Keywords: cambodia dollarization, dollarization effects
Dollarization occurs whenever a country uses US Buck or other money instead of or along with local currency. The picture of dollarization is often as follow: using dollar for bank Deposit, paying arrears, buying goods and service, calculating nationwide budget. 1 There are three types of dollarization: public, semi-official, and unofficial. Public dollarization occurs when a country use buck as the legal currency instead of domestic currency. For instance, Panama is the dominant established dollarization adopter. It does not have any domestic currency released at all. The second type is Semi-official dollarization. Some countries on earth use US dollar and domestic money at the same time; in other phrase, they use bimonetary systems. This enables people to make first deposit in US dollar, do some purchase, but it only act as second role in paying wage, tax, electricity, and daily charge. Adopting this technique, the central loan company can place its monetary insurance plan. Cambodia, Lao, and Haiti will be the examples of semi-dollarized countries. Third, in unofficial dollarization, some countries' bulk wealth is carry in forex and people can use US dollars substituting domestic currency either officially or illegally. In a nutshell, whenever a country uses other money beside it own to swap the three functions of the financial, it is theoretically that the united states has been dollarized officially, semi-formally or informally.
2. World Dollarization Implication
There are two main aspects of dollarization. Dollarization is the subject of not only the economical or also of Politic. Economists think that money is merely just general population goods which contain three functions: method of exchange, store value and device of account and its purpose is merely to help ease the economic deal. Dollarization is the image of the united states power influence country money. The US help for the reconstruction of European Europe after the World Warfare II and many other countries, the role folks in world stage became more important. Then after the abolishment of Gold Standard in 1971, the US money also became the key currency on earth. Because of great shock of financial meltdown, some countries choose dollar US to reduce the risk and create balance. For, those countries implementing dollarization is only another term for resolved exchange rate compared to US money without much work2. Assessing to producing country money, it is more reliable, valuable and profitable in doing trade, keeping value, and making deal. However, some countries use other money with similar quality such as Germany make, Japanese yen and today Euro in Europe.
Beside economical value, money consists of purchasing ability which is the heart and soul of politic. The power has sent out to the inventor, the exchanger, and especially the controller. Thus, circulation of money will not only create hierarchy of individuals but it addittionally creates hierarchy on the globe. 3 However, for a few other countries dollarization is the center of political interest. For instance, using US dollars in Latin America signifies its dependence on US and also shows its inferior. East Timor take up US buck as its formal currency to prevent Indonesian influence. In a nutshell, dollarization can be characterize into both economic and politics. Through both means the dollarization is becoming new influence folks on earth.
3. Dollarization in Cambodia Dollarization
According to IMF the proportion of Dollar in economic blood circulation is 90% which is indifferent for a decade ago. Within an article dollarization in Cambodia, and insurance plan options along the way ahead, Menon (1998) concluded that "dollarization is not the challenge, but is merely symptom. The challenge (or the cause) is too little self-confidence in the riel, whilst the sign (or the result) is the utilization of another currency like the US dollar. 4" Dollarization in Cambodia is the result of both recent and present monetary and politic position. Dollarization in Cambodia is the direct legacy of the destruction of economical and financial
Institutions following the 1970s, monetary mismanagement in the 1980s, and the large inflows of US Dollars through the UNTAC period in the first 1990s5. Today, in Cambodia the US dollar still acts all three functions of money: it is trusted as a medium of exchange, store of riches, and product of account. The fact that dollarization is not the real problem but it is the lack self-confident in riel can be rooted as far as the Khmer Rouge Plan. In 1975 the revolution of Khmer Rouge took over the Cambodia politic and overall economy. affected by the Marxism, to make Cambodia a communist country the Pol Container abolish riel currency as well as stop the nationwide bank operation and so hope to load the space of the wealthy and the indegent. Cambodian people lived in hardship without the personal business activity, any mean of store value or exchange, on private possession. Luckily, in 1979 the population was saved; however, this country came back to the talk about of traditional current economic climate using barter system. Then, not until 1980 does riel currency show up again. Experiencing distress in 1975 when their saving cash became scraps in only days and nights, Cambodian people later preferred to make use of other means such as platinum, silver, rings for exchange. Most people used riel currency for only small exchange and not over 50$ cutting down. When the buck was presented again in 1990s, it is normally accepted along with previous gold and silver money. As much 1. 7 as US million dollars has poured in Cambodia through UN calmness keeping activity, the UNTAC6. This example paved the ways of Cambodian economy rely upon the more robust money US dollars and Cambodia was easily the most highly dollarized country in Asia, and one of the best on the planet The show of us dollars in currency Blood flow is highest in Cambodia, projected at about 90 percent. Nowadays Dollars still plays major role in business transfer, and the major deposit in bank or investment company. The lifetime of dollarization in Cambodia is also expected to last. Another reason for Cambodia in taking dollarization is just a pressure of its country as a producing economy. Despite the fact that Cambodia did three 10 years or reconstructing the economy, reducing political and economic uncertainty, there are more actions to be done to escape dollarization. While expansion and political uncertainty greatly has been reduced, Cambodia remains a minimal income country with significant inequality and poverty, and some degree of politics uncertainty remains. For example, politics turmoil in 1997 coupled with Asian financial meltdown would have been more even more threatening to Cambodia if it was not dollarized.
