Modern Money Theory (MMT) has recently generated considerable discussion and a growing following thanks to the brilliant success of its proponents in popularizing the theory. However, much of the recent attention has been critical. While a significant amount of this criticism has focused on MMT’s relevance to advanced economies, particularly in the United States, debate about the applicability of MMT-inspired policies in developing countries has been relatively limited. Since MMT is now garnering attention in developing countries, amidst crises of legitimacy for orthodox macroeconomic policies, the need for critical engagement with MMT from a developing country perspective is becoming increasingly relevant.
Unfortunately, the wide applicability of MMT is often too simply assumed by academic advocates that have made little attempt to qualify key arguments. The COVID-19 economic shock has amplified our concerns with these developments, as direct central bank financing of fiscal policy has appeared to be more appealing to policy-makers in a period where the prospects for tax financing are diminished by the collapse of incomes, while ‘flight to safety’ dampens foreign demand for government bonds.
In our recent working paper, we argue that the MMT framework mischaracterizes the essence of the economic development challenge for low- and middle -income countries. The primary long-run growth challenge faced by these countries concerns structural transformation, i.e., the transition to an industrial economy, rather than general aggregate demand insufficiency. However, even if MMT had a correct diagnosis of the principal growth challenge faced by developing countries, the chief policy recommendations emphasized by MMT might be counter-productive if implemented outside of select advanced economies. These two points make us sceptical of the relevance of the MMT approach to economic problems in developing economies.
