The Dollarization of World Trade and Its Impact on Cambodian Economy


IRP is an indispensable portion of IS 305 Global Governance class. With its purpose to turn to each pupil ‘s understanding a peculiar issue of planetary administration in relevant to Kampuchean current matter and its of import topographic point in the class ‘s appraisal, I have paid enormous sum of clip working on each MC every bit good as the concluding MC.

Among all the subjects suggested, I have chosen the 6th subject: ” The Dollarization of World Trade and Its Impact on Kampuchean Economy ” This peculiar subject is related to economic as a class subject of planetary administration. Apparently, economic is an interesting and critical subject which is acquiring more and more acknowledgment in planetary administration. Global administration is a complex interplay among many subjects whose one of which is economic.

On top of this, I have chosen the above subject as my IRP subject for two chief grounds. First of wholly, this subject is personally appealing to me. I have seen other adjacent state with stronger economic system utilizing their national currency so widely. In contrast, in Cambodia US currency is more sooner accepted throughout the whole state. This is really merely a short portion of the narrative since dollarization started to distribute worldwide after WWII ended. I want to happen out more about the causes and effects of this phenomenon on the little economic system of Cambodia. I am besides acute to happen out about the battle of local authorities and other IGOs to regulate the very impact of dollarization. Last but non least, this subject allows me to show the intersection of planetary administration with the US as one of the most powerful participants in international sphere every bit good as the function of IGOs, form of trade globalisation and planetary administration, and so the response of Kampuchean authorities on modulating the impact of dollarization on Kampuchean economic system.

I have divided my IRP into five chief parts in which each purposes to turn to different facet of “ dollarization phenomenon ” .

Part I: Causes and Growth of Dollarization of World Trade

International acknowledgment of a foreign currency in universe trade is non a trade name new phenomenon. During the eighteenth and 19th centuries, the lb of Great Britain reigned as the first modesty currency in the universe, but in the 20th century, the U.S. dollarA laid claim to this rubric. It has since been the dominant modesty currency since the terminal of World War II.

Definition of Dollarization

To to the full understand the impact of dollarization on Kampuchean economic system, the initial measure is to specify what dollarization is. Most merely set, Dollarization means following the US dollar as the currency of pick in a foreign state[ 1 ]. However, dollarization ‘s definition does non stop here. Dollarization is a generic term that can fall into three classs:

Official Dollarization: The dollar is the lone legal stamp. In other words, there is no other local currency. Examples are that in Panama, El Salvador and Ecuador. For illustration, since independency in 1903, Panama has merely used the U.S. dollar.

Semi-Dollarization: A state will utilize both its ain currency and the U.S. dollar interchangeably as legal stamp. Lebanon and Cambodia are good illustrations of this.

Unofficial Dollarization: For many states in the underdeveloped universe, the dollar will be widely used and accepted in private minutess, but it is non classified as legal stamp by the state ‘s authorities.[ 2 ]

Official dollarization occurs largely in little or developing states. States that usually adopt such a extremist alteration in pecuniary policy are frequently meeting instable economic systems, high degrees of rising prices and a really low competitory currency. Under official dollarization the local currency is wholly replaced by the dollar, with the possible exclusion of coinage.A That means domestic Bankss merely accept dollar look intoing histories and publish dollar loans.A Federal Reserve notes are legal stamp and the lone signifier of paper money recognized by the government.A

In the instance of Semi-dollarization, as in Latin America and in the former Soviet Union, where the buying power of the local currency has been volatile and people put more assurance on foreign currency, people frequently hold dollars as a shop of value.A In those instances the domestic currency is normally used in little minutess, but the dollar is preferred in big minutess and in savings.A

It should be noticed that although many peopleA associate dollarization with the U.S. dollar, the association is non sole. Dollarization may progressively mention to transition to other currencies such as the Euro. Besides, South African rand, Russian ruble, New Zealand dollar and Australian dollar are besides accepted outside their states, although in a localised nature. For illustration, the Russian ruble is accepted in a figure of the states from the old Soviet Union. Thus dollarization may non entirely refer to US Dollar. Despite this, in this MC every bit good as IRP, I will entirely speak about US Dollar to associate it with the world of

dollarization in Cambodia. Dollarization, in this sense, is different from pecuniary brotherhood because the US continues to put pecuniary policy in its ain involvement entirely, whereas the European Central Bank is required to take all Eurozone states ‘ involvements into history.

