[Partly a response to Bonizzi, Kaltenbrunner & Michell 2019 “Monetary sovereignty is a spectrum: modern monetary theory and developing countries” but also in general to the “developing countries” critique.]
There is a significant amount of criticism of MMT as “not being applicable to developing nations,” sometimes even almost seeming to suggest this undermines MMT entirely somehow (or at least some imply it ONLY works for the USA with its $). A quick google search, for example, leads with these results:
First of all, reality-based macro (MMT) applies anywhere, anytime. One can analyze ancient Rome, the Soviet Union, Namibia, a Euro-using country—whatever—with MMT. The results of policies in a free-floating fiat currency-issuing country with no foreign-denominated debt and many real resources and manufacturing capacity will of course be different than in the above examples. But the analytical method is the exact same, just predicting different outcomes in each case.
First the obvious:
Some countries come from a background—or developed—high valued-added manufacturing (The US, Germany, Korea, Japan).
Some countries have vast amounts of natural resources relative to their populations (Argentina, Australia, Canada; the US has a large population but also an exceptionally varied and productive natural resource base).
Even small, relatively densely populated countries in Europe have high levels of agricultural resources (and high or at least medium-high value-added manufacturing capacity). See the maps at the end of this post regarding global agricultural capacities.
Other countries have essentially none of these. They do no come from a background of high value-added manufacturing. And/or they do not have high levels of natural resources and/or agricultural capacity or diversity.
Note that countries that have high value-added production can export relatively small amounts of those goods in return for large amounts of primary goods. In other words, it is not hard for Germany or Canada to export high value goods and easily import primary natural resources they do not produce (bananas, coffee).
The opposite is not true – it is not easy for a country to export enough primary goods to import high value-added goods it does not produce. It takes a lot of bananas to import a Toyota, a high tech printing press, or a thousand laptops. There are exceptions – Australia is vast with a relatively tiny population, but many geographically smaller, resource sparse, higher population-density countries (such as many in Africa) cannot do what Australia does (and Australia also comes from a history of high value-added manufacture as well).
Currency
Regardless of what the most commonly used international trade currency is (whether the US dollar, the Euro, or if there were something like the bancor not tied to any one country), all but the most dominant countries must usually use something other than their own currency when dealing internationally.
Capital flows and speculation are what make FX values swing. Trade balances do not influence or automatically adjust in the way mainstream economics suggests they do (that is – if your currency declines in FX value a theoretical increase in exports does not generally increase enough to re-balance the situation, nor vice versa).
Borrowing
At the international level for developing countries, in the long-term, because a foreign currency must be acquired, exports must roughly equal imports in value. A poor country with an “unwanted” currency cannot sustainably import high value-added goods (cars, computers, machinery) and not export something in return, earning an international currency. (“Lending in hard currency should be available only to domestic borrowers with earnings in that currency, that is, exporters. Importers would have to find a way to obtain currencies, unless specific imports are deemed necessary for developing policy objectives.” (Bortz & Kaltenbrunner, 2018, p. 13) (and even these should be “for capacity-expansion objectives, ideally oriented to boost exports.”)
So a poor country can borrow in an international currency. This could be sustainable if the borrowed money is used to increase production in the poor country in some way, allowing for the foreign currency denominated loan to be repaid. But if such an investment fails, or if the borrowing is only done for consumption, then sooner or later the poor country will be forced to default on the foreign currency denominated loan.
MMT
Somehow all of the above is construed by some as somehow meaning MMT is in error in some way. (see my 2018 response to Frances Coppola’s “The Myth of Monetary Sovereignty” for more on these issues).
As noted above – MMT is just reality-based macro.
Domestic policy space
In wealthy countries, one key aspect of MMT is the idea of the job guarantee. This 1) anchors the currency, increasing price stability as well as 2) reduces the vast array of social ills from unemployment and 3) helps maintain or increase the skills of the workforce and 4) supplies public goods that otherwise would not occur (clean parks, help for the elderly or disabled, etc).
The real resource levels and relatively low number of unemployed in wealthy countries makes the JG imminently achievable and sensible in resource-rich countries and those with high value-added industries.
In less wealthy societies, with their currency monopoly in their own border, the currency can still be used to organize the unemployed in useful ways.
I do think it is a stretch to believe in very resource poor countries with very large under- and unemployed populations that a job guarantee can transform the society, although any level of increased organization using one’s domestic currency monopoly (reasons 1-4 above) is better than none.
