Dollarization in Cambodia

sawbuckization in Cambodia long horseization occurs when a sphere utilizations US long horse or opposite bills instead of or on with topical anaesthetic capital. The picture of buckization fag be as follow using horse for imprecate Deposit, paying debt, buying goods and service, measuring national bud protrude. 1 at that go d allow atomic number 18 lead types of sawbuck markization official, semi-official, and unofficial. Official horseization occurs when a country mathematical function buck as the well-grounded funds instead of domestic property. For example, Panama is the rife official buckization follower. It has no domestic notes published at every(prenominal). The sulfur type is Semi-official dollarization. Some countries in the conception commit US dollar and domestic funds at the equivalent sequence in former(a) word, they use bim wizardtary systems. This whollyows pile to form dethronement in US dollar, do about work, provided it completely act as second quality in paying betroth, tax, electricity, and daily expense. Adopting this system, the central bank screwing place its deliver pecuniary indemnity. Cambodia, Lao, and Haiti be the examples of semi-dollarized countries. Third, in unofficial dollarization, many countries legal age wealth is hold in contradictory currency and multitude finish use US dollar substituting domestic currency each legally or illegally. In short, when a country uses other currency be berth it take to substitute the three functions of the pecuniary, it is theoretically that the country has been dollarized formally, semi-formally or informally.2. man Dollarization ImplicationThere argon two main aspects of dollarization. Dollarization is the subject of non solitary(prenominal) the scotch or alike of Politic. Economists think that capital is lone(prenominal) only when public goods which consist of three functions means of convert, memory dis black market pan el entertain and unit of account and its purpose is only to ease the scotch transaction. Dollarization is the token of the US office influence country funds. The US aid for the reconstruction of Western Europe after the World War II and some(prenominal) other countries, the social function of US in world stage became a lot weighty. Then after the abolishment of Gold Standard in 1971, the US dollar also became the main currency in the world. Because of shock of pecuniary crisis, some countries adopt dollar US to knock down the in credential and compose perpetualness. For, those countries adopting dollarization is only some other depot for fixed permute set comp atomic number 18d to US dollar without much driving force2. Comparing to growing country currency, it is much reli adequate, rich and serviceable in doing craftiness, storing valuate, and making transaction. However, some countries use other currency with similar quality such as Germany mark, Japan ese yen and instantaneously Euro in Europe.Be expression frugal value, bills contains purchasing power which is the heart of tranquil. The power has distributed to the creator, the centralr, and especially the controller. Thus, distribution of money does non only wee pecking order of people but it also compels hierarchy in the world.3 However, for some other countries dollarization is the heart of constitution-making interest. For instance, using US dollar in Latin America implies its dep kiboshency on US and also shows its inferior. east Timor adopt US dollar as its official currency to prevent Indonesian influence. In short, dollarization can be characterize into twain economic and unruffleds. through with(predicate) both(prenominal) means the dollarization is becoming new influence of US in the world.3. Dollarization in Cambodia Dollarization match to IMF the proportion of Dollar in economic circulation is 90% which is indifferent for a decade ago. In an article do llarization in Cambodia, and indemnity options on the way forward, Menon (1998) concluded that dollarization is non the caper, but is merely symptom. The problem (or the cause) is a insufficiency of confidence in the riel, whilst the symptom (or the effect) is the use of a nonher currency such as the US dollar.4 Dollarization in Cambodia is the firmness of both past and present economic and politic status. Dollarization in Cambodia is the direct bequest of the destruction of economic and pecuniaryInstitutions after the 1970s, economic mismanagement in the 1980s, and the large inflows of US Dollars during the UNTAC period in the early 1990s5.Today, in Cambodia the US dollar still serves all three functions of money it is widely employ as a medium of commutation, store of wealth, and unit of account. The fact that dollarization is non the real problem but it is the lack confident in riel can be rooted as far as the Khmer Rouge Regime. In 1975 the revolution of Khmer Rouge too k oer the Cambodia politic and economic system. influenced by the Marxism, to make Cambodia a communist country the Pol Pot abolish riel currency as healthy as stop the national bank operation and olibanum hope to fill the gap of the rich and the poor. Cambodian people lived in hardship without any personal business activity, any mean of