4. Conclusion
As many areas have problem in both economic and politic balance and weak financial system people will consider using another currency which is more stable and valuable generally in most situation. Within the severe case some countries don't have own currency in any way but US dollar. As the US has strong financial regime its money impress those expanding states to utilize US dollar; therefore, US may slightly influence those state in both financial and politic. Some states may be dollarized to be able to generate financial balance; however, they are simply doubtful what can US do with dollarization for politics. Cambodia is not the exception. Since 1970s and have been attracted to new currency US buck in since 1990s. Until now, the amount of dollarization has modified a little. Dollarization was injected so steadily that people get accustomed to it regardless of the government work to de-dollarize in the last decade. Cambodia monetary and politic problems still power dollarization lifetime. Next concern is to discuss the advantage and disadvantage in Cambodia.
MC2: Situation of Dollarization in Cambodia Today and Its Cost and Benefit
After the two decade of United Nation Transnational Power in Cambodia (UNTAC) managed peacefulness keeping activity and expose dollarization in Cambodia, with high economical performance with average two digits GDP development and considerable politics stability Cambodia should have come out of dollarization already. However, Cambodia's economy continues to be highly and more and more dollarized which desire the federal government to critically consider whether to de-dollarize by comparing its cost and benefit.
The position of Cambodia dollarization today is not way not the same as the 1990s1. The dollar still serves three functions in this overall economy: making business deal, storing value and being utilized as product of account. The cash dollar in blood flow in Cambodia is 90% of all value of deal which is similar as ten years ago. Dollars has been broadly use for private sector wage payment, medium of international trade and also purchase large value products. Additionally, dollars also dominate the money first deposit as storing value device in Cambodia. According to the National Standard bank, the forex deposit in wide-ranging money (M2) is accounted for 75% in 2006 increasing from 54% in 1998. Furthermore, 97% of standard bank deposit is at term of money. The recent increase in dollarization is the result of two main points the higher financial progress and recent political stability has contribute to more dollarization. If the trader think Cambodia is an excellent place to commit they'll inject more dollar investment. In addition, the open up trade economy also allows Cambodia to do more trade with other countries using dollar as medium of international trade exchange.
