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The Conceptual Roots of the Global South’s Debt Crisis

Modern Monetary Theory provides a useful lens through which to view the mounting sovereign-debt crisis in the developing world. It sheds light on why low- and middle-income countries borrow in foreign currencies, while also suggesting that rich countries could provide significant relief if they so desired.

DAKAR – The widening debt crisis in the Global South largely emanates from a flawed multilateral 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.

MMT explains why the most indebted countries, in absolute and relative terms, are not in distress. Consider that Japan’s sovereign debt-to-GDP ratio was 254% last year, while the ratio was 144% in the United States, 113% in Canada, and 104% 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 lower debt-to-GDP ratios when they defaulted on their external obligations.