MMT is gaining traction among progressives as an option for paying for massive government spending projects such as the Green New Deal. Even if it is useful for countries such as the U.S., can it be applied in developing countries? PERI’s Matías Vernengo says only to a limited extent.
GREG WILPERT: Welcome to The Real News Network. I’m Greg Wilpert in Baltimore.
Modern monetary theory–also known as MMT–which is a relatively new school of thought in economics, has been gaining traction among progressives. For example, one of Bernie Sanders’ main economic advisors Stephanie Kelton, who we have interviewed here at The Real News, is one of MMT’s main proponents. MMT says that governments can and should create–that is, print–money in order to fund full employment among other things. The significance is that MMT holds out the promise of fully funding progressive projects such as the Green New Deal, free universal health care and free universal higher education without creating unsustainable debt levels.
However, the theory remains controversial amongst progressives. As a matter of fact, here at The Real News Network, we have featured debates between MMT proponent Randall Ray and one of his main critics, Jerry Epstein. For example, critics often argue that MMT doesn’t pay enough attention to the problem of inflation. Also, some critics argue that the theory mainly works in the context of developed economies but developing economies of the Global South cannot apply MMT’s principles.
Joining me now to present an argument about MMT’s limited applicability to developing countries is Matias Vernengo. He has been a consultant to UN organizations such as UNCTAD, the United Nations Conference on Trade and Development, and ECLAC, the Economic Commission on Latin America and the Caribbean. Currently he is professor of economics at Bucknell University in Pennsylvania, and recently co-authored an article together with Esteban Perez-Caldentey for the Political Economy Research Institute titled Modern Money Theory (MMT) in the Tropics: Functional Finance in Developing Countries. Thanks for joining us today, Matias.
MATIAS VERNENGO: Thank you for having me.
GREG WILPERT: MMT is rather abstract, I would say, and difficult for most non-economists to understand. How would you explain it so a non-specialist can understand it?
MATIAS VERNENGO: I would say there are three things that are central to MMT, modern money theory; in the first place, the notion that if a country has its own sovereign currency, they cannot default in that currency. If I tell you that I have a debt and that that is in dollars and I’m the entity that produced dollars, then there can be no default in your own sovereign currency. That’s the number one proposition of MMT, which refers to that functional finance idea that is in the title of our paper that you’ve cited. That’s mostly what we discuss: can you default? Or the fact that the countries cannot default implies that you can do fiscal policy relatively freely, as you suggested, with the ideas of progressive sort of projects like the Green New Deal or free college education and so on and so forth.
The other two are less relevant from my point of view for this discussion, but they’re interconnected. One is the idea of chartal money, the idea that the behind sovereign currency is the power of the state. The state is the entity that determines in what token, essentially, we pay taxes. So the U.S. government says you pay in dollars; and dollars, the U.S. government says since 1971, is not tied to gold. And that’s it. You pay in dollars, and the government has the power to do so. So it’s chartal money. Chartal money is obviously connected to the idea that you cannot default in your own currency. Those two ideas are connected.
The third is it’s more of a program. I don’t know that everybody in MMT necessarily would put emphasis on that, but I believe they do. It’s the idea of a job guarantee program that is, for example in the platform of Bernie Sanders, the idea that the state provides jobs to anybody that is unemployed. Those would be the three sorts of main propositions of MMT in my understanding. Again, there might be here and there variations on the topic and policies and so on and so forth, but those are certainly crucial for their arguments.
GREG WILPERT: As I mentioned, your article developed a critique of MMT, saying that not all of its principles are applicable to developing countries. Why might MMT be useful for developed countries but not so useful for developing countries? That is, what’s the difference between them and what this means for how MMT can be applied?
MATIAS VERNENGO: In a sense, what I would say is we think that some of the principles of MMT certainly apply to developing countries. Argentina, for example, uses pesos and it cannot really default in pesos. I should say as sort of an irrelevant aside–which we do have in the paper and there is a footnote–the government of Argentina, Mauricio Macri, which probably will lose the election pretty soon as by the end of October, had defaulted, had sort of delayed payments and reduced interest and delayed payments on it in pesos. But there was no reason for them to do that. If you ask me, it’s pride in investors that “if we lose the elections, there might be a default; we’re already in trouble because you’re planning to vote for the opposition.”