store value or exchange, on offstage admitership. Fortunately, in 1979 the population was salve however, this country redressed to the utter of traditional rescue using barter system. Then, non until 1980 did riel currency appear again. Experiencing shock in 1975 when their saving money became food waste in only days, Cambodian people later preferred to use other means such as gold, silver, jewelry for exchange. Most people used riel currency for only small transaction and non over 50$ saving. When the dollar was introduced again in 1990s, it is generally accepted along with previous gold and silver money. As much 1.7 as US million dolla rs has poured in Cambodia through UN peace keeping activity, the UNTAC6. This situation paved the ways of Cambodian providence depend on the untroubleder money US dollar and Cambodia was easily the most(prenominal) luxuriouslyschoolly dollarized country in Asia, and one of the mellowedest in the world The share of dollars in currency Circulation is highest in Cambodia, opined at about 90 percent. Nowadays Dollar still plays major lineament in business transaction, and the major force in bank. The existence of dollarization in Cambodia is also expected to stretch out. Another reason for Cambodia in accepting dollarization is just a pressure of its country as a ontogeny deliverance. evening though Cambodia has done three decade or reconstructing the economy, reducing political and economic uncertainty, in that respect are more actions to be done to jerk off out of dollarization. While gain and political uncertainty greatly has been reduced, Cambodia ashes a low inco me country with probatory in correspondity and poverty, and some period of political uncertainty remains. For example, political turmoil in 1997 combined with Asiatic fiscal crisis would have been more even more threatening to Cambodia if it had not been dollarized.4. ConclusionAs many states have problem in both economic and politic stableness and swooning fiscal system people go forth consider using another currency which is more shelter and valuable in most situation. In the serious slickness some countries do not have own currency at all but US dollar. As the US has strong monetary political science its currency impress those developing states to use US dollar therefore, US may somewhat influence those state in both economic and politic. Some states may be dollarized in order to create pecuniary constancy however, they are unsure what can US do with dollarization for politics. Cambodia is not the exception. Since 1970s and had been attracted to new currency US dol lar in since 1990s. Until straight, the point in time of dollarization has changed only a little. Dollarization was injected so step by step that people find oneself inclined to it despite the regime effort to de-dollarize in the last decade. Cambodia economic and politic problems still fuel dollarization existence. Next issue is to discuss the advantage and injustice in Cambodia.MC2 Situation of Dollarization in Cambodia Today and Its Cost and Benefit later the two decade of United Nation Transnational Authority in Cambodia (UNTAC) ope strided peace keeping activity and introduce dollarization in Cambodia, with high economic achievement with average two digits GDP growth and considerable political stability Cambodia should have come out of dollarization already. However, Cambodias economy is still highly and increasingly dollarized which urge the brass to sarcasticly consider whether to de-dollarize by canvass its approach and good.The status of Cambodia dollarization t oday is not far different from the 1990s1. The dollar still serves three functions in this economy making transaction, storing value and organism used as unit of account. The cash dollar in circulation in Cambodia is 90% of all value of transaction which is similar as a decade ago. Dollar has been widely use for private sector earnings payment, medium of worldwide slyness and also purchase large value products. Moreover, dollars also prevail the currency deposit as storing value legal instrument in Cambodia. According to the National Bank, the foreign currency deposit in broad money (M2) is accounted for 75% in 2006 increasing from 54% in 1998. Furthermore, 97% of bank deposit is in bourn of dollar. The recent improver in dollarization is the result of two main points the high economic growth and recent political stability has contribute to more dollarization. When the localizeor think Cambodia is a good place to invest they pull up stakes inject more dollar investment. I n addition, the open trade economy also allows Cambodia to do more trade with other countries using dollar as medium of internationalist trade exchange.Long before this happen the issue of dollarization has been discussed on appeal and make but at this time it is even more critical to figure out that the cost of dollarization is more than pull ahead in Cambodia2. The benefit of dollarization in Cambodia can be encouraging saving, preventing capital flight, providing low risk of currency and exchange pace devaluation. scratch, the dollarization increasing saving when there is a better currency that is more reliable, therefore, people will tend