Who needs the Central Bank?

frederic · May 27, 2003

Who needs the Central Bank?

Economist Frederic Emam Zade writes in El Caribe on Saturday, 24 May regarding his doubts of the merits of a Central Bank in the Dominican Republic._
Emam Zade explains that because we have a small and open economy, with trade and monetary relations closely tied to the US, like it or not, the person who dictates Domincan monetary policy is the head of the US Federal Reserve, Alan Greenspan, regardless of whether Greenspan is even aware of the DR or of its social and economic problems.

If such is the case, Emam Zade asks what good is the Central Bank and who needs the peso? While some suggest converting to US dollar currency, that is, go from a monopoly of pesos to a monopoly of dollars, Emam Zade has come up a more creative formula. ?We believe it would be best for Dominicans to be free to choose from several currencies.?

He explains how this would abolish the government monopoly on money and would allow free competition for currency. ?Money is a merchandise and the monetary services offered by the peso and our Central Bank would be better served by the central banks that issue currencies that are in popular demand, such as the dollar and the Euro,? he states. He also explains that instead of dollarizing, Dominicans would be better served by a system of free competition of currencies of countries where their governments have had the discipline to effectively limit money in circulation to preserve the public?s trust._

Emam Zade opines that Dominican currency has lost its worth through a lack of discipline on behalf of our government officials in conspiration with weak central bank governors. The renowned economist says the only true solution would be a system backed by gold, but seeing as that is not possible, it would be best for the government to relinquish all control on money._

?Dominicans would live better, the economy would prosper and be sustained, and we would become a truly free nation, more sovereign and more independent,? he concludes._

mondongo · May 27, 2003

frederic, I would like yo read your entire article. Would you mind posting the original El Caribe article?

thanks

Pib · May 27, 2003

Great read

I read it, and I found it very interesting. And I concur with him, when the head of the Central Bank (or any governmental agency) is constantly on the news then something must be very wrong.

Hillbilly · May 27, 2003

I read it, too

I fuigure he really is pi$$9ing a lot of people off. And PIB, you are so right about being in the news every day = Something is wrong!

HB

Hillbilly · May 29, 2003

I had this in my pocket

And forgot about it
It is clipped from Frederic's article and I just love it:

"while our money is weakened by the lack of fiscal discipline of the government, who counts onthe complicity of central bank governors with little testicular fortitude, only the gold standard, inspite of its imperfections, would give us a system that is tolerably secure. In the absence of a gold standard, in cases such as ours, the best thing for the governed is to completely take away control of the money from the government, in order for the Dominicans to live better, have a more prosperous ans sustainable economy and, at last, a really free nation, more sovereign and more independent. And whoever doubts this, look at what is happening and think about this idea dispassionately."

"Magnificent!!

HB

frederic · May 30, 2003

Article: LA MEJOR DOLARIZACION

La mejor dolarizaci?n
Por Frederic Emam-Zad? Gerardino

Cuando un banco central no es noticia, es buena noticia. Usualmente el mejor banco central es el que no se siente, porque cuando se siente es porque esta generando inflaci?n o porque esta devaluando su moneda o porque esta subiendo las tasas de inter?s; en otras palabras, porque le esta dando problemas a su gente. En fin, lo mejor es que ni el banco central ni su gobernador sean noticias. En nuestro pa?s, en estos momentos, el Banco Central es noticia; se?al de que tenemos problemas.

El problema fundamental de nuestro sistema monetario es que somos una econom?a peque?a y abierta con relaciones comerciales y monetarias con una econom?a determinante como la norteamericana. Esto constituye un problema, porque al fin y al cabo, bajo estas circunstancias, quer?moslo o no, quieran los EE.UU. o no, quien de hecho fija la pol?tica monetaria para nuestro pa?s es el gobernador del banco central norteamericano, Alan Greenspan; quien desconoce la Rep?blica Dominicana y sus problemas econ?micos y sociales.

Esto es as? porque si nuestra pol?tica monetaria es m?s expansiva que la norteamericana generamos inflaci?n y devaluaci?n, y si nuestra pol?tica es mas restrictiva entonces generamos deflaci?n y revaluaci?n y nuestras exportaciones se hacen menos competitivas. Entonces, esto nos plantea un dilema: ?si para no tener problemas monetarios hay que tener una pol?tica monetaria igual a la norteamericana, entonces para que nos sirve el peso y el Banco Central? Ante este dilema, algunas personas piensan que lo mejor es dolarizar la econom?a, o sea pasar de un monopolio de pesos a un monopolio de d?lares. Otros, pensamos diferente y creemos que lo mejor es permitirle a los dominicanos la libertad de elegir entre varias monedas.

