority of their debt in that currency.
Most will also issue some external debt, but this tends to be a small percentage of total debt, and in almost every case is hedged on issuance. This is done via cross currency swaps (like all other eurobonds issued), leaving the issuing country with no foreign currency risk, and repays the debt in it’s local currency. The IBRD, EBRD and IMF all structure their packages this way, so the borrower repays in their local currency.
A small proportion of external debt issues are tied to specific USD revenue streams (such as oil) or backed by pre-existing FX reserves (China for example), but these are by far the minority.
There simply aren’t many countries with large FX exposure due to their external debt, having learnt from previous cases – such as Argentina.
There are a couple of notable exceptions (as mentioned earlier, Argentina), which are semi-dollarized, but they are the exception rather than the rule. The extent of their use of the USD tends to go hand in hand with the inflation caused by excessive money printing of the local currency leading to high inflation and devaluation of that currency.
People lose trust in the local currency as a store of value and switch to the USD as it is more stable. Governments don’t encourage the use of a second, non-local currency. You have the causality the wrong way around,
This points to a second flaw in MMT – which claims you can print and spend money without ill effect as long as there is economic underutilization in the economy, normally described by high unemployment.
The cases where printing money has been attempted have in every occasion led to devaluation of the currency and higher inflation. They have also led to economic ruin.
The major claim of MMT, that you can print money without causing inflation as long as there is spare capacity in the economy is demonstrably false. You just have to look at the various countries that have tried it.
I am not sure why you would be trying to promote an idea that has been backtested repeatedly with the same dire outcome every time?
With respect, your first claim is not true and your second is just absurd when we know the exact opposite is true
And what I made clear was that MMT cannot apply in these cases for the reasons I noted – but you claim it does
If you wish to make up falsehoods then, of course, I am wrong
But I stuck to the facts
What may I ask is not true about my first claim? The specific nature of what is incorrect rather than just abuse and denial.
I have seen you write it here on this very blog that there will be no inflation until full employment, according to MMT. Is this true or not?
My other statement was that many emerging markets, and even developed markets historically, have had high inflation at the same time as high unemployment. Many of them have had both systematically, over a long period of time. Is this also untrue?
My point about external debt is that for most emerging markets it simply isn’t an issue. In general, they have relatively small amounts and most of it is already hedged back to local currency. Canada, Australia and the EU have far larger amounts of external debt as a percentage of GDP than all but a handful of emerging markets. Is that an issue for them?
At which point, given they have their own currencies and central banks, MMT should be applicable for emerging markets, if you claim it is for developed markets. I assume Canada and Australia could implement MMT with no issues?
The overriding issue is that if a theory only works in very specific circumstances, and then even in those circumstances it has historically been shown to fail, then it clearly isn’t a very good theory.
The thing that is nit true about your claim is that you blame MMT when as I have made quite clear, and every seasoned observer I note agrees that the conditions in which MMT forecasts might prevail do not exist in the countries in question.
There are parallel countries
There is foreign borrowing
There are weak, and often corrupt tax systems
There are small, states too weak to control markets or impose their will
And then you are surprised that MMT’s predictions don’t work when anyone who knows MMT would say they won’t
Sorry – but what I am saying is that if you make up a false allegation about MMT I will point out it’s false
And, in case you are nit aware of it Canada et al borrowing their own currencies. You are persisting in making false claims in other words
Try raising real reasoned objections or politely go away: I am only here to engage in evidence based discussion
MMT makes clear the conditions when it works. Unlike the nonsensical claims of neoclassical economics, here the assumptions can never be matched in reality that is a big advance in economics