Long before this happen the problem of dollarization has been reviewed on cost and advantage but at this time it is even more critical to determine that the cost of dollarization is more than advantage in Cambodia2. The benefit for dollarization in Cambodia can be encouraging saving, protecting against capital flight, providing low risk of money and exchange rate devaluation. First, the dollarization increasing keeping when you can find a better money that is more reliable, therefore, people will tend to save in the bank in buck to increase their prosperity as well as lubricate the overall economy. Second, this also prevent hot money venture out Cambodia very quickly of come back from investment because trader still deposit profit local loan company and transfer to their homeland at any time when you can find high part of dollar first deposit in the lender. Lastly, dollarization provides security from the risk of currency devaluation and exchange rate depreciation. When the local money face inflation or depreciation the buck holder won't worry about the value of advantage they carry in dollar. On the other hand, those benefits are little looking at to cost of dollarization. To begin with, riel is the countrywide symbol of states sovereignty so using dollar is absolutely affect sovereignty and national identity. Second, When Cambodia use dollar as dominate to riel money, the national symbol has been eroded because folks do not trust their own federal. Instead of get easily affected by local inflation, the money holder get easily have an effect on by buck instability especially in recent years. Thus, this means that Cambodia is slightly dependence on the united states federal monetary coverage. Finally, dollarization make local financial coverage less effective, in other expression, the central bank or investment company cannot use its own currency to totally stabilize price and overall economy. When federal government want to print more money you won't increase much throughout the market because almost all of exchange done by money and the federal government also cannot control the interest rate because the most deposit is money not riel. Government also cannot get inflation duty (printing money to funding short-term deficit but let go the inflation) to funding the federal government budget especially in hard time. 3 Being unable to use inflation duty or seignior age group to support crisis needs the government of Cambodia is estimate to loss seignior years to be $682 million by the end of 2004, with an additional $61 million lost on a yearly basis. and especially in the case of paying the armed forces, the Barry Eichengreen (1994): "Money can be printed to pay military, to purchase materiel, also to underwrite the other costs of your war of national defense and never have to wait for tax returns to be registered or for a overseas loan to be expanded. " As their state sovereignty and being
able to use own policy is very important the cost burden by dollarization above have already exceed the benefit. Thus its about time for Cambodian administration to obtain additional effort in de-dollarized campaigned despite the problem of lack of both dedication and capacity. In short, even although overall economy and politic of Cambodia has improved the dollarization is not eliminated but it does increase because of the more free market mechanism. However, dollarization has impose more cost such as hindering Cambodia from using its own monetary insurance plan, eroding national sovereignty and being not able to finance government budget deficit which is far more significant that the benefit such as creating price steadiness, motivating save and discouraging capital airline flight. This is the about time for Cambodia federal to react to those issues. Cambodia cannot stay besides from dollarization as it shows the bigger level. The Cambodia federal must show its dedication and strengthen capacity to combated dollarization either locally or regionally.
MC#3: Plan Option for De-dollarization in Cambodia
The administration of Cambodia has came to the realization that the current situation of dollarization in Cambodia has higher cost than benefit. The cost is the fact that dollarization has weakened domestic monetary insurance plan capacity to manipulate the financial and monetary system as the benefit has gone to price balance and trade and investment integration. The Cambodian federal has; therefore, allowed the side aftereffect of US federal insurance policy to impact its economy for a long time either good or bad. Thus, it is high time for Cambodia to bolster de-dollarization. There are two main procedures in de-dollarization which are domestic coverage and regional coverage. However, this paper will cover only the opportunity of insurance policy option done by the federal government of Cambodia by themselves. The suggested insurance policies to de-dollarized Cambodia overall economy are full dollarization, currency table agreement, and continue Interim policy reform. However, the latest seems most preferable.
The first selection of Cambodia is to go frontward to full dollarization following precedential example in Latin American economy especially Panama. Implementing this policy, Cambodia has a great save in deal cost, is easy to assimilate itself in the local and global market by trade and capital circulation and also maintain high price stableness. However, full dollarization seems not the right choice for Cambodia. Since Cambodian economy does not meticulously related to US and so it generally does not allow Cambodia to keep monitor with US current economic climate easily. Moreover, quitting riel currency indicates scarifying more seigniorage profit to US and has no more ability to utilize own monetary insurance policy as the lending company of final resort of domestic commercial bank. Moreover, the government of Cambodia hasn't showed any commitment to turn to keep money as legal sensitive. The Minister of Ministry of Economic and Money, Mr. Keat Chhun at the Launching Cambodian Economic Forum in 2006 said ". . . However, it should be seen that the Royal Government is currently applying de-dollarization. . . . Our current economic climate must be predicated on national currency, which should be predicated on a container of foreign currencies and regular with the integration of our economy into local and world current economic climate. " It isn't likely that Cambodia take a opposite policy from its dedication.
Second insurance policy is to set-up currency board agreement in Cambodia. A money panel is a monetary expert, unlike central loan provider, issue domestic currency that is usually convertible to foreign currency at a fixed exchange rate on the basis of 100%. This means that if 1$ = 4000 riel, the currency panel needs 10$ reserve to issue 40000 riel. The currency board makes profit by gaining interest from its international reserve by the trouble of cost in circulating local currency. The benefit of CBA is the gaining of seigniorage advantage within the dollarization that makes country loss for the reason that. Although Currency board seems a good choice but it need too much effort from Cambodia and also has side effects. There can be an estimated that riel is 10% of the currency of circulation and the state reserve is triple of the which is add up to 30%. Thus, it means that Cambodia need to triple the reserve to gather all dollars in blood flow. Therefore, money board may lead to a mass government debt. Will there be any different ways that Cambodia can have more recognized reserve?