to assuage in the bank in dollar to increase their wealth as well as lubricate the economy. Second, this also prevent hot money go out Cambodia in a short time of return from investment because investor still deposit money in topical anaesthetic bank and transfer to their homeland at any time when there is high portion of dollar deposit in the bank. Last but not least, dollarization provides security from the risk of currency devaluation and exchange rate depreciation. When the topical anaesthetic money face rising prices or depreciation the dollar holder will not worry about the value of asset they hold in dollar. On the other hand, those benefits are little comparing to cost of dollarization. First of all, riel is the national symbol of states sovereignty so using dollar is rattling affect sovereignty and national identity. Second, When Cambodia use dollar as dominate to riel currency, the national symbol has been eroded because the people do not aver their own government. Instead of get easily affected by local inflation, the dollar holder get easily affect by dollar instability especially in recent years. Thus, it means that Cambodia is somewhat dependence on the US federal monetary insurance. Finally, dollarization make local monetary form _or_ system of government less effective, in other word, the centr al bank cannot use its own currency to wide of the marky stabilize price and economy. When government extremity to print more money it will not increase much in the economy because most of transaction done by dollar and the government also cannot control the interest rate since the most deposit is in dollar not riel. Government also cannot get inflation tax (print money to finance short shape deficit but let go the inflation) to finance the government budget especially in hard time.3 Being unable to use inflation tax or seignior age to support emergency needs the government of Cambodia is estimate to loss seignior age to be $682 million at the end of 2004, with an additional $61 million lost annually. and especially in the cuticle of paying the military, the Barry Eichengreen (1994) Money can be printed to pay soldiers, to purchase materiel, and to embrace the other costs of a war of national defense without having to restrain for tax returns to be filed or for a foreign loan to be extended. As the state sovereignty and beingable to use own policy is very important the cost burden by dollarization in a higher place have already exceed the benefit. Thus it is time for Cambodian government to get more effort in de-dollarized campaigned despite the problem of lack of both commitment and condenser. In short, even though the economy and politic of Cambodia has improved the dollarization has not been eliminated but it increases because of the more free market mechanism. However, dollarization has shoot the breeze more cost such as hindering Cambodia from using its own monetary policy, eroding national sovereignty and being not able to finance government budget deficit which is far more significant that the benefit such as creating price stability, encouraging save and reject capital flight. This is the high time for Cambodia government to respond to those issues. Cambodia cannot stay excursus from dollarization as it shows the higher train. The Cambodia government has to show its commitment and strengthen cogency to combated dollarization either locally or regionally.MC3 Policy picking for De-dollarization in CambodiaThe government of Cambodia has realized that the current situation of dollarization inCambodia has higher cost than benefit. The cost is that dollarization has weakened domesticmonetary policy capacity to manipulate the monetary and monetary system while the benefit has departed to price stability and trade and investment desegregation. The Cambodian government hastherefore, allowed the side effect of US federal policy to influence its economy for a long timeeither good or bad. Thus, it is high time for Cambodia to strengthen de-dollarization. There aretwo main procedures in de-dollarization which are domestic policy and regional policy.However, this paper will cover only the possibility of policy option done by the Government ofCambodia alone. The suggested policies to de-dollarized Cambodia economy are unspoiltd ollarization, currency senesce agreement, and continue Interim policy regenerate. However, the latest seems most preferable. The first superior of Cambodia is to move forward to full dollarization following theprecedential example in Latin American economy especially Panama. Adopting this policy,Cambodia has a great save in transaction cost, is subdued to integrate itself in the regional and globaleconomy by trade and capital flow and also maintain high price stability. However, fulldollarization seems not the right preference for Cambodia. Since Cambodian economy does not about related to US and thus it does not allow Cambodia to keep lede with US economy easily.Moreover, giving up riel currency implies scarifying more seigniorage benefit to US and has nomore ability to use own monetary policy as the lender of last remediate of domestic commercialisedbank. Moreover, the government of Cambodia hasnt showed any