We had participated in two rounds , wherein we were given two Topics to discuss about-
1. Should small countries go in for dollarization - As Equador And El- Salvadore had opted ?
2.I was designated as an FII in the final round and my views were sought on the discussion seed of - " The relevance of Stock Markets in India ".
Following is the concise summary of the views presented forth by me -
Should small Countries go in for Dollarization ?
Dollarization occurs when the inhabitants of a country use foreign currency in parallel to or instead of the domestic currency. The major advantage of dollarization is promoting fiscal discipline and thus greater financial stability and lower inflation.
I was of the viewpoint that Dollarization , if adopted , should have a Sunset Clause attached to it - i.e. The country must maintain a moratorium of terminating its usage of the Foreign Currency after a Temporary phase.
To support my argument , I enlisted the following points -
4 points
1.From a Long term perspective , Adopting The Dollar is not feasible because a country loses out on the availability of Monetary tools to stem a crisis or stabilize an overheating economy.
Why doesn’t the whole world as a whole adopt the Dollar , or the Euro ?
The Reason being that the Reserve Currency – Say , the Dollar ( The world's reserve Currency ) - will be regulated by the Federal Reserve in the US , keeping in view the US interests and with the Primary aim of stimulating the US economy , Keeping Unemployment Down and responding to the immediate requirements of U.S. Citizens.
2. Different Countries , at a particular period of time May be Passing Through different stages of Business Cycles and Development Phases and may therefore require an appropriate and a unique Monetary approach - A blanket Approach - Eg. Setting up the same Repo & Reverse Repo rates , Reserve Requirements for an entire fleet of Nations will not prove to be a wise decision - It would be akin to providing the same medication for all sorts of ENT Problems.
3. I would stress upon Temporary Dollarization , Countries need to have a Sunset Clause in their drive towards formally adopting a strong Foreign currency as the modus operandi of exchange.
4. Countries suffering from hyperinflation , like Zimbabwe , may resort to Temporary Dollarization to partially stem the spiraling prices and use the interim period to get together their act , take up sole responsibility and Accountability for the precarious situation they find themselves in - A political crisis , uncertainties , civil strife etc. – There should be a timeframe set to put things back in motion – the time bought by resorting to Dollarization should be utilized to bring about stabilization –For example , through external assistance by ones immediate neighbours who share to some extent similar cultures ( Just as in case of Zimbabwe wherein Southern African countries , particularly South Africa are doing their best to Mediate and peacefully resolve the political uncertainties. )
Following Dollarization , a country may completely lose out on its Ability to provide a Monetary stimulus , it may completely lose out on the Opportunity of Providing the right signals to the Economy , Providing an Impetus or Curtailing the Growth through the Means of its Monetary Policy..
Also , by adopting a foreign currency , it implies that there’s no system of flexible exchange rates ,and in the event that the smaller country is suffering a deficit on the BOP / BOT front ,it can't experience a depreciation of its own currency as its own currency does not exist in the first place, such a system may become unsustainable.
Some of the participants rejected Dollarization on the grounds that The Bigger nation may use this opportunity to its advantage - strategically - but I dont buy this argument for the simple reason that Days of colonialism and its related feeling of superiority just doesn't exist any longer - Countries like the U.S. simply wont Fuss about a country adopting the U.S. dollar when they have got a Back-load of problems , especially the $ 2 TRILLION RESERVES HELD BY CHINA - JUST SEE the PALE Comparison - An investment by An MNC Babcock & Wilcox Co.
into A POWER PLANT in China will significantly be higher in value than the annual trade of the U.S. with these small countries .
The issue of SELF PRESTIGE does exist for the small countries - But they should temporarily swallow it if that is the need of the hour.
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