Finally, the last choice for de-dollarization is to use interim insurance policy. Interim policy is to set aim of de-dollarization in long run and speed up reform. In this process, the authorities of Cambodia should remaining the financial system as they are on the main one hand; and increase macroeconomic stableness which increase riel assured and demand as well as restore riel-friendly environment on the other palm. First of all, National Standard bank of Cambodia plays an important role in this policy. NBC is the last resort of loan of commercial lender, so NBC provide riel as a mean to refinance. Then Cambodia federal government should promote the utilization of riel currency as a mean of exchange with security and low priced. Last, the NBC can use Treasury costs to attract the riel financial market by giving higher interest than dollars saving. Next to the role of the bank, the duty plan reform is also considered. Demand of riel can be raised when there is obligation to pay all kind of duty in riel. Thus, when there may be more duty collection in riel implies more demand in riel. Besides, the adaptations of existing establishment that allow ease the dollarization is important. For instance, the least wage legislation in Cambodia is indentify is buck not riel and the most international company managed in Cambodia preferred to pay salary in dollar only while in other country the government required the international organization to pay 30%-40% in local money. Moreover, there's also surplus needs of riel in microfinance that can't be fulfilled. it's estimated that microfinance industry demand Riel 120 billion in 2008, but the supply is insufficient. Thus, it is important to solve the dollarization-friendly-condition above by remove any status help for dollarization although there is a certain part in buck paying in wage and salary and increase way to obtain riel in microfinance industry.
One can criticized that Cambodian administration has done a whole lot in reform for macroeconomic stability however the result is still high dollarization in today overall economy. Cambodia has enjoyed high expansion, average two digit expansion in previous five year, regardless of the distraction from the global financial crisis in 2008, the there still the same dollarization. In addition, to restore appeal to demand in riel as a secure and low transaction cost currency is not good because the commercial bank has promote it by giving higher interest than dollar first deposit already. The problem is not give attention to what have Cambodian did, instead it's important to learn what else needed to achieve long-term goal of de-dollarization. Furthermore, gradually de-dollarization process can alleviate the current economic climate adaption. As end result, when the Cambodia reach the macroeconomic stability the authority can take benefit of strong financial system to increase self-assured in riel and therefore to de-dollarized.
In bottom line, Dollarization in Cambodia is not the problem that easily to settle because there a high link between citizen who like dollarization as the consequence of being not self-assured in riel and vulnerable lender and a higher loss in the government who is the coordinator between those two. On the list of suggested insurance policy in de-dollarization that are full dollarization, currency board agreement and interim coverage, the previous choice is probable your best option for Cambodia because it respresent the appropriate capacity ot the state governments as well as allowed visitors to increase confident and demand in riel extensive. However, the previouse effort in this policy is insufficient so Cambodia desire a higher commitment and capacity in this insurance plan. On the other hand, domestic insurance policy alone may well not enough to deal with the dollarization which is the result from capital and trade integration. Therefore, regional cooperation combating dollarization can be the future choice for cambodia.
MC4: Subregional Co-operation in Dedollarization.
Cambodia, Laos and Viet Nam have shared common feature as the newly emergence economy. First of all, the three countries or so called CLV countries have transform from central prepared overall economy to free and open up market economy during 1980s and 1990s. Because of the knowledge of price instability, fragile financial and exchange rate insurance policy and the underdeveloped or non lifetime of financial market make all countries in the same way tend to use Money alongside the neighborhood currency despite the various degree of dollarization. Although dollarization has donate to price exchange rate stability, it isn't the good choice to them in longterm because the federal government has lost much seigniorage, advantage as well as the role of last resort of lender of central loan company. CLV has tried out their own solution to dedollarize to handle shortcoming problems by their own reform so as to gain currency confident and also improving lender. Those policies appear to need much effort and time and CLV to accomplish alone, therefore there is also another choice of subregional assistance among CLV countries such as exchange rate plan and single money area.