Esta tercera opci?n propone desnacionalizar el dinero, aboliendo el monopolio gubernamental del dinero y permitiendo la libre concurrencia y competencia en el mercado monetario. El dinero es una mercanc?a y los servicios monetarios que nos ofrece nuestro peso y nuestro Banco Central podr?an ofrec?rnoslos mejor los bancos centrales emisores de monedas internacionalmente demandadas y ofertadas, como el D?lar o el Euro. En vez de dolarizar, ser?a preferible reemplazar el monopolio gubernamental del dinero por la libre competencia entre los suplidores de otras monedas, quienes, para conservar la confianza p?blica, suplen sus monedas m?s eficientemente y limitan disciplinadamente la cantidad en circulaci?n de su moneda para as? mantener su valor, para el beneficio de sus usuarios.

Mientras nuestro dinero sea vulnerado por gobernantes fiscalmente indisciplinados, que cuentan con la complicidad de gobernadores de bancos centrales con poca fortaleza testicular, s?lo el patr?n-oro, a pesar de sus imperfecciones, nos dar?a un sistema tolerablemente seguro. En ausencia de un patr?n-oro, en casos como el nuestro, lo mejor para los gobernados es quitarle completamente el control sobre el dinero a los gobernantes; para que los dominicanos vivamos mejor, tengamos una econom?a m?s prospera y sustentable y en fin, una naci?n realmente m?s libre, m?s soberana y m?s independiente. Y quien lo dude, que vea lo que esta pasando y medite sobre este tema desapasionadamente.

Chris · May 31, 2003

frederic said:
Who needs the Central Bank?

While some suggest converting to US dollar currency, that is, go from a monopoly of pesos to a monopoly of dollars, Emam Zade has come up a more creative formula. ?We believe it would be best for Dominicans to be free to choose from several currencies.?

Are there any countries where this has happened? I do not understand all the ramifications of this article and was just wondering if an 'example' country exists?

Amicus · May 31, 2003

Neither the use of the gold standard, which engenders inflation, nor the dollarization of the currency, which binds the country's fortunes to the apron strings of the US, is the solution. As the dollar goes down in terms of world currencies, this seems like a good idea. (The US came off the gold standard for the above reason, and Argentina's flirt with dollarization was short-lived as impractical.)

But, the dollar is not expected to remain down, so terms-of-trade may well come back to levels that existed over the past decade, thereby overpricing DR goods in foreign markets. The DR is not particularly privileged to have a distinctive and unique basket of goods to trade. It is therefore exposed to competition.

The answer is really quite simple. The budget must be balanced, and at a lower level than in the past. Even a small deficit is tolerable, if it suffices to stimulate the economy.

Solving the current problem by borrowing, thereby enhancing further the indebtedness of the DR Treasury, is only a palliative. The country has been living beyond its means. It has done some things right - particularly the infrastructure developments (roads, airports). But, increasing its debt will simply change its credit rating for the worse, choking off funds necessary for future economic growth.

Unfortunately, it did not know when to stop, and this government probably thinks it can purchase re-election by simply hiring civil servants. In many countries that works, but you need good economic times for that ploy to pay off - which is not the case.

There is a silver lining in the cloud, however. If the peso's devaluation is allowed to flow through into prices, then tourists will be more attracted to the island and spend more money whilst there. This may diminish unemployment and allow the state to better pay off the debt - and the increased cost of imports.

Criss Colon · Jun 1, 2003

Your logic is correct(Mostly) but it doesn't apply to the DR!

The government has completed,and continues to build,"infrastructure"! This is good.They borrow 500 milion dollars for ,lets say,highway construction,the real cost is only 200 million dollars.They "steal" 300 million dollars!This is "BAD", very bad!This has been,and continues to be, the "Normal" way of doing business here! Now If the peso continues it's "free fall",yes it will reduce the cost of a tourists vacation,and should stimulate tourism.Unfortunately you would need millions more tourists to make a difference in the general economy.Don't forget,many "AI" resorts are foreign owned,and the real income leaves the DR to the home countries of the owners.Nothing will ever change here.Its like if robbing banks were not illegal,would the "Bank Robbers" pass laws to make it a crime,and then turn themselves in to the prisons???I kinda Phucking doubt it!!!!! Cris Colon

Amicus · Jun 1, 2003

Re: Your logic is correct(Mostly) but it doesn't apply to the DR!