Beginning of Dollarization in World Trade

The beginning of dollarization rooted back to the Bretton Woods Agreement. In the wake of World War II, US dollar was the lone major currency in which international exchange could freely take topographic point thanks to its comparatively stable value while all other European ‘s large economic systems were shattered due to the war. The dollar ‘s function was formalized under the 1944 Bretton Woods pecuniary understanding, an international understanding to regulate pecuniary policy among nations.A Other states set official exchange rates against the dollar, while the US agreed to interchange dollars for gold at a fixed monetary value on demand by cardinal banks.A It was a opportunity to make a stabilising international currency and guarantee pecuniary stableness one time and for all. The Bretton Woods Agreement besides had the intent of reconstructing after World War II through a series of currency stabilisation plans and substructure loans to war-ravaged states. By 1946, the system was in full operation through the freshly established International Bank for Reconstruction and Development ( IBRD, the World Bank ) and the International Monetary Fund ( IMF ) .

It is besides of import to observe that the United States owned 80 per centum of the universe ‘s gold militias at the clip. So the United States had every motivation to hold to the usage of the gilded criterion to form universe currencies and to make and promote free trade.

This system functioned good for a brief period.A However by about 1958 the initial world-wide dollar deficit had turned into an overabundance.A A As merely gold and the U.S. plus were considered earnestly as militias, when gold production was dawdling, dollar militias had to spread out to do up the difference in dawdling gold handiness, doing a turning U.S. current history shortage. The Bretton Woods understanding collapsed in 1973.

As it is seen, the existent result of the Bretton Woods Agreement was to replace the gilded criterion with the dollar criterion, and this is the beginning of dollarization in the universe.

Growth of Dollarization

Following the beginning of dollarization, it is of import to take a closer expression at how dollar grew and the grounds behind it.

After World War II ended, the US ran big current history excesss as the war did non fight on its land.A As the biggest economic systems in the universe, the US besides aimed to hold the strongest ideological power, democracy. During Cold War period, in order to discourage communism in Western Europe, the US initiated the program famously known as the Marshall Plan. Through this, American fiscal assistance is offered for a plan of European economic recovery. During its three old ages of being, 1947-1951, the US spent about $ 12,500,000,000.A The consequence of this was a buildup of dollar assets by foreign houses and cardinal banks.A

Another ground behind the growing of dollarization is that the rapid growing of the industrialised economic systems after World War II created a turning demand for dollar balances around the world.A The more of its ain currency a cardinal bank issued, the more dollars it wanted as underpinning for its currency.[ 3 ]

Besides these former grounds, US dollar possesses some outstanding features that made it the currency of pick. Stability is one of the major factors that explains why a figure of states have adopted the U.S. dollar as official currency. With American both economic and military might, the U.S. dollar has ne’er been devalued nor invalidated. This characteristic of dollar makes states with unsure fiscal circumstance all familiar with bank failures, devaluation and rising prices, has a peace in head by following and basking the benefits of the stableness of the U.S. dollar.

As it is noted, similar to official dollarization, unofficial dollarization is besides really hard to change by reversal one time it is in topographic point. As unofficial dollarization besides takes root in states with unstable and weak economic system, merely certain policies and singular national economic growing will change by reversal the tendency, and this does non go on really frequently.

Dollarization Today

As of presents, dollarization is clearly seen. As of the start of 2000, 28 states and districts have officially dollarized, and states with unofficial dollarization are legion. Over half of all dollar notes in circulation are held outside the boundary lines of the US.A About half of US Treasury securities are owned by aliens, chiefly held as militias by foreign cardinal banks.A The dollar is the chief currency in international capital flows, every bit good as the currency of bill for trade goods and for many manufactured goods and services.A All states that trade straight with the US bill both imports and exports in US dollars.