For CLV co-operation in economic and exchange rate policy to combat both depolarization and economic system sustainability which includes price stableness, financial stableness and exchange rate balance, CLV have to create co-operation environment as a precondition. First, they have to develop a network of coverage producers, economist elites, officials, and researcher from all degree of government and lender to adopt close surveillance on CLV financial performance and discuss the likelihood of new insurance plan. Moreover, the networks should make a regular meeting information exchange, checking progress and also make consultant the possible area in economic integration in the region. Secondly, CLV countries should create strong interconnection of capital market among them. A couple of two possible options for this. The Viet Nam should allow the Cambodian and Laos company to list it currency markets or the CLV can create common relationship market of CLV subregion. To develop capital market in CLV countries in addition they need to make a joint legislation and supervisory to ensure transparency to investors and they need to reduce foreign exchange restriction among the three countries to lessen exchange rate risk among investor too.
After achieving the above mentioned precondition in economic and exchange co-operation above, CLV have two alternatives that happen to be exchange rate co-operation and monetary co-operation to multilaterally fight dollarization.
First of most, consider the possible of future exchange plan in ASEAN+3 in the East Asian financial community, the CLV exchange rate cooperation can be pilot task of the larger picture of cooperation. CLV countries should think about the joint peg of money to Buck or currency basket of currency famously Buck, Euro and yen as the weight of currency depends upon the trilateral dialogue. This common peg to Dollar is an excellent choice for CLV countries because of several reasons despite some issues. First, the secure exchange rate to Dollar has revealed the strength of currency against external fluctuation thus gain trustworthiness of money. Second, CLV already choose restricted fluctuation of money against Dollar and those main trading spouse, China also already peg to Dollar. By doing this the three countries will have less exchange cost in changing their currency to Dollar when they are doing trade and at the same time their currency will get positive from people since it is secure with Dollar. For the other palm, when CLV peg to the basket of money including Money, Euro and Yen, the CLV country can reduce risk when there is certainly currency shocked in US. Instead of rely entirely on exchange rate steadiness with Buck, CLV decrease the risk by rely upon two more major economies, Europe and Japan. There is absolutely no correct proportion of the three currencies in the currency basket, yet it will depend on the economic relation of CLV to the G3 (US, Europe and Japan) and also their own negotiation. Besides, CLV can move further to sublocal currency plank which ensures the more powerful peg to foreign currency thus they have more seigniorage benefit. However, they want much more work to do this. First, they need to create a stronger assistance in coordinating money policy. Second, they want more overseas reserve to run money board and it requires high legal endorsement to get people use local currency.
In addition to cooperation in trade rate regime, additionally it is important that CLV cooped to create monetary plan. The CLV common money is a long-term goal they might need many work from CLV to improve the credibility among general public of money as well as effective institution to handle the transitional change of money and strong political will of CLV leaders. Besides, the CLV money area can be proven only following the Asian Currency Device (ACI) which is comparable to European Money Unite, has been created in ASEAN+3. When you can find common peg to ACI in ASEAN+3 economy, the CLV changes to peg ACI and they can create their own sublocal common currency in lower level to increase their voice in ASEAN cooperation, in addition to the gain for Exchange rate routine. However, some scholar suggests this program is difficult to accomplish at least in a nutshell and medium term because there are many political very sensitive issue to beat, weak establishment, and flexibility of people.
In summary, in order to cooperate with each other so as to dedollarize their economy CLV countries has to two choices of Exchange rate routine and single money. Those policies are only possible when CLV countries have strong foundation of co-operation in critical are such economical consolation and information showing, joint assessment etc. They can more reap the benefits of this cooperation somewhat than taking action singularly however it is only longterm goal on their behalf. In possibility there continues to be possibility to get out dollarization when CLV are determined enough in co-operation.
MC#5: Dollarization and Implication of Financial Structures Reform
Cambodia among CLV is entirely dollarized countries in the world which face the problems. Dollarization is the normal problem in developing countries such as Latin America also. Thus the truth of dollarization in Cambodia can also reveal the situation of the change of financial architecture that affect the financial and monetary system on earth. Dollarization is the indication of weak capability of local financial framework, historical price in balance and political problems urges people to use foreign currency. While the authorities the seigniorage gain and role of last resort of lender people enjoy the stableness of profit deposit as well as trade and investment. Rooted from the globalization there are three main debates in global economic climate:
- Does indeed dollarization best for growing country?
