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Is Dollarization Good for Cambodia?

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  • Kiwon Kang
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    Abstract

    During the 12 years since 1992 when people started to use the dollar as a currency in Cambodia, the share of the dollar has reached more than 70% of the total currency. This dollarization phenomenon has resulted in large seigniorage losses for the Cambodian government. The costs are estimated up to US$682 million at the end of 2004 with an additional US$61 million lost annually. Furthermore, there are many other kinds of costs caused by the side effects of seigniorage loss. Without siegiorage, some monetary, fiscal and foreign trade policies are no longer available. Worsening the distortion of income distribution is another side effect. These are major costs of dollarization over the direct seigniorage loss. The benefits of dollarization include stabilizing price levels and lowering the risk of national default during a foreign currency crisis. It is not difficult to conclude that the costs of dollarization outweigh the benefits. There are two de-dollarization methods. One is a policy that prohibits people from using the dollar as a currency by law. The other is the policy that widens the difference of the costs and the benefits of using dollars, also by law. Either method is applicable but it seems reasonable that the method of prohibition by direct law would be more effective and efficient than the other method, since 84% of the total population exclusively uses the riel in Cambodia. It is totally dependent on the decision of the Cambodian government whether or not a de-dollarization policy is adopted. The results of the decision, for good or ill, will rest finally with the people of Cambodia.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/12265080500117517
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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal Global Economic Review.

    Volume (Year): 34 (2005)
    Issue (Month): 2 ()
    Pages: 201-211

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    Handle: RePEc:taf:glecrv:v:34:y:2005:i:2:p:201-211

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    Related research

    Keywords: Dollarization; dollarization phenomenon; M2; costs of dollarization; benefits of dollarization; seigniorage; seigniorage loss; national default; de-dollarization; bonus of confidence;

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    Cited by:
    1. Venus Khim-Sen Liew & Tuck Cheong Tang, 2010. "An empirical investigation of purchasing power parity for a transition economy - Cambodia," Economics Bulletin, AccessEcon, vol. 30(2), pages 1025-1031.
    2. Seiha Ok & Makoto Kakinaka & Hiroaki Miyamoto, 2010. "Real Shock or Nominal Shock? Exchange Rate Movements in Cambodia and Lao PDR," Working Papers EMS_2010_05, Research Institute, International University of Japan.
    3. Sok Heng Lay & Makoto Kakinaka & Koji Kotani, 2010. "Exchange Rate Movements in a Dollarized Economy: The Case of Cambodia," Working Papers EMS_2010_18, Research Institute, International University of Japan.
    4. Samreth, Sovannroeun, 2008. "Estimating Money Demand Function in Cambodia: ARDL Approach," MPRA Paper 16274, University Library of Munich, Germany, revised Jun 2009.

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