Dealing with Dollarization: What Options for the Transitional Economies of Southeast Asia?

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" criteria. Lao PDR attempted to enforce dedollarization 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 dollarization 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 dollarization.