- Should states liberalize people choice in using currency they like or impose people to choose countrywide fiat money?
- Should IMF play important role on the globe exchange rate balance?
- Does dollarization best for growing country?
Dollarization can provide price and exchange rate stability in low priced in most emergence market current economic climate. Hanke recommend growing countries to use dollarization in case that the states don't have strong financial and fiscal insurance plan to tighten currency value in long term should use dollarization as monetary institution. These idea is not elevated by him alone some scholar also propose choice of dollarization because of several reasons. First, considering the financial and dept turmoil during 1980s and 1990s in much area of the world and thus leads to increase of high inflation, currency devaluation and mass capital outflow by overseas investors. When growing country dollarization they can stabilize the currency, exchange rate. When those countries use a high confident and good quality money like money in economy is no possibility of a sharpened depreciation, and quick capital outflows because of investor unconfident is also omitted. Second, dollarization can highly reduce purchase cost and integrate developing economy closer to US. Thirdly, the stableness of dollar throughout the market as money in expanding countries will encourage people to save more and foreigner to invest more. However, dollarization is costly. Authorities of producing countries need to scarify seigniorage gain in dollarized overall economy and the Central bank losses its role of lender of last holiday resort to the commercial lender in case there is liquidity problems. Furthermore, the states will lose its sovereignty in term of monetary insurance policy and exchange rate policy. Thus, it is a crucial decision to if to dollarize in growing countries because they have to compare the benefit of dollarization the cost to endure it as well as managing the inner risk with external risk.
- Should state governments liberalize people choice in using currency they like or impose people to choose countrywide fiat money?
According to Laurence H. Meyer, an associate of the Plank of Governors of the Federal Reserve System when you can find more global financial integration the federal government should increase role in market willpower, regulation and also supervision in money and also exchange rebate. The says should improve the international capital standard, market self-discipline. Their state has monopolized the authorization on Money self-discipline by introduces countrywide currency to show the selfhelp system in term of money and also gains seigniorage benefit. However, Randal Krozner, an economist at the College or university of Chicago's Graduate, rejects the role of government in currency circulating. He claim that private regulation found in private actors such as clearing house, credit history agency, trader, capitalist investor, yet others has provided steadiness and invention because they work meticulously to financial and money market. He advises that the government should decrease the treatment in the financial and monetary system and let the dynamic private sector to modify the system. In a nutshell, although some scholar support federal government role in regulation the currency market, some other reject it and promote the private legislation instead. It is a hard decisions of a state, however, to loss its sovereignty in term of money. Yet that will not mean the stableness on the market pressure by private sector is not important. Eventually, the second debate becomes a difficult decision.
- Should IMF play important role on the globe exchange rate balance?
The third argument is approximately the role of IMF as the financial stabilizer. IMF is theoretically very important to stabilize the exchange between states. When the government is unable to pay your debt or has large budget deficit the IMF will provide short time account to finance your debt or budget deficit. The countries that contain short-term balance of payment problem will get financial associate to help them keep up with the stability of exchange rate. For, example during Asian financial crisis IMF provide fund to Thailand, Indonesia, Philippine to help them come out of the turmoil. Nowadays, the account is greater and term is longer. However, an Economist historian form Rutger School, stated that the due to its moral hazard problem IMF should reduce its current role. If the express economies are always backed by help IMF they may reduce to work to enhance own monetary and budget policy and they tend to borrow and spend more because every time they get problem IMF will help them. Furthermore, when borrow are expected to get money pay your debt even when they can not pay your debt they will likely to borrow more and dare to endure more risky investment. For instance, in 1990s there is a widespread debt problems in Latin America countries acquire much help from IMF and from then on they still borrow much money for other countries. Then, when they borrow too much they still thought IMF can help them again. This, problems create distrust in local currency in those country that make local people turned to dollar money instead. Thus, IMF can play an important role in financial meltdown by providing shortterm debt funding but it also open up door to crisis by creating moral risk.
Cambodia only encounters the problem of two former debates about the dollarization and role of authorities in money choice. However, Cambodia haven't experience high debts problems as Latin America although Cambodia used to receive temporarily finance from IMF double in 1994 and 1999 to complete the government budget deficit.
