Dollarization and De-dollarization in Transitional Economies of Southeast Asia ed. by Koji Kubo (review)

This book explores the concepts of dollarization and de-dollarization in Cambodia, Lao People’s Democratic Republic (Lao PDR), Myanmar and Vietnam (CLMV) — the new members in the Association of Southeast Asian Nations (ASEAN). After opening up to trade and foreign investment in the late 1980s and early 1990s, these economies witnessed rapid dollarization. Details of their unique experiences form the body of this book.

The introductory chapter by Koji Kubo clearly explains the classification of, and the motivations for holding foreign currency deposits (FCDs) in CLMV economies, shedding light on how they are measured, and the associated benefits and costs. The technical language and formulaic discussion involving monetary and exchange rate policies prepares the readers for similar rigorous analysis in the rest of the book.

As explained in the book, dollarization occurs when domestic residents hold a significant share of their financial assets in the U.S. dollar, for purposes of payments/settlements and holding asset portfolios. In CLMV, dollarization is measured in terms of the ratio of FCDs to broad money, the latter comprising: (1) local currency outside banks; (2) local currency deposits; and (3) FCDs. The charts used in the first chapter demonstrate that the FCDs/broad money ratio has recently been declining in Lao PDR, Myanmar and Vietnam, but increasing in Cambodia.

Readers will find the next four chapters — individually devoted to one CLMV economy — equally rich in quantitative analysis. The authors provide both literature surveys, as well as data sources to elaborate on the state of economic and financial developments in the respective countries. While these chapters show similarities between the economies in terms of large dollar inflows, major macroeconomic policy differences are also noted as each country is progressing at a varying speed.

Chapter 2 by Ken Odajima talks about Cambodia, specifically focussing on the dollarization undertaken by households and enterprises. The data used in this chapter is based on a large-scale survey conducted by the Japan International Cooperation Agency Research Institute (JICA-RI) in collaboration with the National Bank of Cambodia (NBC) in 2014. Based on the responses, three states of partial dollarization (payment, real, and financial) are identified. The author notes that foreign currencies are widely used in transactions by households and firms as payment dollarization (means of payment), and real dollarization (unit of account). Both of these have developed alongside with financial dollarization (financial contracts). Among a number interesting insights in the chapter, Odajima mentions that the lack of financial regulations is the main reason behind the rapid growth of dollarization in Cambodia.

Using bank-level data in the third chapter, Phetsathaphone Keovongvichith finds that for a long time, dollarization in the form of FCD holdings by individuals acted as a means of asset substitution (fixed assets) in Lao PDR. Laos was severely affected by the 1997 Asian Financial Crisis and managed to fully restore its macroeconomic stability only by 2006. Since then, the pace of dollarization has slowed down throughout the country. For complete de-dollarization, the author elaborates on a spectrum of policies to make the local currency as attractive and viable as the U.S. dollar. Keovongvichith also comments that such policies have to be implemented gradually. This is because an immediate ban on domestic account transfers of FCDs may lead to underground transactions, thereby creating more problems.

Koji Kubo and Set Aung, in the next chapter, discuss the issue of high dollarization in Myanmar. As part of the legacy of central administration of foreign exchange, a large proportion of FCDs belong to the state, and are allocated for economic planning. Officially, payment dollarization is quite limited by the government’s Foreign Exchange Regulation Act of 1947, which promotes the circulation of the local currency. However, informal cross-border deposits were traded among exporters and importers in Myanmar’s parallel foreign exchange market. According to the authors, dollarization has not posed any significant risk to Myanmar’s banking system as compared to the other...