Conclusion
Criticizing MMT for not being able to make resource-poor countries and/or countries with little high value-added manufacturing richer is like criticizing a leading expert on cancer for not being able to cure some patient with some severe type of cancer. It doesn’t mean the expert is somehow no longer a leading expert. It just means all the knowledge in the world cannot fix some cases.
Reality-based macro can be used to analyze any country. But knowledgeable analysis can’t magically increase real-resource levels or cause high value-added manufacturing capacity to magically appear.
It is a bleak truth that it is unlikely that many of the poorest countries in the world are going to improve in the short or medium term.
There may be hope that they can “leap-frog” past the long industrial development stage that past countries went through. Sort of in the way parts of Africa went from having almost no telephone service to having advanced, widely used cell phone systems (skipping the long phase of telephone pole and lines that slowly developed in the US and Europe over the 20th century before cell-phones).
Maybe some of the poorest countries can leap-frog in a similar way to knowledge based economies, energy independence from wind and solar, and so on.
On the other hand, with little high value-added exports and few natural resources/low agricultural potential, and some with growing populations pressuring their limited agricultural resources ever further, the future may prove bleak.
This is not what anyone wants to hear. But to even begin to work on solutions, the true extent and nature of the problems must be clearly and honestly laid out. (Maggie Black’s honest assessment, for example).
At any rate, the idea that any of the above somehow means MMT is in error somehow is ridiculous. Reality-based macro analysis helps us understand what is happening in rich and in poor countries. The process of the poorest countries improving their condition is likely to be long, complex, and likely come from slow, incremental internal developments, much in the way Europe went from one of the poorest areas of the world to the richest through incremental internal change over many centuries.
It won’t be easy, or fast. But honest analysis is necessary to even begin to make useful changes.
Notes
I find many of even the “left” or “progressive” criticisms of MMT are wildly off the mark (the “right” ones are pure fantasy). However, on re-reading this paper (Bonizzi et. al. below) carefully I feel it makes some important and fair points and is worth considering carefully.
Bonizzi, Bruno, Annina Kaltenbrunner and Jo Michell. 2019. “Monetary sovereignty is a spectrum: modern monetary theory and developing countries.” Real-World Economics Review, issue no. 89
I think some of the related FX and capital controls issues are “answered” partially here, with the concept of the “demi-quadrilemma”: Siddiqui, Kalim and Phil Armstrong. 2017. “Capital Control Reconsidered: Financialization and Economic Policy.” International Review of Applied Economics.
See also Bill Mitchell (bc Bonizzi et. al. bring up Thirlwall’s (1979) model) Balance of payments constraints. (Bill Mitchell 2016) as well as Ultimately, real resource availability constrains prosperity. (2016)
Fadhel Kaboub speaks very clearly on these issues, FDI, etc here and here. Well worth a listen.
Also regarding exchange rates and trade: The clearest, best work is that by John Harvey:
- Exchange Rates and Trade Flows: A Post Keynesian Analysis
- Exchange Rates and the Balance of Payments: Reconciling an Inconsistency in Post Keynesian Theory Working Paper · September 2017
- See also the very useful: Andrade, Rogerio P. and Daniela Magalhães Prates “Exchange Rate Dynamics in a Peripheral Monetary Economy: A Keynesian Perspective.”
Regarding trade I always point out the work of Erik Reinert. I discuss it in detail, and the process all “wealthy” nations went through to become wealthy, here: Mercantilism and the Rise of the West. (Note towards the end I never finished the section around the concept of “ecumenes”, it needs completing so is a little choppy there. Also, it was mostly written around 2007, not 2011).
The “exports are real costs and imports real benefits” idea leaves out key factors; a full heterodox trade theory must incorporate increasing returns/decreasing returns, as well as the related factor of agglomeration/spillovers (positive externalities). We have to think not just of the goods, but also think of “productive capacity” & “varied economy” as “real resources” when we make society-wide import/export calculations
Some other related works:
Guzman Martin, Jose Antonio Ocampo and Joseph Stiglitz. 2018. “Real exchange rate policies for economic development” World Development Volume 110, Pages 51-62.
Oberholzer, Basil. 2020. Economic Sovereignty for Developing Countries: What Role for Modern Money Theory? (Developing Economics blog).
The following maps show how unevenly distributed food security/agricultural productivity is distributed in the world. I believe this important fact is not sufficiently widely appreciated.
The term “capital controls” is often heard, but there is no one “thing” that they are
Clint Ballinger 
In the map in the banner, the colour coding puts Australia in the 0-20% range of “commodity export value as a share of merchandise export value”. That has to be wrong.
