When a series of financial crises hit emerging economies in their early stage of capital account liberalization from the late 1990s to the early 2000s, the unsophisticated bank-based financial system with underdeveloped capital markets was pointed out as the main reason of their vulnerability to capital flow. 10 years later, however, the global financial crisis arose from the very heart of the most sophisticated market-based financial system, re-igniting the debate on the merits/demerits of a bank-based and market-based financial system.

In this context, the case of Korea which experienced two different Foreign Exchange (FX) liquidity crises at the time of the 1997 financial crisis and the 2007 global financial crisis provides us implications for understanding the changing nature of FX liquidity crises. After experiencing the 1997 Asian financial crisis, Korea has undertaken full-scale reform of its financial system towards a market-based system faithfully following the prescription of International Monetary Fund. Ironically, among the group of emerging economies hit by the Asian financial crisis in 1997, Korea was the only country which experienced the same pattern of FX liquidity crisis when the dollar liquidity shock spread across the globe. The pattern of a rapid increase of short-term foreign debt and subsequent capital flows reversal was similar in both crises, however, the underlying cause of the vulnerable external position was totally different reflecting the transformation of the financial system.

This paper will conduct a comparative analysis of those two FX liquidity crises in Korea, focusing on (1) the cause of a rapid increase of short-term foreign debt, (2) transmission channels of the shock, (3) policy responses by government authority. The purpose of this study is to understand the changing mechanism of the FX liquidity crisis in emerging economies transitioning towards a market-based financial system and to draw policy implications for the effective containment of financial crises.

Cambodia is one of the most dollarized economies in the world. The present paper overviews the Cambodian dollarization while reviewing the major recent empirical findings. Conventional measurements of dollarization, such as foreign currency deposit over M2, suggest that the country is almost completely dollarized. However, due to low financial inclusion, the conventional measurements fail to capture the use of currency by the majority of the Cambodian population. Thanks to the nation-wide large-scale survey conducted jointly by the National Bank of Cambodia and JICA Research Institute, the recent studies reveal real picture of dollarization with the micro level data. Although the deposits and loans are almost completely dollarized, households and enterprises are using the local currency in their transactions more intensively than expected. In particular, households and enterprises in rural areas, where the degree of financial inclusion is low. These findings provide the useful policy recommendations for promotion of local currency. For example, the promotion of financial inclusion in the rural areas could also be one of the possible strategy to promote the local currency deposits and then to mitigate FX loan provision.

The high extent of dollarization and flourishing of microfinance institutions (MFIs) are both unique features of the Cambodian economy. Microfinance is very beneficial to the development of the national economy as it provides a wide range of financial services at a fair price to the people in general, particularly rural people or those who have difficulty accessing the services of commercial banks. In the meantime, the Cambodian microfinance sector and the commercial banking sector have for decades been subject to a high rate of dollarization. There are pros and cons to the dollarization of the microfinance sector. However, there is a paucity of analysis on the intersection between dollarization and the microfinance sector. Thus, it is required to investigate this issue in order to advise how to deal with currency mismatch risks in MFI’s operation and to advise what policy measures should be taken for MFIs.

In this regard, although the nature of the analysis in this paper is explanatory and descriptive, we investigate how dollarization affects MFIs using a unique dataset manually constructed from audited financial statements of individual MFIs, which are obtained from MIX Market. As a result, we find that while the recent growth of the Cambodian microfinance sector depends on international funding streams, dollarization possibly mitigates the currency mismatch risks by allowing MFIs to extend loans in a foreign currency. However, there is a heterogeneity of currency choice in lending, and outreach-oriented MFIs are likely to face currency mismatch since they lend to a larger extent in the local currency.

We also summarize the stance of the government regarding dollarization in the Cambodian microfinance sector. Recent government policies, especially restrictions on foreign currency loan provisions and the interest rate cap, will significantly affect Cambodian MFIs’ operation, since most MFIs deal with currency risks and lower profitability. Most MDIs have more than 10% of their deposits in KHR, so it does not seem to be difficult for MDIs to meet the requirement of keeping 10% of their loan portfolio in KHR, although MDIs might still face challenges resulting from the high funding costs of KHR.

After the genocide during the Pol Pot regime between 1970 and 1975 and the period of isolation from international communities in the 1980s, Cambodia’s first election in 1993 ended the country’s isolation and introduced a new era. Since then, Cambodia has achieved remarkable economic growth and development. This achievement has been accompanied by structural changes in both production and employment patterns toward more industrial ones. It has also contributed to a general improvement in living standards and decreases in poverty and inequality. Economic growth and development in Cambodia over the 1990s to 2010s can be attributed to various factors, including political and macroeconomic stability, foreign aid and foreign direct investment inflows, the abundance of young labor and relatively low labor costs, and the improvement of human capital.

