The wideningdebt crisisin the Global South largely emanates from a flawedmultilateral system. But it also reflects the inadequacies of the dominant analytical and policy frameworks — specifically, their assumptions about the nature of money, the economic possibilities available to currency-issuing governments and the underlying causes of developing countries’ external indebtedness.
Viewed through the lens of Modern Monetary Theory (MMT), the limitations of mainstream economic thinking as applied to sovereign-debt crises become even clearer. The basic idea behind MMT is that, unlike households or private firms, governments that control their own fiat currency cannot default (assuming their debt is denominated in their own currency). As they are not money-constrained, they can spend to achieve their goals. Their main constraint is the availability of productive capacity, which determines the risk of inflation.
Monetary sovereignty vs. borrowing in foreign currencies
MMT explains why the most indebted countries, in absolute and relative terms, are not in distress. Consider that Japan’ssovereign debt-to-GDP ratiowas 254 per cent last year, while the ratio was 144 per cent in the United States, 113 per cent in Canada and 104 per cent in the United Kingdom. Yet, none of these countries is experiencing a sovereign-debt crisis. By contrast, in 2020, Argentina, Ecuador and Zambia had much lowerdebt-to-GDP ratioswhen theydefaultedon their external obligations.
The main difference is that Japan, the US, Canada and the UK aremonetarily sovereign: their public debt is denominated in their national currency, while their central banks maintain some control over the interest rates applied to that debt. Most governments in the Global South are at risk of insolvency because they borrowed in foreign currencies.
MMT implies that if rich countries desired to provide significant debt relief to the Global South, the main challenges would be coordination – between different creditors and debtors, as well as other relevant actors – and accountability, not affordability. Given that these countries cannot run out of their own currency, there are no financial constraints on cancelling in whole or in part the public and publicly guaranteed external debt stock of131 lower- and middle-income countries(excluding China, Russia and India). This debt stood at$2.6 trillionin 2022 — an amount less thanGermany’s public debt.
As money is not scarce, anything that is technically and materially feasible at the national level can be financed in the national currency.
See AlsoAddressing the looming sovereign debt crisis in the developing world: It is time to consider a ‘Brady’ plan | BrookingsThe global south’s debt crisis is thwarting climate ambition | Heinrich Böll StiftungGlobal South Countries Need a New Legal Framework for Debt ReliefSession 12: Sovereign Debt Distress in the Global South
Why do Global South countries that are currently in or at risk of debt distress borrow in foreign currencies in the first place? Economists’ usual answer is that these countries would otherwise lack ‘money’ and ‘savings’. Such a view is based on an erroneous understanding of the nature of money. Currency-issuing governments cannot run out of their own money. Moreover, as the Bank of Englandhas shown, banks are not intermediaries between savers and loan applicants; instead, they create new purchasing power every time they extend a loan.
This leads to anotherimportant observationderived from MMT: as money is not scarce, anything that is technically and materially feasible at the national level can be financed in the national currency. Developing countries need not issue foreign-currency debt to finance projects that require locally available resources such as labour, land, raw materials, equipment and technologies.
When required resources are not locally available and can be purchased only with foreign currencies, developing countries might be forced to take on the burden of dollar-denominated debt. One could imagine resource-poor or climate-vulnerable countries making such a choice.
Asymmetric tax agreements and resource theft
But this ignores the fact that Global South countries often earn substantial income from exports. The issue is that a significant proportion of this income is remitted back to foreign investors – many of whom benefit from an inequitableglobal tax architecture– as profits or dividends. This is on top of the fraudulent practices that result inillicit financial flows.
Between 2000 and 2018, for example, African countriessufferedgreater financial hardship from profit transfers by foreign investors, dividend repatriation by subsidiaries to their parent companies andillicit financial flowsthan from servicing their external debt. They issued foreign-currency debt that paidhigh-interest rates,partly to plug the gap created by foreign nationals appropriating – both legally and illegally – vast dollar earnings.
In a just world, countries subject to asymmetric tax agreements and resource theft would be fairly compensated, rather than crushed by austerity policies.
ConsiderZambia, a copper-producing country that lost around$10.6 bnin the form of illicit financial flows between 1970 and 1996 (355 per cent of its GDP in 1996),$8.8 bnbetween 2001 and 2010 and$12.5 bnbetween 2013 and 2015. Zambia’s public and publicly guaranteedexternal debtwas $1.2 bn in 2010, rising to $12.5 bn by 2021.
If the Zambian government had betterfiscal and technical controlover its export sector, it would have accumulated sufficient dollar reserves to enhance food and energy self-sufficiency and to finance investment in infrastructure and other public goods requiring the import of foreign productive capacity. There would have been no need to take on so much foreign-currency debt. The same could be said for otherresource-rich African countries.
In a just world, countries subject toasymmetric tax agreementsand resource theft would be fairly compensated, rather than crushed by austerity policies. Barring that, external debt cancellation would help developing countries invest in climate resilience and improve the health and well-being of their populations. As many policymakers, economists andsocial movementshave argued, it is an urgent necessity.
But even such a bold step would not be enough to address the root causes of recurring debt crises in the Global South. That would requirestopping the financial bleedingcaused by multinational corporations and promoting an economic development strategy that makes full use of the resources each country can command with its national currency.
As an expert in international finance and economic systems, it is evident that the widening debt crisis in the Global South is intricately linked to a flawed multilateral system and the inadequacies of prevailing analytical and policy frameworks. The assertions made in the provided article align with my deep understanding of Modern Monetary Theory (MMT) and its implications on sovereign-debt crises.
MMT serves as a crucial lens through which we can dissect the limitations of mainstream economic thinking. The core tenet of MMT posits that governments with control over their own fiat currency cannot default, assuming their debt is denominated in their national currency. This crucial insight brings into question the prevailing assumptions about the nature of money, the economic possibilities for currency-issuing governments, and the root causes of external indebtedness in developing countries.
The article highlights the significance of monetary sovereignty versus borrowing in foreign currencies. It draws attention to the fact that highly indebted countries like Japan, the United States, Canada, and the United Kingdom, with debt-to-GDP ratios that would traditionally signal distress, do not face sovereign-debt crises. The distinction lies in their monetary sovereignty, as their public debt is denominated in their national currency.
Furthermore, the article underscores MMT's implication that providing significant debt relief to the Global South is more about coordination and accountability than affordability. The argument here is that these countries, having control over their own currency, do not face the same financial constraints as traditionally perceived.
The piece delves into the reasons why Global South countries resort to borrowing in foreign currencies. Contrary to common economic wisdom, which suggests these countries lack 'money' and 'savings,' MMT argues that currency-issuing governments cannot run out of their own money. It challenges the prevailing understanding of banks as intermediaries, emphasizing their role in creating new purchasing power when extending loans.
The article also touches upon the impact of asymmetric tax agreements, resource theft, and illicit financial flows on the debt crisis in the Global South. It provides concrete examples, such as Zambia, to illustrate how substantial income from exports is often siphoned off through inequitable global tax structures, leaving these countries with high levels of foreign-currency debt.
In conclusion, the root causes of the recurring debt crises in the Global South, as outlined in the article, require a comprehensive understanding of monetary sovereignty, international finance dynamics, and the impact of asymmetric economic relationships. Addressing these issues, along with advocating for external debt cancellation and fair compensation for resource-rich nations, is crucial for fostering economic development and resilience in the Global South.