According to the Department of Foreign Affairs and Trade, Australia’s FY2019 export earnings were $470 billion, of which “merchandise” represented $373 billion. $349 billion (74% of total export earnings, 93% by value of merchandise exports) was “commodity exports”.
Breaking that down … $201 billion (42%) was from “exports of unprocessed primary products”. Iron ore was 16% of export value, coal 14% and LNG 10%. (I think LNG doesn’t count as unprocessed, but it is definitely a commodity).
https://www.dfat.gov.au/sites/default/files/cot-2018-19.pdf
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Warren Mosler tried to comment on this post (his comments are the CAPS below) but I think bc it was on the whole article it was too long for WordPress to allow, so I am posting it for him here.
So – Warren Mosler’s comments in CAPS on the above post (PS – thanks for the input and time Warren):
The results of policies in a free-floating fiat currency-issuing country with no foreign-denominated debt
NOT NECESSARILY A PROBLEM
and many real resources
NOT NECESSARILY A PROBLEM
and manufacturing capacity will of course be different than in the above examples. But the analytical method is the exact same, just predicting different outcomes in each case.
First the obvious: Some countries come from a background—or developed—high valued-added manufacturing (The US, Germany, Korea, Japan).
Some countries have vast amounts of natural resources relative to their populations (Argentina, Australia, Canada; the US has a large population but also an exceptionally varied and productive natural resource base).
ALL ARE WAY AHEAD OF ANCIENT ATHENS, FOR EXAMPLE, AND THEY DID OK…
Even small, relatively densely populated countries in Europe have high levels of agricultural resources (and high or at least medium-high value-added manufacturing capacity). See the maps at the end of this post regarding global agricultural capacities.
Other countries have essentially none of these. They do no come from a background of high value-added manufacturing. And/or they do not have high levels of natural resources and/or agricultural capacity or diversity. YET WAY AHEAD OF, FOR EXAMPLE, ANCIENT ATHENS
Note that countries that have high value-added production can export relatively small amounts of those goods in return for large amounts of primary goods. In other words, it is not hard for Germany or Canada to export high value goods and easily import primary natural resources they do not produce (bananas, coffee).
The opposite is not true – it is not easy for a country to export enough primary goods to import high value-added goods it does not produce. It takes a lot of bananas to import a Toyota, a high tech printing press, or a thousand laptops. There are exceptions – Australia is vast with a relatively tiny population, but many smaller, sparser countries (such as many in Africa) cannot do what Australia does (and Australia also comes from a history of high value-added manufacture as well). YET THE HEADLINE ‘PROBLEM’ AS SEEN EVEN FOR THE LOWLIEST OF NATIONS SEEMS TO BE ‘TOO MANY IMPORTS’ AND WHAT TO DO ABOUT IT. IMPORTING APPARENTLY IS A LOT EASIER THAN MOST MAKE IT OUT TO BE.
Currency
Regardless of what the most commonly used international trade currency is (whether the US dollar, the Euro, or if there were something like the bancor not tied to any one country), all but the most dominant countries must usually use something other than their own currency when dealing internationally. I DON’T SEE IT THAT WAY. GENERALLY IMPORTING IS DONE WHEN FOREIGN EXPORTERS ATTEMPT TO SELL IN YOUR DOMESTIC MARKET, WHERE THEY PRICE IN LOCAL CURRENCY AND THEN PERHAPS DO FX TRANSACTIONS, OR NOT. THE GOV ITSELF IMPORTING DIRECTLY FROM FOREIGN SELLERS DOES HAPPEN, WITH A VARIETY OF FINANCING ARRANGEMENTS.
Capital flows and speculation are what make fx values swing. CAPITAL FLOWS ARE JUST BUYING AND SELLING OF CURRENCIES, AND NOT NECESSARILY IN ANY CASE. I’VE SEEN CURRENCY MARKETS SHIFT ON NEWS WITHOUT ANY TRADING AT ALL.
Trade balances do not influence or automatically adjust in the way mainstream economics suggests they do (that is – if your currency declines in FX value a theoretical increase in exports does not generally increase enough to re-balance the situation, nor vice versa). MAINSTREAM ANALYSIS HAS J CURVES, MARSHALL LERNER CONDITIONS, ETC. AND ALL THAT.