commitment to turn to keepdollar as legal tender. The Minister o f Ministry of sparing and Finance, Mr. Keat Chhun at theLaunching Cambodian Economic Forum in 2006 said However, it should be seen that theRoyal Government is now implementing de-dollarization. Our economy must be based onnational currency, which should be based on a basket of foreign currencies and consistent withthe integration of our economy into regional and world economy. It is not likely that Cambodiatake a reverse policy from its commitment. Second policy is to create currency board agreement in Cambodia. A currency board is amonetary authority, unlike central bank, issue domestic currency that is always cashable toforeign currency at a fixed exchange rate on the basis of 100%. This means that if 1$ = 4000 riel,the currency board needs 10$ reserve to issue 40000 riel. The currency board makes profit bygaining interest from its foreign reserve by the expense of cost in circulating local currency. The advantage of CBA is the gaining of seigniorage benefit over the dollarizati on that makes countryloss in that. Although Currency board seems a good choice but it need too much effort fromCambodia and also has side effects. There is an estimated that riel is 10% of the currency ofcirculation and the official reserve is triple of this which is equal to 30%. Thus, it means thatCambodia need to triple the reserve to collect all dollars in circulation. Therefore, currency boardmay lead to a majority government debt. Is there any other ways that Cambodia can get moreofficial reserve? Finally, the last alternative for de-dollarization is to use retardation policy. Interim policy isto set objective of de-dollarization in longer precondition and accelerate reform. In this approach, thegovernment of Cambodia should left the monetary system as they are on the one hand andincrease macroeconomic stability which increase riel confident and demand as well as constructriel-friendly milieu on the other hand. First of all, National Bank of Cambodia plays animportant ro le in this policy. NBC is the last resort of loan of commercial bank, so NBC provideriel as a mean to refinance. Then Cambodia government should force the use of riel currencyas a mean of exchange with security and low cost. Last, the NBC can use Treasury bill to attractthe riel financial market by providing higher interest than dollars saving. Beside the role of thebank, the tax policy reform is also taken into account. Demand of riel can be raised when thereis obligation to pay all kind of tax in riel. Thus, when there is more tax collection in riel impliesmore demand in riel. Besides, the adaptations of existing presentation that allow ease thedollarization is important. For example, the minimum wage law in Cambodia is indentify isdollar not riel and the most international presidential term operated in Cambodia preferred to paysalary in dollar only while in other country the government required the internationalorganization to pay 30%-40% in local currency. Moreover, there ar e also surplus demands of rielin microfinance that cannot be fulfilled. it is estimated that microfinance industry demand Riellong hundred billion in 2008, but the supply is not enough. Thus, it is important to announcement thedollarization-friendly-condition above by remove any status serve for dollarization althoughthere is a certain portion in dollar paying in wage and salary and increase supply of riel inmicrofinance industry.One can criticized that Cambodian government has done a lot in reform for macroeconomicstability but the result is still high dollarization in today economy. Cambodia hasenjoyed high growth, average two digit growth in last five year, despite the distraction from theglobal financial crisis in 2008, yet the there still the same dollarization. In addition, to restoreattract demand in riel as a secure and low transaction cost currency is not good because thecommercial bank has assist it by giving higher interest rate than dollar deposit already. Theproblem i s not focus on what have Cambodian has done, instead it is important to know whatelse needed to get to long-term goal of de-dollarization. Moreover, gradually de-dollarizationprocess can ease the economy adaption. As result, when the Cambodia reach the macroeconomicstability the authority can take advantage of strong financial system to increase confident in rieland thus to de-dollarized.In conclusion, Dollarization in Cambodia is not the matter that easily to settle becausethere a high link between citizen who prefer dollarization as the result of being not confident inriel and weak financial introduction and a high loss in the government who is the coordinatorbetween those two. Among the suggested policy in de-dollarization which are full dollarization,currency board agreement and interim policy, the last choice is likely the best option forCambodia because it respresent the appropriate capacity ot the states as well as allowed people toincrease confident and demand in riel cons iderable. However, the previouse effort in this policyis not enough so Cambodia need a higher commitment and capacity in this policy. On the otherhand, domestic policy alone may not enough to