Criss Colon said:
They "steal" 300 million dollars!This is "BAD", very bad!This has been,and continues to be, the "Normal" way of doing business here!

Well, I was trying to put a little silver lining in a dark cloud.

I suspect many people share your opinion that "nothing can be done". There is a old saying, "People deserve the government they have." This is true all over the world. If you want to change government, then you will have to change peoples' attitudes towards political governance. That is, to expect and demand more from thier politicians.

Only the Domincans can do this. We foreigners can bitch and moan, but we are only spectators in the process.

The DR is young in the democratic process. It has had, what?, only four presidents in its entire democratic history, after a mind-numbing how many decades of dictatorship? It will take time, and you are probably right, a lonnnnng time.

But, if something is not done to better the lot of its people, then like many latin cultures, one ordinary day, just like all the others, it just might all explode. And, that day will be an ugly one for all.

I don't know what income distribution is in the DR - but it would be an interesting study. If 10% of the population owns 80 or 90% of the wealth, then that is a sure danger sign. All it takes is a match....

One thing is for sure, foreign direct investment MUST improve soon for the income spigot to open again. There are signs that both the US and Europe are on the mend, so let's hope FDI will pick up by the end of this year.

Porfio_Rubirosa · Jun 1, 2003

It's simply a matter of stealing too much

The DR is called a "democracy" in the same way that the people call themselves "catholic". In other words, it's a very loose description.

The DR is not a "normal" economy for two reasons: It relies on dollar remittances and is inextricably and directly within the gravitational pull of the United States. With the exception of some agricultural products (sugar), minerals and garment assembly, there are no exports. Therefore, to evaluate the DR economy as if it were Brazil or Mexico is inapposite.

For the period from 1996 to 2000, the value of the Domican Republic was in its attractiveness to tourists and to overseas Dominicans and others looking to invest in "paradise", its relatively stable political and economic situation, and its suprisingly developed infrastructure. It was never about the labor rate of underwear stichers or hotel waiters or the price of sugar.

This is why the Mejia administration is such a fantastic failure. Actually, I would call it a diabolical failure given the impact that this disaster will have on the poor (ironically, the ruling PRD party is part of the international socialist organization). All Dominican governments steal, including that of the Fernandez administration ('96 - '00). However, Mejia's crew wasn't content with, as Criss describes, skimming off of regular projects financed through local banks. Mejia's group discovered early on that they could take advantage of the relatively low level of debt of the nation, borrow billions, and steal that too. The money mainly goes to an absurdly bloated government payroll and to infrastructure projects. But unlike previous administrations, this administration feels no real need to actually start or complete the projects from which they are skimming. So it's not really skimming at all, it's just theft.

The result is the present economic collapse. But the irony is that Mejia and his group could probably have kept on skimming forever (their party is by far the most popular) if they just weren't so damned greedy and without shame. The economic collapse COULD result in him not being reelected.

The DR would have continued succeeding economically, even with somewhat greater government theft than in previous administrations, because of its "paradise" qualities (low crime, great climate, beaches, friendly people, etc.) and desire of overseas Dominicans and others to get a share of "paradise". What I find most galling is that, after looting the country, the Mejia group might actually get reelected. Thus is the success of Dominican "democracy" and other democracies where the population is too uneducated to responsibly carry out the vote.

Keep to the topic of the thread, you say! Okay, here's my point: All this paradise needs to do to create investment and growth is maintain stability - and that would be helped by going to the dollar (and by Mejia coming down with a debilitating illness). The arguments against dollarization do not apply here, because the economy is not "real" and we're just a small, insignificant moon being pulled around planet America anyway.

mondongo · Jun 2, 2003

frederic, thanks for posting your article. I have a couple questions/comments:

1) If the DR were to eliminate the DR Central Bank (hooray!), what entity would be responsible for modulating the DR$ money supply? My first order guess is that money supply should grow approximately at the rate of GDP + inflation (DR).

2) How would the local supply of US$ and EUR$ gorw in response to DR economic growth? Remittances, free trade zones and tourism may not have a predictable correlation with local economic output. The local DR economic cycle would then have to depend on these forms of hard currencies for its expansion.

