Malaysia in the Era of Globalization #39

Mahathir never fails to rail against currency speculators whom he blames for the economic crisis of 1997. There is another simple and effective way to prevent speculations on the ringgit. Get rid of it, by dollarizing the economy. No one will miss the ringgit. There are plenty of other places where we can put the picture of the king’s head.

By M. Bakri Musa

Chapter 5: Understanding Globalization (Cont’d)
The Corollary to Globalization

A corollary to globalization is the development of a common acceptable standard, or to use the language of computers, a common platform, or at least a compatible operating system. In the computer industry, a common platform enables my computer to link and communicate with thousands of other computers. One of the common platforms of globalization is language. There is a need for a common language to facilitate communication. By default English is now assuming that role. This is not a dictate from Britain or America but simply the result of an evolving pattern.

Another imperative would be a common currency. At present there is no single currency that has successfully assumed the role of a global currency. In pre-Breton Wood days when the dollar was tied to gold, it could probably be acceptable as a world currency. And indeed it was. Currently the dollar is like any other currency, backed only by the confidence consumers and investors have on the underlying American economy. When that confidence is high, the value of the American dollar shoots up; when America runs chronic deficits and its financial house in disarray, the dollar plummets. It has ranged from over 300 yen to under 80, all within a few decades.

It is more likely that eventually the world would settle into a few major currencies, with the others tied to one of them. Western Europe has dispensed with its multitude of currencies into the euro. The dollar is fast becoming the currency of choice in the Western hemisphere.

Panama and more recently Ecuador have dollarized their economies, dispensing with their own currencies. The more currencies there are, the more exchange rates there will be, and more opportunities for currency traders to exploit. The best way to put these traders out of business is not to rant and rave against them or label their activities “unnecessary, unproductive and immoral” (Mahathir’s phrase), but to have a single world currency, or at least only a few.

In the Caribbean and Mexico, the dollar is the de facto marketplace currency; only government employees are paid with the national currency. Everyone else, especially taxi drivers and airport porters, insist on the dollar. Before Ecuador dollarized its economy in January 2000, its sucre was gyrating from 14,000 to 26,000 to the dollar. Ridiculous! You would need a wheelbarrow full of notes to execute even a single transaction, reminiscent of pre-Hitler Germany. With dollarization, confidence was immediately restored and Ecuador’s GDP, which contracted by 8 percent in 1999, was poised to expand by an impressive 4.5 percent in 2001. Meanwhile inflation dropped from a dizzying 90 percent in 2000 to the mid teens in 2001.

Dollarization brings its own peculiar and unanticipated problems. In Ecuador, airport porters who once were gleeful with a few hundred sucres in tips (pennies in US currency), now belittle “only a dollar” tip!

Illiterate peasants who once could value paper money by its size and color are now easily confused by the similarity of the various dollar denominations. Many Ecuadorian retailers now refuse to accept denominations over $20.00 for fear of counterfeit notes.

Adopting the dollar means more than just simply replacing worthless local notes with the greenback. It commits the nation to some very profound economic and non-economic changes. Henceforth that nation would be linking its economic and other fates with America. The Federal Reserve Bank and Washington, DC, would determine its monetary and other policies. For most Third World countries, seeing how incompetent their leaders are, that would represent a significant improvement.

Dollarization or even strict dollar linkage is no economic panacea. Argentina gave up its peso-dollar linkage recently because the stronger dollar made its exports more expensive and thus less competitive vis a vis its neighbors. Even though Malaysia is not dollarized, nonetheless by pegging its ringgit to the dollar, she would also be made similarly vulnerable. The current major economic threat to Malaysia is if China in particular were to devalue its yuan, then Malaysian exports would be at a significant disadvantage price-wise.

Mahathir never fails to rail against currency speculators whom he blames for the economic crisis of 1997. There is another simple and effective way to prevent speculations on the ringgit. Get rid of it, by dollarizing the economy. No one will miss the ringgit. There are plenty of other places where we can put the picture of the king’s head.

This idea that every little nation should have its own currency, central bank, and even airline is nonsensical. Were California to be an independent state, its economy would be the fifth largest, yet it does not have any of those expensive state symbols. When Malaysia imposed capital controls in1998, Bank Negara had to recruit hundreds of new workers. But they were not employed to monitor wayward banks but to check on travelers entering and leaving the country, and to process the now voluminous paper work necessary for routine foreign fund transfers. Totally nonproductive work, essentially paper pushing activity!

Had Malaysia adopted the dollar, Bank Negara would be relieved of these tedious non-productive chores. It would then be able to concentrate on doing what central banks are supposed to do – keep close tabs on local financial institutions. Had Bank Negara been diligent in its primary function, Malaysia would not have had the Bank Bumiputra debacle or the massive dud loans now strangling the Malaysian banking system. The incompetence if not malfeasance of Malaysian bankers was what aggravated (or even contributed to) the economic crisis.

By adopting the dollar or any other major currency, Malaysia would be demonstrating its commitment to embracing globalization. I prefer the dollar for many reasons. One, Malaysia’s foreign trade is already 80 percent dollar-denominated anyway. Two, we are more familiar with it than with the yen or euro. Last, and most important, I have more faith in the American economy than that of the European or Japanese.

Mahathir’s proposal for an ASEAN currency has no merit. Not many Malaysians would trust the central bankers of Indonesia, Thailand, and Philippines to maintain the value and integrity of their hard-earned money. Mark Mobius of Templeton Fund had a similar idea, but he added the important proviso that such a currency be backed by gold to prevent those bankers from printing money at will.

The Islamic world had a universal currency based on gold (dinar) and silver (durham) that Muslim enthusiasts are now trying to resurrect. In concept this is commendable but beyond academic seminars and political posturing, there is not much being done to bring the idea to fruition.

Having a gold-backed currency alone is not enough. There must also be trustworthy and reliable banking systems to go along with it.

Next: Correlates of the IT Revolution