Borrowing
At the international level for developing countries, in the long-term, because a foreign currency must be acquired, AS ABOVE, NOT NECESSARILY exports must roughly equal imports in value. YET, AS ABOVE, IMPORTS GENERALLY EXCEED EXPORTS A poor country with an “unwanted” currency PRETTY MUCH NO SUCH THING, UNLESS THERE ARE CAPITAL CONTROLS CAUSING THE UNATTRACTIVENESS cannot sustainably import high value-added goods (cars, computers, machinery) and not export something in return, earning an international currency. DO YOU HAVE AN EXAMPLE OF THIS? SEEMS EMERGING MARKET NATIONS HAVE LOTS OF IMPORTED AUTOMOBILES BURNING LOTS OF IMPORTED FUEL? (“Lending in hard currency should be available only to domestic borrowers with earnings in that currency, that is, exporters. Importers would have to find a way to obtain currencies, unless specific imports are deemed necessary for developing policy objectives.” (Bortz & Kaltenbrunner, 2018, p. 13) (and even these should be “for capacity-expansion objectives, ideally oriented to boost exports.”) OVER SIMPLIFICATION
So a poor country can borrow in an international currency. This could be sustainable if the borrowed money is used to increase production in the poor country in some way, OR IF THE TERMS ARE FAVORABLE. UNSECURED AND NON RECOURSE ARE PARTICULARLY APPEALING TO ME… allowing for the foreign currency denominated loan to be repaid. But if such an investment fails, or if the borrowing is only done for consumption, then sooner or later the poor country will be forced to default on the foreign currency denominated loan. SO? DEPENDING ON RECOURSE THIS MAY NOT MATTER FOR THE MACRO ECONOMY.
MMT
Somehow all of the above is construed by some as somehow meaning MMT is in error in some way. (see my 2018 response to Frances Coppola’s “The Myth of Monetary Sovereignty” for more on these issues).
As noted above – MMT is just reality-based macro.
Domestic policy space
In wealthy countries, one key aspect of MMT is the idea of the job guarantee. This 1) anchors the currency, increasing price stability as well as 2) reduces the vast array of social ills from unemployment and 3) helps maintain or increase the skills of the workforce and 4) supplies public goods that otherwise would not occur (clean parks, help for the elderly or disabled, etc). I WOULD PREFER GOV EMPLOY PEOPLE TO DO THOSE KINDS OF THINGS AT REGULAR GOV PAY, ETC.
The real resource levels and relatively low number of unemployed in wealthy countries makes the JG imminently achievable and sensible in resource-rich countries and those with high value-added industries. IT’S EQUALLY GOOD POLICY TO DO IT IN ANY SOCIETY.
In less wealthy societies, with their currency monopoly in their own border, the currency can still be used to organize the unemployed in useful ways. AND HIRE PEOPLE FOR DESIRED PUBLIC PURPOSE IN THE NORMAL COURSE OF GOV HIRING.
I do think it is a stretch to believe in very resource poor countries with very large under- and unemployed populations that a job guarantee can transform the society, although any level of increased organization using one’s domestic currency monopoly (reasons 1-4 above) is better than none. http://moslereconomics.com/mandatory-readings/mosler-palestinian-development-plan/
Conclusion
Criticizing MMT for not being able to make resource-poor countries and/or countries with little high value-added manufacturing is MIXING METAPHORS. MMT IS A FRAMEWORK FOR ANALYSIS like criticizing a leading expert on cancer for not being able to cure some patient with some severe type of cancer. It doesn’t mean the expert is somehow no longer a leading expert. It just means all the knowledge in the world cannot fix some cases.
Reality-based macro can be used to analyze any country. But knowledgeable analysis can’t magically increase real-resource levels or cause high value-added manufacturing capacity to magically appear. NOR IS THAT AN OBSTACLE FOR DOMESTIC WELL BEING.
It is a bleak truth that it is unlikely that many of the poorest countries in the world are going to improve in the short or medium term. I COULD TURN THEM AROUND OVER A 3 DAY WEEKEND IF THE POLITICAL OBSTACLES WEREN’T THERE. 😉
There may be hope that they can “leap-frog” past the long industrial development stage past countries went through. INDUSTRIAL DEVELOPMENT ISN’T ANY KIND OF REQUIREMENT. IN FACT IT’S BEEN SO COMMODITIZED THAT IT’S THE NATION WHO CAN GET ITS WORKERS TO LIVE ON THE FEWEST CALORIES THAT GETS THE INDUSTRY. Sort of in the way parts of Africa went from having almost no telephone service to having advanced, widely used cell phone systems (skipping the long phase of telephone pole and lines that slowly developed in the US and Europe over the 20th century before cell-phones). ALL IMPORTED, BY THE WAY.