My guess is that the availability of hard currencies would be directly tied to the DR outperforming the US and EU in productivity and GDP growth.

Amicus · Jun 2, 2003

Re: It's simply a matter of stealing too much

Porfio_Rubirosa said:
The DR is not a "normal" economy for two reasons: It relies on dollar remittances and is inextricably and directly within the gravitational pull of the United States.

Yes, and so? How does that distinguish it particularly from any other Caribbean country?

The economic context of the DR is no different from a great many islands and is better than some - just look a Haiti to the west. Or Cuba.

But the irony is that Mejia and his group could probably have kept on skimming forever (their party is by far the most popular) if they just weren't so damned greedy and without shame. The economic collapse COULD result in him not being reelected. [/B]

Perhaps, so. But, for us spectators, that is a matter for the Dominicans to evaluate and judge, via the ballot box.

Dollarizing the DR economy only pulls the country closer to the US economy - and there is no historical reason to assume that the US should want that to happen. After all, there is no communist party waiting to take power. And the US's Latin American foreign policy has always been ambivalent, at best. (With the sole exception of Mexico, when the threat of financial implosion was contiguous to the mainland.)

The problem can address itself by simply balancing the budget. DR citizens need to be made aware of the facts. It would be far more effective to be out amongst the voting public trying to educate them of the predicament and those responsible. Far better than a sterile debate here in this forum.

Also, going hat in hand to the US will not work. Why should the US take responsibility for the financial and economic policies of the DR, if the Domincans cannot do so themselves? And, if America allows the DR to dollarize, why should it prevent any Latin or South American country to do so every time it demonstrates inept governance? And if it does allow dollarization, then the DR is not the only country that would want to do so.

The arguments against dollarization do not apply here, because the economy is not "real" and we're just a small, insignificant moon being pulled around planet America anyway. [/B]

Click to expand...

This argument is sad. The DR economy is real enough, and where it isn't it has to "get real". This takes a tremendous amount of education, and if that means educating the DR people, then ... that is what must be done.

To wit, where is the debate in the DR of its economic destiny? To be continually in orbit around the US? There are no alternatives? (For instance, Europe? Or is that too incoveniently far away?) Why remain fixated on the US? Do you hope for a future that resembles that of Puerto Rico, where people must leave thier homeland in order to better thier lives - then come back in retirement to die? Is this your vision of the future for the DR ... just more of the past?

The solution to the mess has to be democratic, it must be via the ballot box, and it must be soon. I doubt the message from Washington would be any different ... but I am not privy to what makes this administration tick. It is too fixated on the "war on terrorism" - its champion battle horse for the elections next November.

Amicus · Jun 2, 2003

mondongo said:
My guess is that the availability of hard currencies would be directly tied to the DR outperforming the US and EU in productivity and GDP growth.

The US allowed this to hapen for about twenty-years after WW2 in Europe in order to revitalize thier economies.

The result was the "Euro-dollar" (dollar deposits retained by European nations in reserves). The further result was the threat that these reserves be used to manipulate the exchange rate - a threat that never materialized. European economies, however, proved themselves financially responsible - so the threat was never taken seriously. I doubt the same consideration can be made for the Americas' southern hemisphere, where financial crises are continual fodder for the news mills.

To allow dollarization of every Latin or South American economy that is incapable or incompetent at financial self-government would only lead to the same - tremendous amounts of dollars being held in reserves or circulating beyond the active control of American fiscal policy.

I doubt seriously the US Federal Bank would look kindly to this. This present DR crisis must be resolved internally.

frederic · Jun 2, 2003

Re: Re: Who needs the Central Bank?

Chris said:
Are there any countries where this has happened? I do not understand all the ramifications of this article and was just wondering if an 'example' country exists?

Yes, of course.
For many years, some time ago, Switzerland had no central bank and money was printed by an association of banks. Sometime back Switzerland even had three different currencies circulating at the same time. Also, in Switzerland, you can have your account balance in one or several currencies and make check payable in any currency (as you specify in the check).

We also have the European union where different currencies have been melted into one and local central banks have diminished their roles substantially, giving way to the European Monetary Union.