So in principle that that is valid, the idea that Argentina cannot default in pesos. We don’t disagree, we think that’s perfectly all right. I should say also that I tend to agree with MMT offers that the biggest risk is by no means inflation. I don’t think that U.S. is on the verge of having an inflationary crisis, and even less so a significant hyperinflationary crisis like say Zimbabwe or Venezuela. Those arguments are, I would say, out of line. I’m not saying that at all critics have suggested that, but I’m saying in principle, I’m not concerned with inflation. I think that MMT has had a positive effect in moving some of the discussion in advanced economies in the direction of inequality and how fiscal policy can be used to promote certain progressive sort of policy. But developing countries have the following sort of situations.
If you think of a country like… Let’s forget for a second I used Argentina as the example. But think of a country like Cuba. Cuba imports oil, it doesn’t have reserves of oil. It won’t have any time in the future. They needed to import that and by the nature of commodity markets, because the sovereign currency globally, the key currency globally, the dollar–the oil is priced in dollars. So they need–even if they don’t run current account deficit–they need dollars to buy certain essential things. The nature of the developing countries is that they come late to the process of development; they need to import essential things. I gave you an example of energy. But normally capital goods–if you’re behind in the process of development–capital goods normally are imported. You need intermediary goods to produce the actual things that you produce in your country. And all of those things require hard currency, essentially dollars.
Once you have that need, there are problems associated to the management of the balance of them. A thing that no MMT office suggests is, “Look, if your debt is in pesos, then you don’t have to be concerned, and if your currency is floating…” So what’s a floating currency? It’s when the central bank does not intervene to guarantee a certain exchange rate. Their notion is that if you’re not guaranteed that I’m going to give you for my pesos a certain amount of dollars, and hence you can print as many pesos as you want because you’re not going to default in pesos, then you don’t have to be concerned with the exchange rate and with the possibility of defaulting. But the problem is that you still need the dollars for buying essential things. You have to be concerned with the amount of dollars that you have, and that creates a problem for your domestic spending in your own currency.
I’ll give you an example. If you’re running out of dollars… Say Argentina is at this moment. Okay. So Argentina doesn’t have enough reserves. It’s sustained the situation by loans by the IMF. Let’s say if the IMF does not give Argentina money by December after the election, Argentina doesn’t have enough dollars. So the options facing Argentina; they default in dollars, but they also need to stop what? Important stuff, because for that they need dollars. That slows the economy into recession. The use of dollars being concerned with the amount of reserves that you have is sort of a central thing for developing countries. I don’t want to go too much into this. Also the issue of the effects of depreciation. For the most part, MMT offers, although they suggest that a depreciation is not necessarily good for solving balance of payment problems… If you look at the writings, if you look at the extensive writings on monetary policy, they have very little to say about the exchange rate. But every time they talk about exchange rates, they suggest that exchange rates and depreciation tend to have a favorable effect on the developing strategy of a country. And that, again, is a problematic proposition.
GREG WILPERT: Yep. So the question of course that your paper raises is also, well, what is the alternative? That is, you’re suggesting, it seems, a fixed exchange rate. That’s kind of what I’m reading between the lines, that you’re saying that MMT might work under certain conditions. But of course, fixed exchange rate is also a very problematic proposition. And we particularly know it in the case that I’m very familiar with, which is the case of Venezuela, which had a fixed exchange rate from 2003 until very recently. And they basically instituted precisely in order to prevent capital flight. But this created a huge black market because they weren’t able to provide the dollars that were needed because they ran low eventually on the dollars that were needed for it to pay for imports and to supply the market with the demand for dollars at the official exchange rate.
In other words, the whole black market started to take over. And that was a problem as well which caused inflation, which you talked about already. Because essentially it ended up in being a free floating currency even though that wasn’t the official policy. But that’s what they ended up having. I’m wondering, in the context then of the difficulty of maintaining a fixed exchange rate and also trying to implement policies that might provoke capitol flights such as taxing the wealthy or taxing foreign corporations, what alternatives does a developing country have that might work?
