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Dealing with multiple currencies: what options for the transitional economies of Southeast Asia?

2008; Routledge; Volume: 13; Issue: 2 Linguagem: Inglês

10.1080/13547860801923525

1469-9648

Jayant Menon,

Fiscal Policies and Political Economy

Abstract There is a spectrum of policy options available in dealing with dollarization in the transitional economies of Southeast Asia. These range from official dollarization at one end and enforced de-dollarization at the other. In between lie: currency board arrangements (CBAs), single currency options; and the muddling through approach. Both official dollarization and CBAs are not viable options for these countries. Official dollarization is politically untenable, while implementing a credible CBA is currently beyond the financial capacity of these countries. The single currency option remains somewhat vague in terms of detail, in relation to both design and time frame, and the region is unlikely to meet Optimal Currency Area (OCA) criteria. Lao PDR attempted to enforce de-dollarization in 1997, but the result was counter-productive. The muddling through but accelerating reforms approach appears to be the most realistic option. This approach views the multiple currency phenomenon (MCP) not so much as the problem, but rather as a symptom. The causes of the problem emanate from macroeconomic instability, political uncertainty, an underdeveloped financial and monetary system, and weak legal and institutional systems. Addressing these problems directly should eventually remove the symptom in the form of the MCP. Keywords: dollarizationmultiple currenciesmonetary unioncurrency boardIndochinaJEL Classifications: F31F33 Acknowledgment This is a revised version of a paper presented to the ADB workshop on Monetary and Exchange Rate Policies in Selected ASEAN Countries, Ho Chi Minh City, 5-6 February 2007. Comments received from Giovanni Capanneli, Alicia Herero-Garcia, Eric Gerardin, Alfred Steinharr and an anonymous referee are gratefully acknowledged without implicating them in any way. Notes a As of September 2005. b Data from National Bank of Cambodia. c As of June 2006. d Note: this number is from National Bank of Cambodia. e Note: this number is in Sep. 2005. f Note: this number is in June 2006. 1. Argentina had a currency board-like system anchored to the US dollar up until 2002, and many Caribbean states continue to employ a dollar-anchored CBA. 2. The pioneering work on OCAs is CitationMundell (1961). A good, general reference on OCAs in the context of the MCP is CitationWillett (2003), and on regional (European) integration is CitationBaldwin and Wyplosz (2004). 3. Proponents of CBA argue that should it be run efficiently and credibly, the risk of an endogenous crisis would be significantly reduced, thereby reducing the need for a lender of last resort. 4. This assumes that the foreign currencies in circulation are held for transaction purposes, or to serve the medium of exchange function. Some share of foreign currencies in circulation may be held to serve the store of value function, given low confidence in the domestic banking system. This share would not have to be recouped in implementing the CBA. Although the precise amount that this share constitutes is unknown, it is unlikely to be substantial enough to alter the conclusion that implementing a CBA in these countries will be financially demanding on governments. 5. The various forms that seigniorage sharing arrangements can take are discussed in CitationBogetic (2000b). 6. That is, (0.5 - 0.303) / 0.303 × 100 = 65%. 7. During the Gold standard for instance, this saving resulted from resources that would otherwise have to be expended in mining and smelting large quantities of metal, such as gold. Similarly, the MCP deprives governments of this social saving to a large extent. 8. In theory, the demand for money should decrease over time as financial development results in a reduced need for currency to effect transactions. Given the low level of development of the financial system in the Lao PDR, this is unlikely to happen for some time.