The US has several central banks (I think 5) which operate as one, but 45 states don't have a central bank and operate under the same currecny. But in the past the US has had several currencies. And don't forget the Thaler (dollar) was an imported currency to begin with, and the it became Thalerized.

frederic · Jun 2, 2003

mondongo said:
frederic, thanks for posting your article. I have a couple questions/comments:

1) If the DR were to eliminate the DR Central Bank (hooray!), what entity would be responsible for modulating the DR$ money supply? My first order guess is that money supply should grow approximately at the rate of GDP + inflation (DR).

2) How would the local supply of US$ and EUR$ gorw in response to DR economic growth? Remittances, free trade zones and tourism may not have a predictable correlation with local economic output. The local DR economic cycle would then have to depend on these forms of hard currencies for its expansion.

My guess is that the availability of hard currencies would be directly tied to the DR outperforming the US and EU in productivity and GDP growth.

Answers:
1) the superintendency of banks, which would remain existant. Money suppl would be more (not wholly) determined by the market demand than by policymakers.

2) The Government could modify the Required Reserves ratio (% of deposits that cannot be loaned) to expand and contract Money Supply or could also establish a Monetary Rule (i.e. M1 will grow at a 1% monthly rate). And money does not necesarily determine growth, but investment, local and foreign.

Chris · Jun 2, 2003

Re: Re: Re: Who needs the Central Bank?

frederic said:
Yes, of course.
For many years, some time ago, Switzerland had no central bank and money was printed by an association of banks. Sometime back Switzerland even had three different currencies circulating at the same time. Also, in Switzerland, you can have your account balance in one or several currencies and make check payable in any currency (as you specify in the check).

Thank-you for the reply. Things are clearer now in terms of money supply and demand.

Now for the hard question. Do you have any glimmer of a hope that any of your thoughts, or any other sane fiscal management policies will be put in place in the short term?

Amicus · Jun 3, 2003

Re: Re: Re: Re: Who needs the Central Bank?

Chris said:
Now for the hard question. Do you have any glimmer of a hope that any of your thoughts, or any other sane fiscal management policies will be put in place in the short term?

"It is better to light one candle than to curse the darkness", Eleanor Roosevelt.

One cannot wail for "something to be done". Have you not a democratic process in the DR? Then, participate in it. Even if it is necessary to start a new political party - or partake of one that is established and has a platform for profound, fundamental change in the "political system" of cronyism.

It is difficult to believe that only you and a few others posting here do not share with the greater part of the DR people the revulsion at what has happened, and is likely to continue if change is not brought about.

What is the alternative? Complaining about it in this forum will bring neither relief nor change - and waiting for the American army to show up as it did in the sixties is not on either. It is busy elsewhere.

Chris · Jun 3, 2003

Re: Re: Re: Re: Re: Who needs the Central Bank?

Amicus said:
[BIt is difficult to believe that only you and a few others posting here do not share with the greater part of the DR people the revulsion at what has happened, and is likely to continue if change is not brought about. [/B]

From my side, I'd like to keep this thread on topic - and that is fiscal and monetary policy - not what the DR1 posters are doing politically to bring about change. It is seldom that we get the opportunity to ask questions, and learn from Federic - I'd like to keep it very clean and not waste this opportunity. Amicus, I've sent you a pm.

Tony C · Jun 3, 2003

Re: Re: Re: Re: Who needs the Central Bank?

Chris said:
Now for the hard question. Do you have any glimmer of a hope that any of your thoughts, or any other sane fiscal management policies will be put in place in the short term?

None whatsoever. The current administration will do some things to keep cash comming into their pockets but I hold no hope for the Administration to bite the bullet and do what is best!
It is going to get a lot worse before it will get better. I will be pleasantly surprised if Mejia is not re-elected. Instant Gratification is a trait that the typical Dominican wants. Expect a lot of new Zinc Roofs and lots of free chickens. Combine that with promised Gov. Jobs, Bottelas and "it's Baninter Fault" and you have lots of votes for Mejia.
Do you think that the Typical Dominican can even comprehend and understand all this economic talk and theory? I even have a hard time following it all. The Average Dominican on the street doesn't even have a bank account nor has ever even written a check. Their will be protest by the opposition but the PRD will be quick to put on counter-protests and with the Police and army will quickly put down any mass opposition on the street. Also Remember who controls large amounts of both print and electronic media.
The only hope I see for the DR is if the OAS or the US gets involved in the political process. If not the PRD is going to drag the DR into a economic quagmire that will make Argentina look like a garden party.

Amicus,
What do you think?

Tony C.

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