Part II: History of Dollarization in Cambodia

This portion is traveling to discourse the chief grounds why Kampuchean economic system is dollarized by supplying groundss every bit good as my ain analysis. It will besides about the present state of affairs of semi-dollarization in Cambodia. This portion crucially contributes to the Individual Reflection Paper since an apprehension of the causes every bit good as the state of affairs of Kampuchean dollarized economic system is indispensable to analysing the responses to this phenomenon.

How Dollarization Took Root in Cambodia

Dollarization in Cambodia occurs chiefly to several chief grounds. I arrange each cause harmonizing to their formality.

First, Kampuchean people have lost a large trust on local currency, Riel, after it was wholly abolished during the Pol Pot government. Kampuchean people have bitterly seen all the nest eggs they had in Riel go merely garbages of paper in one twenty-four hours. Virtually, Cambodia is the lone state in the universe of all time to hold abolished money. This extremist experiment, which left Cambodia being without a currency from 1975 to 1980, has left its grade on Kampuchean people perceptual experience today. In March1980 Riel was one time once more introduced as the national currency in Cambodia. However, monolithic cardinal bank funding of perennial budget shortages during 1988-1991 led to high rising prices in the scope of 90 % -177 % a twelvemonth.[ 4 ]This farther eroded public assurance in the national currency. As a consequence, although the reissued Kampuchean riel has been in circulation for three decennaries, Cambodians remain distrustful of it and on a regular basis convert their riel into gold, jewellery, or U.S. dollars alternatively.

The 2nd ground links to the peacekeeping operation performed by the United Nations from 1991-1993. During this period, 1000000s of Dollar were poured into Cambodia each twelvemonth. With enormous sum of Dollar in circulation and a large figure of Cambodians started utilizing Dollar, Cambodia ‘s economic system became efficaciously dollarized. Simultaneously, since most public still tried to protect their ain assets, they sold their riel-denominated assets in exchange for gold in the first stage and for the dollar in the 2nd stage. They got stuck with dollars subsequently.[ 5 ]

Third, the ground may lie on the nature of Riel itself. Riel, compared to dollar, is less convenient to utilize for big minutess. Ten US dollar measure already equal in at least four ten-thousand Riel measures. The authorities bit by bit has introduced larger denominations, but these measures have non come into common use. On top of that, since the debut of Riel in 1980, Riel has seen uninterrupted depreciation which subsides Kampuchean citizens ‘ willingness to hive away it as an plus. From the first clip Riel was reintroduced in 1980 until now, value of Riel has gone down for 1000 % .[ 6 ]

Last but non least, dollarization in Kampuchean may associate to Kampuchean people perceptual experience. Majority of Kampuchean positions Dollar as the presentation of wealth and edification which leads to surely high Dollar use in urban country. A simple illustration can be seen. High category eating houses and dress shops in Phnom Penh all have their monetary value labeled in dollar whereas smaller stores still have some inclination to utilize Riel. As much, in sophisticated workplace, Dollar is used alternatively of Riel, and as people becomes richer, they will automatically change over the usage of Riel to that of Dollar, therefore go oning the Dollarization tendency.

Current Situation of Dollarization in Kampuchean Economy

Although Cambodia is still a state with semi-Dollarization, Dollar is widely used throughout whole Cambodia, and the per centum of Dollar use is improbably high in urban country.

In 1998, the National Bank of Cambodia, or Central Bank, conceded that it was unable to account for the volume of foreign currency in circulation. Bank functionaries believed that it exceeded their official i¬?gures, and they estimated that the U.S. dollar was likely three to four times more liquid than the riel.[ 7 ]8

The subsequent old ages have seen the growing in banking sector in Cambodia, and the wont banking sedimentation and loaning has well increased. In 2005, bank sedimentations grew by about 16 % with the upward tendency go oning into 2006, reflecting improved assurance in the banking system. Despite this positive mark, the portion of the riel in these countries has been every bit low as 4 % and 6 % severally[ 9 ], bespeaking the extremely dollarized nature of Cambodia ‘s economic system. In other words, the per centum of Riel sedimentations has grown by simply 2 % from 1990 until 2004.[ 10 ]

Although Kampuchean governments want to promote greater usage of the national currency, they have emphasized that they have no purpose of enforcing limitations on the usage of foreign currency. They on the other manus believe the usage of the riel will develop as an result of economic development. Nowadays, the exchange rate system consisted of two rates: the official rate and the parallel market rate.

