The dollarization happens when people of one country use foreign currency in their country officially or unofficially as legal tender to make all transactions. Actually, there are three main kinds of dollarization that illustrated in many part of the world. Most developing countries in our global have started to use dollar of the United States as their official dollarization. This would mean that the country use foreign currency legally in all transactions and there is no local currency in the country such as East Timor, Panama, and so on. With the countries that use foreign currency or substitute the domestic currency with foreign currency to use in private transaction which it is not legal tender is known as unofficial dollarization. This kind of case can find in most of the former Soviet Union and most of Latin America that they use foreign currency in a way which is not legal tender. While some other countries, they adopted the U.S dollar as their official semi-dollarization which means that the currency in the country is used as US dollar legal tender and their domestic currency is still use in their country at the same time. It is actually true that there are three main types of dollarization circulated in the region but in this context we focus mainly about the dollarization in Cambodia. Cambodia is a country that reflects with the official semi-dollarization. Cambodia people use foreign currency which is the US dollar and the use of Cambodia's currency, riel, to conduct in every transaction. Obviously, the official semi-dollarization is very common and acceptable for Cambodia to conduct this kind of dollarization in country.
Every country has their own case in adopting the foreign currency to conduct all transactions in their countries. The dollarization flowed into Cambodia in several different aspects. Cambodia is considered as a country that experienced all kinds of war which include civil war, cold war, and proxy war. The economic and politic in Cambodia started to have good image after the end of civil war and other international war for almost two decades during 1980s and 1990s. In the year 1991 to 1993, Cambodia was overseen by the United Nations Transitional Authority in Cambodia (UNTAC) to bring free and fair election in order to put civilian government to power. At that time about 1.7 billion US dollar was distributed in Cambodia.
The economics in the country recover after the election and political issues in 1997. Then the election was formed again in 1998. This time the coalition government started to focus on economics and political reform. Since then Cambodia featured the dollarization surged which made decision makers to compete to devise a best policy for economic growth. The cause of massive inflows of foreign currency, private transfers, and export earnings are from the supply side. The demand side cause large inflows of dollars from foreign countries and cause the lack of confidence in local currency. Plus, with the government accepted a liberal exchange system and an open economy, the dollar of the United States became a de facto legal tender along with the domestic currency.
In conclusion, the three various types of dollarization which include the official dollarization, the official semi-dollarization, and the unofficial dollarization are issued in almost countries in the globe. This dollarization plays an important role in the countries that adopted this kind of dollarization in their countries even though they flow in their countries in variety way. However, the official semi-dollarization is the most suitable for Cambodia to accept it to circulate in the country and as this nation used to face many conflicts as well as war in the country.
II. The Emergence of Dollarization in Cambodia Economy
During the last two decades, the most popular currency feature of the globalization has been increased significantly in de facto dollarization____ the domestic use of a foreign currency, US dollar, in most emerging market, transition economies and so on. The dollarization of the United Stated has been using in every transaction in many countries especially in the developing world that some of those use this kind of currency as official dollarization, some use as unofficial dollarization and the other use as semi-official dollarization, Cambodia as an example, as to what I have mentioned in the previous mini-composition. Each of those countries has their own case in adapting the foreign currency to conduct transaction in their countries. Cambodia is considered as one of the developing countries that adopted the US dollarization to conduct in their everyday life as well as to circulate that green back along with domestic currency. There are several possible reasons with the emerging of dollarization in Cambodia economy that this lead Cambodia to be a dollarize country up until now.
The main reason with the emerging of the dollarization in Cambodia economy is started from the historical background which were sustained due to subsequent weak macroeconomic management in the mid 1980s and promoted to the so called 'hysteresis' phenomenon___ from simple inertia to path dependence to rigid irreversibility or the fact that history matters, as cite by Jayant Menon (2008). Cambodia is a country that experienced many wars and conflicts that reflect in the feature of internal and external conflict. For example, Cambodian people couldn't find a peaceful country as there were still some conflicts occurred after the Khmer Rouge was ended which this results in United Nations Transnational Authority in Cambodia (UNTAC) to come to Cambodia to oversee the country's political and economic management in the early 1990. Because the presented of the UNTAC in Cambodia, there was a large inflow of the dollarization of the United States began to circulate in this country since that time. Also, there was a signing of the Paris Peace Agreement which allowed the United Nations Transnational Authority in Cambodia to take over the country's administration for two more years (1991-1993). With the extending of mission, the cost of the UNTAC intervention was estimated nearly 2 billon US dollars. It showed that the subsequent of the dollarization was very high.