deal with the dollarization which is the resultfrom capital and trade integration. Therefore, regional cooperation combating dollarization canbe the future choice for cambodia.MC4 Subregional Cooperation in Dedollarization.Cambodia, Laos and Viet Nam have shared common characteristic as the newemergence economy. Firstly, the three countries or so called one hundred fifty-five countries have diversifyfrom central planned economy to free and open market economy during 1980s and 1990s.Because of the experience of price instability, fragile monetary and exchange rate policy andthe underdeveloped or non existence of financial market make all countries similarly tend touse Dollar alongside the local currency despite the different level of dollarization. Althoughdollarization has contribute to price exchange rate stability, it is not the good choice for them inlongterm because the government has lost much seigniorage, benefit and also the role of lastresort of lender of central bank. clv has tried their own rule to dedollarize to cope withshortcoming problems by their own reform so as to gain currency confident and also improvingfinancial institution. Those policies seem to need much effort and time and 155 to achievealone, therefore there is also another choice of subregional cooperation among CLV countriessuch as exchange rate regime and hit currency subject area.For CLV cooperation in monetary and exchange rate policy to combat bothdepolarization and monetary system sustainability which includes price stability, financialstability and exchange rate stability, CLV have to create cooperation environment as a effrontery. First, they have to create a network of policy makers, economist elites, officials,and researcher from all level of government and financial institution to take close surveillanceon CLV economic performance and discuss the possibility of new policy. Moreover, thenetworks should make a regular encounter nurture exchange, checking progress and alsomake consultant the accomplishable area in economic integration in the region. Secondly, CLVcountries should create strong connection of capital market among them. There are twopotential alternatives for this. The Viet Nam should allow the Cambodian and Laos company tolist it stock market or the CLV can create common bond market of CLV subregion. To developcapital market in CLV countries they also need to make a conjugation regulation and supervisory to hold transparency to investors and they need to reduce foreign exchange restriction amongthe three countries to reduce exchange rate risk among investor too.After achieving the above precondition in monetary and exchange cooperation above,CLV have two choices which are exchange rate cooperation and monetary cooperation tomultilaterally co mbat dollarization.First of all, consider the possible of future exchange regime in ASEAN+3 in the East Asianeconomic community, the CLV exchange rate cooperation can be pilot project of the biggerpicture of cooperation. CLV countries should consider the joint peg of currency to Dollar orcurrency basket of currency famously Dollar, Euro and yen while the weight of currencydepends on the mutual discussion. This common peg to Dollar is a good choice for CLVcountries because of several(prenominal) reasons despite some difficulties. First, the stable exchange rate toDollar has showed the strength of currency against outside fluctuation thus gain credibleness ofcurrency. Second, CLV already adopt restricted fluctuation of currency against Dollar and thosemain trading partner, China also already peg to Dollar. By doing this the three countries willhave less transaction cost in changing their currency to Dollar when they are doing trade and atthe same time their currency will get confid ent from people since it is stable with Dollar. On theother hand, when CLV peg to the basket of currency including Dollar, Euro and Yen, the CLVcountry can reduce risk when there is currency ball over in US. Instead of rely merely onexchange rate stability with Dollar, CLV reduce the risk by depend on two more majoreconomies, Europe and Japan. There is no cleanse proportion of the three currencies in thecurrency basket, yet it depends on the economic relation of CLV to the G3 (US, Europe andJapan) and also their own negotiation. Besides, CLV can move further to subregional currencyboard which ensures the stronger peg to foreign currency thus they get more seignioragebenefit. However, they need much more effort to achieve this. First, they have to create astronger cooperation in coordinating currency policy. Second, they need more foreign reserveto run currency board and it needs high legal endorsement to get people use local currency.In addition to cooperation in rally rate regi me, it is also important that CLV coopedto create monetary regime. The CLV common currency is a long term goal they require manyeffort from CLV to improve the credibility among public of currency as well as effectiveinstitution to handle the transitional change of currency and strong political will of CLV leaders.Besides, the CLV currency area can be launch only after the Asian Currency Unit (ACI)which is similar to European Currency Unite, has been