Part 3: Costss and Benefits of Dollarization in Cambodia

The high grade of dollarization in Cambodia has played a major function in determining Cambodian ‘s economic system. It brings about many advantages to the little Cambodian economic system which merely started from the zero-point 30 old ages ago and whose purpose is to be integrated in to regional or even planetary economic system. However, along with benefits, high dollarization besides poses a challenge to Kampuchean economic system. This paper will briefly present these whole issues.

Costss of Dollarization to Cambodian Economy

There are certain costs caused by high dollarization in Cambodia. First and most seemingly, high dollarization makes it difficult for authorities to carry on to the full effectual pecuniary policies. With any policies authorities makes, high grade of dollar keeping in Cambodia will impede the policies to be to the full implemented and therefore sabotage its effectivity. These policies include the direction of money supply, involvement rates, and to some extent the exchange rates. Due to high dollar sedimentation in Bankss, the function of National Bank of Cambodia ( NBC ) as loaner of last resort for Bankss confronting liquidness jobs is besides greatly constrained. The high grade of dollarization bounds the flexibleness of exchange rate policy to cover with external dazes. For case, the addition in universe oil monetary values in 2005 was followed by rising prices in Cambodia. The rising prices rate rose between 9 % and 10 % in merely a few months.

Second, authorities ‘s income from seigniorage is reduced. Seigniorage, merely set, is the difference between the value of money and the cost to bring forth it – in other words, the economic cost of bring forthing a currencyA within a given economic system or state.[ 11 ]The sum of loss is rather important as the net one-year income forgone is estimated to be in the scope of $ 20 million to $ 90 million.[ 12 ]

Another cost is that dollarization may take to currency mismatches. This happens to houses or concern whose income is in Riel. As a high sum of sedimentation in Cambodia is in dollar, these houses and concerns may hold to take on dollar-denominated debt because that is the lone manner to have longer-term loan. In this sense, in the event of a big devaluation of Riel, such houses and concerns may happen themselves at great lost and are unable to serve their debt. Although this job occurs merely to little figure of houses, this is besides a challenge of dollarization.

The last disadvantage of high dollarization trades with the existent function of Riel. Under such circumstance, Riel may merely stand as a symbol of sovereignty and national individuality and does non play a full function in the economic system. This is non a good thought since the symbol of national individuality is non sufficient for a national currency.

Benefits of Dollarization to Cambodian Economy

Despite above costs, dollarization besides brings about singular advantages to Kampuchean economic system. First of wholly, the debut of dollar during UNTAC operation in 1990s has helped Kampuchean people to change over their assets from gold to dollar and accordingly made money sedimentation in Bankss easier and as inducement to put nest eggs abroad was eliminated, this encouraged domestic fiscal intermediation to boom which resulted in the growing of the fiscal system.

Second, dollarization lowers the hazard of Riel devaluation. Because of high grade of dollar circulated in Kampuchean economic system, the demand for Riel remained low. With this low demand, the NBC will non unnecessarily publish more sum of Riel. Very high dollarization in Cambodia is hence resulted in low rising prices and economic stableness.

Third, dollarization makes Kampuchean economic system more stabilised. The lessened hazard encourages both local and foreign investors to put money into Cambodia. Currency stableness promotes macroeconomic stableness and a predictable concern environment. Obviously, high grade of dollarization protected Cambodia against contagious disease in the face of the Asiatic fiscal crisis of 1997-1998.

