Spurring Development, Local, and Global Monetary Sovereignty, and Reforming International Financial Institutions

World federalists hold that social, economic and environmental problems should be addressed at the lowest appropriate political level, and that some practical solutions can only be managed globally. Federal systems should be democratic, so that those affected by decisions have more and greater opportunities to influence their creation and implementation.

Unfortunately, non-democratic international financial institutions today impose strictures that prevent developing countries from optimizing the management of their affairs. In his blog post “When disaster strikes the poorest nations, the IMF guarantees to make it worse,” economist William Mitchell criticizes structural adjustment programs (such as fiscal austerity, and market liberalisation) that the IMF and World Bank typically impose on poor nations struggling with balance-of-payments problems.

These programs act to dismantle domestic industries, rendering Global South countries more dependent on imports, and therefore also dependent on foreign currency and creditors. Options for growth are mainly raw materials exports such as oil or foodstuffs, or the export of cheap sweatshop output.

Extractivism however, is ecologically ruinous, while sweatshops ensure permanently low wages. In order to attract international investments, governments move to cut environmental regulations, reduce labour protections, and slash corporate tax rates in a brutal race to the bottom. This arrangement works well for international capital, by ensuring a steady supply of cheap labour and raw materials, but is also very damaging for developing governments and their peoples.

Foreign creditors require fiscal and monetary “discipline,” so governments cannot use deficit spending to stimulate economic activity and growth. If they do, then creditors and ratings agencies punish them, capital flees, and borrowing costs rise. An alternate economic program is offered by proponents of Modern Monetary Theory (MMT) who advocate using the national currency to mobilize domestic resources, including labour to accomplish human development. It’s a bright, relatively simple idea…a potential game changer for struggling national economies.

MMT economists have long pointed out that monetarily sovereign governments — those who issue domestic fiat currencies that float in value against others, and are non-convertible, on demand to other currencies or commodities — are not like households. They do not have to “earn money” first through taxing or borrowing in order to spend, but can simply create money, and expand their deficits, and can never be forced into bankruptcy. Despite an accounting legerdemain obscuring the process, this is how these governments including Canada actually function.

The Library of Parliament publication “How the Bank of Canada Creates Money for the Federal Government Through its Asset Purchases” explains that the Bank of Canada “records new and equal amounts on the asset and liability sides of its balance sheet, creating money through digital accounting entries. The federal government can then spend that newly created money in the Canadian economy as it sees fit, subject to Parliament’s approval.”  This “is essentially an internal government process” and “external factors, such as financial market dysfunction, cannot cause the federal government to run out of money.”

Of course, if a government and private sector spend too much money, demand may overwhelm the country’s productive capacity and cause inflation. However, industrial policy can help expand available goods and services, and excess money can be taxed to reduce both aggregate demand and inequality.

Even governments with limited monetary sovereignty have the possibility to finance in the national currency, those technically feasible projects that require mostly locally available resources. This way, recourse to international finance and austerity can be minimized.

The goal is to reduce imports, secure a favorable trade balance to pay off debts, ensure full employment, and focus on the root causes of trade deficits. To achieve this, governments can simply issue money and spend on achieving urgent goals such as:

1. Developing generous, high-quality universal public services – healthcare and education, public transportation, affordable housing, water, electricity and internet.
2. Investing in sustainable agricultural practices (like aquaponics)  and fisheries to produce healthy, organic food for domestic consumption, while restoring soils, biodiversity and marine life.
3. Rolling out renewable energy infrastructure — solar panels and wind turbines — to replace fossil fuels and reduce energy imports.
4. Funding education, research and development to increase productivity and gain the ability to manufacture more valuable products.
   
5. Offering an Employment Guarantee to ensure that anyone willing can work,or train others, can contribute to socially valuable projects,like building houses and infrastructure, staffing public services, expanding renewable energy, or regenerating farmland, and be paid, at minimum a living wage while doing so

A developing government can use its full monetary powers, while staying within the limits of the economy’s productive capacity. Relying on national currency instantly eases the need for foreign credit, by working toward self-sufficiency, especially in food and energy. The overhang of existing debt acquired during the prior period of colonial and neoliberal policies however, may also require defaulting on some external debt obligations.

Loan default might make it more difficult to borrow on international markets or cause currency depreciation, however an array  of mitigation measures are available to soften the economic (and political) impacts. Multiple countries could co-ordinate to default together (“united debt resistance”), in order to reduce creditors’ leverage and force them to absorb the losses. Tariffs and subsidies can also be used to develop national industries, substituting imports and further reducing foreign reliance. In cases where imported goods cannot be substituted, trade with other developing countries where terms of trade are fairer can be maximized. Capital controls can be imposed to prevent finance from fleeing the country, or rules imposed that require approval or fees before investors move their profits or holdings abroad.

The ultimate constraint on prosperity is the real resources a nation can command, which includes the skills of its people, and its natural resource inventory. But if a nation can only access limited quantities of real resources relative to its population, then no matter what actions that government might take, the nation will likely stay poor. For some countries, appropriate international assistance may therefore be required. 

A radically reformed World Bank and IMF must be charged with responsibility for ensuring that highly disadvantaged nations can access essential real resources such as food, and are not priced out of international markets due to exchange rate fluctuations.

Two essential multilateral functions aiming to reduce poverty through sustainable economic development would be:

1. Development aid — providing funds to develop public infrastructure, education, health services and governance support.
2. Macroeconomic stabilisation — the provision of liquidity to prevent exchange rate crises in the face of problematic balance of payments.

Unfortunately the current institutions, set up post-WWII, are dominated by high-income countries (via weighted voting based on economic power/quotas) and lack direct democratic accountability to citizens, leading to policies that favour market liberalization over social equity.

World Federalists can be proud of the movement’s history campaigning for democratic accountability and climate justice. Like CSO’s are pressuring IFIs to reform their governance structures and lending practices to support genuine inclusive growth, rather than impose one-size-fits-all austerity or market-driven policies.

The existence of a global parliamentary assembly could also hasten IFI reform. A UN Parliamentary Assembly (UNPA) representing citizens rather than countries, could foster a planetarian ethos to act as watchdog, ombudsman and spokesperson seated at the centre and heart of international action, attracting media, and garnering public attention.

A UNPA would lobby for more effective and fairer management of the current system, to catalyze longer-term structural reforms (including its own legislative powers) thereby ensuring that those impacted by global decisions have direct input on global decision making.

Developing countries need to use the monetary tools at their disposal more to help themselves, and World Federalists must continue their campaigns to reform International Financial Institutions, so that disadvantaged countries get a nurturing, helping hand, not an extractive one that imposes a governing regression of their social and economic evolution. 

Mondial is published by the Citizens for Global Solutions (CGS) and World Federalist Movement — Canada (WFM-Canada), non-profit, non-partisan, and non-governmental Member Organizations of the World Federalist Movement-Institute for Government Policy (WFM-IGP). Mondial seeks to provide a forum for diverse voices and opinions on topics related to democratic world federation. The views expressed by contributing authors herein do not necessarily reflect the organizational positions of CGS or WFM-Canada, or those of the Masthead membership.