created in ASEAN+3. When there iscommon peg to ACI in ASEAN+3 economy, the CLV will change to peg ACI and they can createtheir own subregional common currency in lower level to increase their voice in ASEANcooperation, in addition to the benefit for Exchange rate regime. However, some scholarsuggests this option is difficult to achieve at least in short and medium term because there aremany political sensitive issue to overcome, weak institution, and flexibility of people.In summary, in order to cooperate with each other so as to dedoll arize their economyCLV countries has to two choices of Exchange rate regime and single currency. Those policiesare only achievable when CLV countries have strong hindquarters of cooperation in critical aresuch economic consolation and information sharing, joint assessment and so on. They can morebenefit from this cooperation alternatively than taking action individually however it is only longtermgoal for them. In prospect there is still possibility to get out dollarization when CLV aredetermined enough in cooperation.MC5 Dollarization and Implication of Financial Architecture Reform Cambodia among CLV is solely dollarized countries in the world which face the problems. Dollarization is the common problem in developing countries such as Latin America also. Thus the case of dollarization in Cambodia can also reflect the situation of the change of financial architecture that affect the financial and monetary system in the world. Dollarization is the symptom of weak ability of dome stic financial structure, historical price in stability and political problems urges people to use foreign currency. While the government the seigniorage benefit and role of last resort of lender the people enjoy the stability of money in deposit as well as trade and investment. Rooted from the globalization there are three main debates in global financial system Does dollarization good for developing country? Should states modify people choice in using currency they like or impose people to choose national fiat money? Should IMF play important role in the world exchange rate stability? Does dollarization good for developing country? Dollarization can give price and exchange rate stability in low cost in most emergence market economy. Hanke recommend developing countries to use dollarization in case that the states do not have strong monetary and fiscal policy to tighten currency value in long term should use dollarization as monetary institution. The above idea is not raised by him alone some scholar also propose choice of dollarization because of several reasons. First, considering the financial and dept crisis during 1980s and 1990s in much part of the world and thus leads to increase of high inflation, currency devaluation and mass capital dodging by foreign investors. When developing country dollarization they can stabilize the currency, exchange rate. When those countries use a high confident and good quality currency like dollar in economy is no possibility of a sharp depreciation, and sudden capital outflows because of investor unconfident is also omitted. Second, dollarization can highly reduce transaction cost and integrate developing economy closer to US. Thirdly, the stability of dollar in the economy as currency in developing countries will encourage people to save more and foreigner to invest more. However, dollarization is costly. Government of developing countries need to scarify seigniorage benefit in dollarized economy and the Central ban k losses its role of lender of last resort to the commercial bank in case there is liquidity problems. Moreover, the states will lose its sovereignty in term of monetary policy and exchange rate policy. Thus, it is a critical decision to whether or not to dollarize in developing countries because they have to compare the benefit of dollarization the cost to bear it as well as balancing the internal risk with external risk.Should states liberalize people choice in using currency they like or impose people to choose national fiat money? According to Laurence H. Meyer, a member of the Board of Governors of the Federal Reserve System when there is more global financial integration the government should increase role in market discipline, regulation and also supervision in money and also exchange rebate. The states should improve the international capital standard, market discipline. The state has monopolized the authorization on Money discipline by introduces national currency to show t he selfhelp system in term of currency and also gains seigniorage benefit. However, Randal Krozner, an economist at the University of Chicagos Graduate, rejects the role of government in currency circulating. He claim that private regulation found in private actors such as clearing house, credit rating agency, trader, capitalist investor, and others has provided stability and innovation because they work closely to financial and currency market. He advises that the government should reduce the intervention in the financial and monetary system and let the dynamic private sector to regulate the system. In short, while some scholar support government role in regulation the currency market, some ot