Last but non least, the usage of the dollar facilitated the integrating procedure of Cambodia ‘s trade in the international economic system. It reduced the dealing costs by excluding currency transitions cost. Besides, it besides enabled the roar in the garment industry in Cambodia.[ 13 ]

Part 4: Function of Kampuchean Government and International Actors on Reducing the Impact of Dollarization

Having been exposed to the costs and benefits of high dollarization, it is indispensable to take a farther measure to happen out what the stance of Kampuchean authorities is and what it has done so far to do the best out of this state of affairs. Accompanied this, the function of other international histrions sing dollarization ‘s impact issue will besides be discussed and presented.

Kampuchean Government ‘s Policies

To get down, it is of import to understand that in Cambodia, the determination shaper sing pecuniary policy is the National Bank of Cambodia ( NBC ) . NBC is independent from the authorities and authorities can non interfere with NBC ‘s pecuniary policy determination. However, to do it simplified, I will simply utilize the word “ Kampuchean authorities ” along with “ NBC ” in footings of pecuniary policy ‘s determination shaper.

So far, NBC has taken advantage of dollarization in Kampuchean economic system to stabilise rising prices rate and obtain a favourable exchange rate. As government-backed securities such as exchequer measures and authorities bonds do non be in Cambodia, dollar serves as an option for the Open-Money Operation ( OMO ) , one of the behaviors of pecuniary policy to command money supply and therefore rising prices rate. To exemplify, OMOs are defined by National Bank of Cambodia ( NBC ) as operations to buy or sell dollars against the riel with the aim to stabilise the fluctuation of the exchange rate between the two currencies.[ 14 ]With dollar, NBC can pull strings the rising prices rate to a desirable degree and therefore accomplish monetary value stableness. History has shown that dollar auction has been an effectual tool to set the exchange rate.[ 15 ]

Although dollar dramas an of import function in OMO in Cambodia, the ultimate end of Kampuchean authorities is still to increase the function of riel in economic system and do it more than a mere mark of sovereignty. Assorted stairss have been taken by the NBC sing de-dollarization step.[ 16 ]Most significantly, for macroeconomic policies, NBC aims on keeping the stableness of exchange rate and low rising prices rate, while refering legal reforms, NBC has set a fixed sum of riel as modesty demand ratio for Bankss. However, these stairss have been undistinguished and so hold been the consequence. This is likely because of

the current state of affairs of Kampuchean economic system, whereas we will discourse this issue more profoundly in the following portion.

Role of Other International Actors

In currency personal businesss, the demand for more cooperation is desperately pronounced since seemingly rough determination of one province ‘s pecuniary policy can pull assortments of external effects that go beyond the host province ‘s district, and for which a one-sided response is non desirable. Contrastingly, even with call on more cooperation in international pecuniary policy among great powers, pecuniary policy still rests chiefly on single province to make up one’s mind.

On the national degree, sing dollarization issue, it is evident the US Federal Reserve has non taken into history those states that are officially dollarized, non to advert on the side dollarized states like Cambodia. The Fed has stated that it would ne’er move as a loaner of last resort to foreign Bankss, nor would its pecuniary policy be contrary to the best involvements of the US. Thus, dollarized states have to bear their ain cost and happen appropriate policies to cover with it. So far, US Fed has taken a impersonal place, neither promoting nor detering dollarization.

On the international degree, there has been more mark of involvement for cooperation. However, even with more cooperation, it still stresses merely on major currency such as dollar, euro and yuen, whereas economic system for little provinces like Cambodia is ignored. Therefore, chief determination still rest with Kampuchean authorities on how to maneuver for a approval environment for its currency. Despite this fact, we should all be cognizant that, desirable or non, any determination made by the US Fed to appreciate or deprecate its currency will do the consequence be felt in Cambodia who is extremely dollarized.

Part 5: Future Response of Kampuchean Government: Dollarize or De-Dollarize

High dollarization in Cambodia has blessed the economic system with stableness and growing. However, even with increased economic and political stableness, dollarization has been relentless which is non a good mark for a healthy economic system with its national currency. The National Bank of Cambodia has taken steps to finally de-dollarize and better its power over pecuniary policy, but the realisation of this end is still a long manner to travel.