Rapid economic growth has been supported by dollar-based financial development. Due to the use of the dollar as a highly reliable international currency, the confidence in the monetary economy that was once destroyed by the Khmer Rouge regime has been restored, and the dollar-based financial system with its strong network externalities has promoted financial transactions and funded mobilization in the dollar. The vigorous demand for the dollar has been satisfied by two sources. One is the stable inflow of overseas funds, such as foreign aid and foreign direct investment, and the other is credit creation in the dollar through financial intermediation inside Cambodia.

Although the prospects for good performance for the Cambodian economy are still continuing, in order to be on track for long-term economic growth and development, various challenges and issues should be taken into account. Such challenges and issues include the diversification of industrial production, the improvement of governance and institutional quality, and concerns about whether sufficient growth funds and a good macroeconomic environment can be ensured in the future under the dollarization, all of which require more effective measures and policy actions.

Since the end of the 1990s, Cambodia has become politically stable and achieved an unprecedented level of economic performance under the authoritarian rule by the ruling Cambodian People’s Party (CPP). It came into power after overthrowing the Khmer Rouge regime led by Pol Pot in 1979. With a focus on the Leninist-type party control over the state and the society which was inherited from the 1980s, this study examines how the CPP maintains a firm grip on power and pursues economic development. More specifically, based on the party documents and fieldwork conducted in Cambodia, this study analyzes the structure and organizational principles of the CPP, the relationship between the party and the state, and the CPP’s membership recruitment. This study consists of three sections. In the first section, after reviewing the political process in the country in the 1990s, it shows that the constitutional amendment in 2006 and the CPP’s landslide victory in the 2008 National Assembly elections determine the establishment of the one-party dominant regime by the end of the 2000s. The second section reveals that the CPP has preserved the composition of the party leadership and the organizational principles, that is, democratic centralism since the 1980s when Marxism-Leninism was the official ideology of the party; and has penetrated into the state and the society by co-opting leaders from all state institutions and generating a vast increase in party membership. In the third section, upon analyzing how the substantive fusion of the party and the state affects economic development, it argues that the CPP drives private-sector-oriented development while co-opting talented economic technocrats and dominant business elites into the party or the government. From the above discussions, this study concludes that the CPP’s penetration into the state and the society is a crucial analytical perspective for understanding politics and society in contemporary Cambodia.

As the world economy becomes increasingly globalized, dollarization, that is, the replacement of all or some functions of domestic currency by foreign currency, is indeed prevalent. This study discusses the major issues of dollarization in Cambodia, the most dollarized economy in Asia, where the degree of financial dollarization has reached more than 95% as of the late 2010s.

The dollarization of the Cambodian economy has several distinguishing characteristics. First, financial and real dollarization have developed a mutually promoting relationship. Second, network externality of currency has played a crucial role in the persistent progress of dollarization under rapid financial development. Third, the dollarization is of a domestically driven nature, as bank credits in dollars are financed only by domestic deposits in dollars.

While dollarization has had several merits in the development of the real and financial sectors of the Cambodian economy, it is uncertain if a highly dollarized economy is sustainable in the future. In addition to the recognized cost of dollarization, such as a lack of the last resort function of central banks, lack of independent monetary policies, and loss of seigniorage, there is concern that sufficient dollar fund amounts will not be available to sustain economic growth. Therefore, it is important to expand the use of the Khmer Riel as the unit of account, means of payment, and store of value to circumvent financial growth constraints.

The rest of this paper is organized as follows. Section 2 provides an overview of the historical development of Cambodian dollarization. Section 3 introduces the realization of dollarization as revealed by the NBC-JICA joint nationwide survey on expanding the use of the Khmer Riel, also noting that the dollarization of Cambodia is not a surface phenomenon but rather financial development combined with dollarization, which has never been observed in the economic development of East and Southeast Asian countries. Section 4 discusses the background of Cambodian dollarization and the prospect of economic development based on the dollarized financial system. Section 5 describes the evolutionary process of dollarization from political perspectives, focusing on the changing political platform of the Cambodian People’s Party. Section 6 introduces the recent development of de-dollarization policies, based on the understanding that the successful repression of dollarization needs policy instruments that effectively suppress the network externality of dollar-based financial development.