MATIAS VERNENGO: So there are few things that I think are important in this content. First of all, we’re not saying that fixed exchange rate systems are necessarily better. Actually, I gave–I think it was nine years ago or something like that–an interview for your network on the Greek crisis. And Greece obviously doesn’t have an exchange rate, but it has something very similar. They have a common currency with the rest of the European countries. And so, we’re not saying that… What we’re saying is that developing countries must manage their exchange rate system. Which they do, by the way. That’s what they tend to do. Sometimes they do mismanage it. You suggested that in the case of Venezuela. And that’s certainly a possibility. But we’re not saying that fixed exchange rates are better in general.
Mind you, I would like to suggest that historically, the period in which developing countries grew the fastest–which was the period from the ’40s to the late ’60s, early ’70s, which is known as the golden age of capitalism–was also the period of Bretton Woods in which you had two things, not just a relatively fixed or managed exchange rate system. So countries could devalue but also capital controls. The combination of those two things was sort of favorable. It allowed governments to have lower rates of interest; it allowed them to expand their debts in domestic currency and provide those social policies that were necessary. Having said that, we’re not necessarily for fixed relief. We think that developing countries are correct in managing their current and in not allowing depreciation.
And then this fundamental idea is the following. Which again, I think the fact that MMT offers, mostly because they look at developed countries, it’s somehow U.S.-centric, their analysis. They have less understanding of a typical issue of developing countries, which is that when you depreciate the exchange rate–so when your currency, when the peso is less valuable than the dollar–what happens is that a lot of this stuff that is consumed by workers, by consumers in general, is important. As soon as the dollar becomes more expensive and the domestic currency is depreciated, all of those important goods are more expensive. The real wage defaults, so it has a distributive effect. Normally, what you expect from the process of development is that real wages go up, the patterns of consumption in developing countries improve, and so on and so forth. If you’re looking for a development strategy, what you want to do is to some extent allow those patterns of consumption to sort of improve and people have more access to the things that they need, so you improve the quality of their life.
Depreciation might not necessarily be the best way to achieve that. How do you solve those problems? Historically, the countries that were able to deal well with issues of development catch up, which there are not many. How many countries have caught up with advanced economies since the select group of Western European countries and some Western countries like the U.S. and Australia have become developed starting in the 19th century? Very few countries. It’s South Korea, it’s Israel, and it’s mostly in Asia. We think mostly people tend to think of the Japanese experience, although Japan started back in the 19th century, and then South Korea. And now these days, they think of China. The policies that they pursued is that they do control the exchange rate. It’s managed, they do control reserves, they accumulate significant and large amounts of dollars, and they also use strategies to industrialize policies; interventions to increase their exports, to develop their own national champions.
There are companies that are technologically advanced and so on and so forth. What they need is a developmental state. And in that sense, in the sense that you need a state that is strong and capable of promoting development, I think that there is a sense in which there’s a commonality of ideas with MMT. So whether, say, he needs a strong state and the U.S. can promote all of these policies that promote development per se, meaning that people have access to good healthcare, that people have access to good education, that people have access to employment. For developing countries, our point is that that requires managing of exchange rates and the foreign currency that you cannot just say, “Oh, we are looking only at that in your own currency and you cannot default on that one, hence you are fine.” You need to be concerned with the major currency to some extent, depending on which area of the world you are.
I suppose if you are in Eastern Europe, you have to be concerned with the Euro. If you are in Latin America, certainly, or Asia, you have to be concerned with the dollar; perhaps increasingly with the Yuan, but that’s still far away from being a reality. That’s the challenge: how you manage those resources. Well, I would suggest that some countries have done that reasonably well, others less so. So Argentina, Venezuela; different sort of situations. The Argentina case is certainly much less problematic than the Venezuelan–have not dealt very well with those issues in the more recent past. I should say in the case of Argentina, when I say the more recent past is the last four years, in which there was a huge accumulation of foreign debt in dollars. That should be avoided. And I think that MMT and some of the critics would agree. We would agree that it’s a bad idea to borrow too much in a currency that you do not control.
GREG WILPERT: Okay. Well, unfortunately we’re going to have to leave it there for now. But I just wanted to summarize. I think one of the bottom line lessons one can draw is that in effect–and this shouldn’t come as a surprise–but maybe it’s also over-simplified. Developing countries have less options than developed countries. But we’re going to have to leave it there. I was speaking to Matias Vernengo, professor of economics at Bucknell University. Thanks again, Matias for having joined us today.
MATIAS VERNENGO: Oh no, thank you for having me.
GREG WILPERT: And thank you for joining The Real News Network.
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