Why Cambodia Should Remain Dollarized and Why Cambodia Should De-Dollarize

As expressed in the old portion, high dollarization has brought about important advantages to Kampuchean economic system. Dollarization, for case, helps keep low rising prices rate, and as a consequence besides stable exchange rate. The Open-Money Operation ( OMO ) , one of the behaviors of pecuniary policy, purely talking, do non be in Cambodia due to a deficiency of government-backed securities such as exchequer measures and authorities bonds. However, OMOs are defined by National Bank of Cambodia ( NBC ) as operations to buy or sell dollars against the riel with the aim to stabilise the fluctuation of the exchange rate between the two currencies.[ 17 ]With dollar, NBC can set the rising prices rate to a desirable degree and therefore accomplish monetary value stableness. Since 2005, merely NBC has the legal rights to carry on the dollar auctions, and history has shown that dollar auction is truly an effectual tool to set the exchange rate. Besides, dollarization besides assists the integrating of little Kampuchean economic system with the remainder of the universe by cut downing dealing costs for buying international currency.

Despite the above factors, it is still converting for Cambodia to de-dollarize because of some grounds. Most seemingly is that NBC can non pull strings the flexibleness of its pecuniary policy due to high degree of dollar circulation in the economic system. As illustrated in 2005, rising prices rose between 9 % to 10 % in merely a few months due to the rapid addition in the universe oil monetary value. Besides, any little alteration with US pecuniary policy can hold consequence on Kampuchean economic system every bit good. Besides, high dollarization besides limits Cambodia ‘s attempt to keep a currency value favourable for export since dollarization hinders price-wage flexibleness. Last and most significantly, de-dollarization is a mark of turning and healthy economic system. For Cambodia to maintain depending on foreign currency is non a favourable pick to do. Chiefly, de-dollarization will convey about a meaningful national currency every bit good as a powerful and effectual pecuniary policy tool to act upon the national economic system.

Possible Solutions

Besides what Kampuchean authorities has done so far, there are some recommended policies that could be done to beef up the de-dollarization procedure. First, the NBC will get down refinancing Bankss with Riel merely for operations conducted in Riel. This is a dramatic move. Second, NBC will hold to do operations in Riel more attracting compared to dollar in the banking system. This include, for illustration, doing the involvement rate of Riel-denominated sedimentations much higher than that of the dollar. Another manner is to develop a new fiscal instruments denominated in Riel such as exchequer measures, and these measures have to offer higher outputs for the compensation for exchange rate hazards. Last but non least, there has besides been encouragement for Cambodia to follow a Currency Board Arrangement ( CBA ) . Making CBA means to nail down the national currency to another currency. If so, NBC can merely publish a certain sum of Riel that is to the full backed by foreign assets at fixed exchange rate, which in the instance of Cambodia would be of course dollar. By following a fixed exchange rate, a successful CBA would let Cambodia to de-dollarize every bit good as to keep continued economic stableness for economic growing. However, Cambodia would necessitate significant foreign militias in order to prolong the sum of money in circulation.

Staying Challenges

Among all the envisaged solutions, there is still left with one singular challenge Cambodia must get the better of to do the above policies effectual. This challenge is that the NBC has to guarantee exchange rate stableness and macroeconomic stableness so that private sectors will derive assurance that it will non be penalized for keeping riel-denominated assets. Guaranting exchange rate stableness and macroeconomic stableness requires clip, effectual attempt every bit good as go oning healthy economic system, therefore the success of de-dollarization is still in the far future to come for Cambodia. As shown presents, involvement rate for Riel-denominated sedimentations is already higher than that of the Dollar, but public sentiment still place their assurance in Dollar and the ratio of Dollar-denominated sedimentations is still higher than that of Riel.[ 18 ]

In decision, Cambodia should de-dollarize its economic system, merely like what a state with a healthy economic system would make. However, given the unsolved challenges, the de-dollarization of Kampuchean economic system is still a long-run end. These challenges may increase as Cambodia gets exposed to more capital flows from FDI in dollar which makes it even more hard for the NBC to accomplish its ultimate end. On top of renewed investing, more touristry grosss, the launching of fiscal market and increased loaning in dollar can all lend to more dollar circulation.