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.
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.
I'm an economist deeply entrenched in the intricacies of global finance, debt dynamics, and economic policy. My expertise stems from years of academic study, practical application, and ongoing engagement with the latest developments in the field. Allow me to delve into the concepts embedded within the article you provided, shedding light on each in detail:
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Sovereign Debt Crisis in the Global South: The article outlines the widening debt crisis affecting many countries in the Global South, attributing it to systemic flaws within the multilateral system and shortcomings in prevailing analytical and policy frameworks. These frameworks often misinterpret the nature of money, the economic capacities of currency-issuing governments, and the underlying causes of external indebtedness in developing nations.
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Modern Monetary Theory (MMT): The article advocates for viewing the debt crisis through the lens of Modern Monetary Theory (MMT). MMT posits that sovereign governments with control over their fiat currencies cannot default on debts denominated in their own currency. Thus, unlike households or private firms, they are not inherently money-constrained and can spend to achieve policy objectives, with inflation risk being their primary constraint.
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Monetary Sovereignty vs. Foreign Currency Borrowing: The distinction between monetarily sovereign nations (e.g., Japan, US, UK) and countries in the Global South, which often borrow in foreign currencies, underscores the resilience of the former to debt crises. Monetarily sovereign nations can issue debt in their own currency and have control over interest rates, whereas borrowing in foreign currencies exposes countries to insolvency risks.
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Debt Relief and Financial Constraints: MMT suggests that financial constraints are not the primary impediment to providing debt relief to indebted nations. Rather, challenges lie in coordination among creditors and debtors. The article argues that debt cancellation for lower- and middle-income countries is feasible given their ability to issue currency, implying that affordability is not the main concern.
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Nature of Money and Financing Possibilities: The article challenges conventional views regarding the nature of money and financing possibilities for developing countries. It argues that currency-issuing governments cannot run out of money and can finance projects domestically in their national currency, minimizing the need for foreign-currency borrowing.
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Asymmetric Tax Agreements and Resource Theft: The article highlights the detrimental effects of asymmetric tax agreements and resource theft on countries in the Global South. It suggests that substantial income from exports often flows back to foreign investors, exacerbating financial hardships and necessitating foreign-currency borrowing to cover revenue shortfalls.
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Debt Cancellation and Economic Development: The article advocates for debt cancellation as a means to mitigate the impacts of asymmetric tax agreements and resource theft, enabling countries to invest in climate resilience and public goods. It emphasizes the urgent need for a just economic framework that addresses the root causes of recurring debt crises.
In essence, the article underscores the importance of reevaluating prevailing economic paradigms and policy frameworks to address the structural inequities perpetuating debt crises in the Global South. It calls for a holistic approach that combines debt relief, fair compensation for resource-rich nations, and sustainable economic development strategies to foster global financial stability and social equity.
