The phenomenon of dollarization in developing countries’ monetary systems

Abstract

The lack of reliable domestic financial instruments, including a stable currency,
results in domestic entities’ desire, and sometimes a need, to possess
monetary resources from other currency areas. The phenomenon is called
dollarization although it may relate to any currency, including mainly global
currencies. The need for dollarization also appears in connection with the
necessity of possessing reserves by the banking system. Official reserves made
of world currencies that are kept by developing countries are definitely higher
than required as standard traditional precautionary measures. It results from
the lack of the international financial system solutions that might guarantee
stable conditions for the functioning of developing economies, which makes
them maintain high monetary reserves. Thus, it seems that dollarization of
developing countries should be treated as an important factor shaping demand
for world money. The specific share of the countries that are world currencies
issuers, including first of all the dollar, in raising demand for world money that
lets them solve their domestic problems is an issue that requires further analysis.
On the other hand, the sources of these problems should be looked for in
persistent defectiveness of neoliberal policy of the contemporary capitalism.