Following with the cost of the UNTAC resulted in huge amount of dollars; Cambodia became almost completely de facto dollarization during 1991-1995 which this condition continued till today. Dollarization at that time was neither sought nor encouraged by monetary authorities but rather on 'supplied side' it resulted from the massive foreign currency inflows stemming from sizable international assistance, private transfers, so on and so fore. Such big amount of dollarization inflow from overseas plus the lack of confident of 'demand side' in domestic currency and political and economic uncertainties during 1990s, making the dollarization at a very high level than the local currency, riel.
To sum up, the dollarization in Cambodia economy occurred in varieties aspects that the core of this cause started from the historical background that showed in conflicted between outsiders as well as insiders, the UNTAC intervention, large inflows of dollarization of foreign assistance, unstable politics and economics, and lack of confident in nation currency. As Cambodia is a dollarize country that accept the flow of dollarization in the country, dollarization has give some advantages to maintain economy in this country as well.
III. The Advantages of Dollarization in Cambodia
In the last ten years, Cambodia economy has been improved very significantly. As we can see from the capital income per person is rapidly increasing even though it is lowed comparing with others countries in Asia. In the year 2000 to 2001, Cambodia GDP (Growth Domestic Product) has gone up from 5.0% to 6.3%. Also, from 2004 to 2007 the growth of country economy reached to about 10% per year. Is it because of dollarization circulated in our country? The main factors of GDP growing are driven largely by an expansion of the garment sector, construction, agriculture, and tourism. Obviously, the use of dollarization in Cambodia has three advantages that will describe in the next paragraphs.
First and foremost, the general advantage of dollarization which is clearly seen is the number of investors has become higher and higher in our country. The investors in this context refers to FDI (Foreign Direct Investment) who seek to invest in the countries that has less chance of risking in exchange rate. This is a good opportunity for dollarizing country such as Cambodia that the FDI interested in investment. The U.S dollar is considered as one of the currencies that has low exchange rate risk among other currencies. Because of the low risk in exchange rate, many investors started to trust and have more confident in investing their business in Cambodia. As the number of FDI keep moving upward, the number of unemployment in Cambodia is reducing. The chance of working for Cambodian people is higher than there were a few investors in the country. According to Cambodia economic statistic show "the garment industry currently employs more than 320,000 people and contributes more than 85 per cent of Cambodia's exports." Furthermore, the country's saving will increase as well. Garment Factories, for example, they produce million of products to import to oversea and provide a lot of jobs for Cambodian people to have a good living. With the import of the garment factories, they earn many profits which one part of their profits come to domestic government.
Second, the dollarization can also establish as a firm basis for a financial sector. The term of dollarization means more than just the adoption of a foreign currency but also means financial integration with the United States, which this will force Cambodia financial institutions to improve their efficiency and the quality of their services. Moreover, as the institutional change, it signals a permanent commitment to low inflation, fiscal responsibility, and transparency. This would mean that it would be of particular value to Cambodia that previously have not enjoyed much of a reputation for price or fiscal stability.
Last but not least, the benefits of the country could get from the using of dollarization is that there could be a reduction of interest rates for someone who borrow in the country. Dollarization creates a stable relationship with a currency whose reputation is already well established and secure.
All in all, the advantages of dollarization in Cambodia are the high number of FDI that could lead Cambodia to increase their GDP as well as cut down the poverty in country, the improving of Cambodia financial institutions in terms of efficiency and quality, and the reduction of interest rate for borrowers in the region.
lV. The Disadvantages of Dollarization in Cambodia
Following from the previous mini-composition, the dollarization in Cambodia help to stimulate the economy of this developing country significantly which this emphasizes that dollarization do provide some advantages to the country that issue dollarization. However, for every advantage there is a disadvantage. This context will list some disadvantages to show the impact of dollarization on Cambodia economy.
