This piece is a response to ​“PAY­GO Is Based on a Fal­la­cy” and ​“The Best Way to Argue Against PAYGO.”

Developing countries' trade deficits are the product of fundamental economic shortcomings, themselves often a legacy of colonial rule.

The ris­ing pop­u­lar­i­ty of mod­ern mon­e­tary the­o­ry (MMT) has inevitably brought mis­con­cep­tions. Crit­ics across the polit­i­cal spec­trum often claim that MMTers want sov­er­eign gov­ern­ments to ​“just print mon­ey” with no con­cern for the nation­al debt or, as Max B. Saw­icky sug­gests, infla­tion. Some, espe­cial­ly on the Right, point to Venezuela and Zim­bab­we as clas­sic cas­es of hyper­in­fla­tion.

But MMT points to a dif­fer­ent pri­ma­ry cause of infla­tion in devel­op­ing coun­tries: not domes­tic spend­ing, but for­eign debt and a result­ing lack of ​“mon­e­tary sovereignty.”

A coun­try has full mon­e­tary sov­er­eign­ty when it has its own nation­al cur­ren­cy that is not fixed to the val­ue of gold or anoth­er nation’s cur­ren­cy; it uses that cur­ren­cy to impose tax­es, fees and fines; and all its debt is payable in that cur­ren­cy. Coun­tries that meet these cri­te­ria, like the Unit­ed States and Japan, face no exter­nal con­straints on gov­ern­ment spend­ing, as Pavli­na R. Tch­erne­va explains. The risk of infla­tion remains under con­trol so long as gov­ern­ment spend­ing does not out­pace the economy’s real pro­duc­tive capac­i­ty — the avail­abil­i­ty of phys­i­cal resources, skilled labor, equip­ment and tech­ni­cal know-how.

For devel­op­ing coun­tries, the prob­lem begins with trade deficits and result­ing debt owed in for­eign currencies.

Those deficits are the prod­uct of fun­da­men­tal eco­nom­ic short­com­ings, them­selves often a lega­cy of colo­nial rule. Post­colo­nial coun­tries are typ­i­cal­ly unable to pro­duce enough food and ener­gy to meet domes­tic need, and they face struc­tur­al indus­tri­al and tech­no­log­i­cal defi­cien­cies. Because of this, they must import food and ener­gy, along with essen­tial man­u­fac­tur­ing inputs. For exam­ple, Venezuela lacks refin­ing capac­i­ty, so — while it exports crude oil — it must import more expen­sive refined oil, con­tribut­ing to trade deficits.

Import­ing more than they export caus­es these coun­tries’ cur­ren­cies to depre­ci­ate rel­a­tive to major cur­ren­cies. With a weak­er cur­ren­cy, new imports (like food, fuel and med­i­cine) become rel­a­tive­ly more expen­sive. This imbal­ance is the real dri­ver of infla­tion, and often of social and polit­i­cal unrest.

The Inter­na­tion­al Mon­e­tary Fund (IMF) his­tor­i­cal­ly steps in at this point with emer­gency loans cou­pled with painful aus­ter­i­ty mea­sures. To get out of IMF con­di­tions, even pro­gres­sive pol­i­cy­mak­ers typ­i­cal­ly pri­or­i­tize acquir­ing for­eign cur­ren­cy reserves in order to hon­or exter­nal debt pay­ments. They pro­mote tourism (tourists bring for­eign cur­ren­cy) and design agri­cul­tur­al and man­u­fac­tur­ing poli­cies to sup­port export indus­tries. Mean­while, indus­tries that would build self-suf­fi­cien­cy (and thus fix the trade imbal­ance), like food crops for domes­tic con­sump­tion, receive lit­tle gov­ern­ment sup­port. All of this decreas­es self-suf­fi­cien­cy and rein­forces the depen­dence on for­eign goods that caused the debt in the first place.

Most devel­op­ing coun­tries look­ing for for­eign cur­ren­cy also open their economies to invest­ment from for­eign cor­po­ra­tions, agree­ing to low envi­ron­men­tal stan­dards, weak labor reg­u­la­tions and tax exemp­tions, going deep­er in the hole.

So what would an MMT-informed solu­tion look like to help devel­op­ing coun­tries regain mon­e­tary pol­i­cy and their abil­i­ty to spend on domes­tic pri­or­i­ties? The goal is to reduce imports, secure a favor­able trade bal­ance and pay off their debts, so coun­tries would focus on the root caus­es of trade deficits: invest in sus­tain­able agri­cul­tur­al prac­tices (like aquapon­ics) to restore food sov­er­eign­ty; build renew­able ener­gy (like solar) to secure ener­gy sov­er­eign­ty; and invest in edu­ca­tion and research and devel­op­ment to increase pro­duc­tiv­i­ty and gain the abil­i­ty to man­u­fac­ture more valu­able prod­ucts. Such devel­op­ment would also increase the real pro­duc­tive capac­i­ty of the econ­o­my, mean­ing that gov­ern­ments would have more room to spend before inflation.

By illu­mi­nat­ing the ori­gins of post­colo­nial eco­nom­ic strug­gles, MMT shows us how to over­come them.