Maybe some of the poorest countries can leap-frog in a similar way to knowledge based economies, energy independence from wind and solar, and so on.
On the other hand, with little high value-added exports and few natural resources/low agricultural potential, and some with growing populations pressuring their limited agricultural resources ever further, WITHOUT UNDERSTANDING MONETARY OPERATIONS the future may prove bleak.
This is not what anyone wants to hear. But to even begin to work on solutions, the true extent and nature of the problems must be clearly and honestly laid out. (Maggie Black’s honest assessment, for example).
At any rate, the idea that any of the above somehow means MMT is in error somehow is ridiculous. TRUE! Reality-based macro analysis helps us understand what is happening in rich and in poor countries. The process of the poorest countries improving their condition is likely to be long, complex, and likely come from slow, incremental internal developments, AND GROSS IGNORANCE OF MONETARY OPERATIONS OR MASSIVE CORRUPTION much in the way Europe went from one of the poorest areas of the world to the richest through incremental internal change over many centuries.
It won’t be easy, or fast. DUE TO POLITICS. But honest analysis is necessary to even begin to make useful changes.
Notes
I find many of even the “left” or “progressive” criticisms of MMT are wildly off the mark (the “right” ones are pure fantasy). However, on re-reading this paper (Bonizzi et. al. below) carefully I feel it makes some important and fair points and is worth considering carefully.
Bonizzi, Bruno, Annina Kaltenbrunner and Jo Michell. 2019. “Monetary sovereignty is a spectrum: modern monetary theory and developing countries.” Real-World Economics Review, issue no. 89 BEST NOT TO USE THE TERM ‘MONETARY SOVEREIGNTY’ AS IT’S A RESIDUAL TERM DEFINED BY WHAT IS BELIEVED TO BE THE EXCLUSION OF POLICY OBSTACLES.
I think some of the related FX and capital controls issues are “answered” partially here, with the concept of the “demi-quadrilemma”: Siddiqui, Kalim and Phil Armstrong. 2017. “Capital Control Reconsidered: Financialization and Economic Policy.” International Review of Applied Economics.
See also Bill Mitchell (bc Bonizzi et. al. bring up Thirlwall’s (1979) model) Balance of payments constraints. (Bill Mitchell 2016) as well as Ultimately, real resource availability constrains prosperity. (2016) THAT’S IF YOU DEFINE PROSPERITY BY REAL RESOURCE CONSUMPTION.
Fadhel Kaboub speaks very clearly on these issues, FDI, etc here and here. Well worth a listen.
Also regarding exchange rates and trade: The clearest, best work is that by John Harvey:
Exchange Rates and Trade Flows: A Post Keynesian Analysis
Exchange Rates and the Balance of Payments: Reconciling an Inconsistency in Post Keynesian Theory Working Paper · September 2017
See also the very useful: Andrade, Rogerio P. and Daniela Magalhães Prates “Exchange Rate Dynamics in a Peripheral Monetary Economy: A Keynesian Perspective.”
Regarding trade I always point out the work of Erik Reinert. I discuss it in detail, and the process all “wealthy” nations went through to become wealthy, WEALTHY AS DEFINED HOW? MATERIAL CONSUMPTION? ETC. here: Mercantilism and the Rise of the West. (Note towards the end I never finished the section around the concept of “ecumenes”, it needs completing so is a little choppy there. Also, it was mostly written around 2007, not 2011).
The “exports are real costs and imports real benefits” idea leaves out key factors; IT IDENTIFIES THE FRAMEWORK FOR ANALYSIS OF THOSE FACTORS a full heterodox trade theory must incorporate increasing returns/decreasing returns, as well as the related factor of agglomeration/spillovers (positive externalities). We have to think not just of the goods, but also think of “productive capacity” & “varied economy” as “real resources” when we make society-wide import/export calculations YOU MEAN POLICY CONSIDERATIONS.
Some other related works: MOST ALL OF THE LITERATURE TENDS TO BE APPLICABLE TO FIXED EXCHANGE RATE POLICY, AND NOT TODAY’S FLOATING FX REFIMES.
Guzman Martin, Jose Antonio Ocampo and Joseph Stiglitz. 2018. “Real exchange rate policies for economic development” World Development Volume 110, Pages 51-62.
Oberholzer, Basil. 2020. Economic Sovereignty for Developing Countries: What Role for Modern Money Theory? (Developing Economics blog).
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