First and foremost, the adoption of dollarization in Cambodia clearly show its impact on government which it loses the income of government where they get it from seigniorage. This term can describe as the source of income for the country along with what they get through taxation. Dollarization automatically conclude that income unless balance by some kind of agreed formula for seigniorage-sharing with the U.S. In real practice, the loss of seigniorage will be smaller, the greater is the degree of prior informal dollarization.
The second disadvantage of this dollarizes country that gets from the U.S greenback is lender of last resort, after the U.S dollarization was adopted it seems like the ability of central bank of discounting freely in times of financial crisis. The potential liquidity risks might be more exposed by domestic bank. Since an external share the transactions that before required foreign exchange that now treated as the equivalent of domestic transaction the dollarization cut down the overall require for international reserves
Finally, the use of dollarization circulated in Cambodia affect the symbolic of Cambodia.
The centralization of country authority help insofar as citizens all feel themselves bound together as a member of a single social unit where it come from all the part of the similar political and traditional community and thus share the same identity. This identity can be considered by all the tangible symbols such as flags, public architecture, anthems so on and so fore and among those symbols money also represent as national identity of one country like Cambodia currency, riel, because it is issued by the government or central bank as well which this currency plays an important role as a reminder to Cambodian people of related to Cambodia.
In the nutshell, the use of dollarization although we conduct it as unofficial dollarized, it show the disadvantages of this currency on Cambodia on various aspects such as the loss of seigniorage, an effective lender of last resort for local bank, and the loss of symbolic of Cambodia currency. With these impacts, it seems that the curse is so far overweight the blessing. Cambodia government should do some actions to stop these impacts before it become worse.
V. The Conclusion
The dollarization in Cambodia as I have mention before in the previous mini-composition stated that the dollarization was use as de-facto dollarization which it was adopting into Cambodia after the ending of the civil war as well as the coming of UNTAC that saw a huge of the U.S dollar circulated in Cambodia. To bring free and fair election as well as to stabilize security and strengthen the economy for this developing country, UNTAC distributed such a big amount of dollar nearly 2billion on these issues. The flow of dollarization in Cambodia not only because of the coming of UNTAC but also because of some factors such as the circulating of dollarization by foreigner who came to Cambodia for their business or for their visit, the using of neighbor currency (Vietnamese Dong and Thailand Bath) which these also lead to the unfavorable and lack of confident of Cambodian people in doing transaction through Cambodian currency, riel, and as the situation of the country at that time was unstable in political and economic sectors also allowed the dollarization flow into Cambodia easily.
With the flowing of dollarization, this dollarized country can gain some positive sights from this greenback. From what it obviously showed, the number of foreign direct investment came to invest their money in Cambodia has increasing significantly as those foreign investors see that the chance of risking in exchange rate is very low compare with other country that use domestic currency to circulate in their economy. The comings of investors help cut down the level of unemployment to be shorter than before that this could stimulate the GDP of Cambodia to be more improve compare with the past. However, there are some drawbacks with the using of dollar in such a developing country. The government of the state will see the loss of income where those come from the seigniorage which means the income of taxation and also the lender of last resort which the ability of central bank have cut down on discounting in time of financial crisis. Plus, the adopting of dollarization as the unofficial dollarization in Cambodia also makes Cambodian pride to be low as it can represent our nationality.
The dollarization in Cambodia is seemed in some positive sights but at the same time it also has some negative sights which affected several advantages for the government. From this point of views, it clearly showed that the disadvantage outweigh the advantage. As a result, the government should do some action to stop the spread of dollarization or reduce the degree of using dollarization in this country but the question also come along with this idea which is "can we really ban the dollarization to flow in Cambodia if the people nowadays holding dollar in their hand and every transaction are made in dollar". The answer to this is still reluctant to respond with that question. Cambodia government should discourage the using of dollarization and encourage and make trust for Cambodian people to use domestic currency. In doing so, the macroeconomic of Cambodia have to perform very well and it have to be stability which related to financial market development and introduction of local currency denominated instruments, which can still be appealing to local investors. In addition, the local institutional of the central bank as well as its monetary policy strategy should stimulate towards reducing uncertainty about the value of the local currency. This obviously implies that price stability should be the central bank's main objective and independence should be granted so as to facilitate the achievement of this objective.
