Jason Riddle writes for the Foundation for Economic Education:
As part of the agreement in the 1991 Paris Peace Accords, the government of Cambodia relinquished the role of economic rehabilitation to the United Nations. The UN invested in health, education, and transportation infrastructure. Entrepreneurship and private sector development were promoted to prepare for Cambodia’s entry into the global marketplace as a free economy.
The government deficit was slashed, and inflation fell from 26 percent in 1994 to only 6 percent in 1995. The national currency stabilized, enabling long-term saving and capital investment.
Despite these economic gains, civil war and political instability persisted in Cambodia throughout much of the 1990s. Finally, in 1999, the remaining Khmer Rouge forces surrendered, and Cambodia enjoyed the first full year of relative peace in three decades.
Three necessary factors for entrepreneurship to flourish were finally in place: private property, stable currency, and peace. (emphasis applied)
A high-level of dollarisation, attributable to the presence of United Nations personnel and peacekeepers in the early 1990s, has largely been the reason for a relatively stable Khmer riel. The recognition of foreign currencies as valid legal tender under statute ensured the existence of competing currencies, esp. the US dollar, in the market, enforcing discipline on the central bank thereby preventing manipulation of interest rates, inordinate expansion of money supply and ensuring that inflation remains relatively low since then.
Here’s what the IMF has to say on the effect of dollarisation in Cambodia during the 1997 Asian financial crisis, a period of heavy turbulence in the history of Southeast Asia.
"The impact of the regional financial crisis and domestic political unrest on Cambodia's external balance was also tempered by the strong increase in 1997 in the country's garment exports, for which the primary markets were located outside the region, mainly in Europe and the United States. This increase allowed Cambodia to boost its reserves to 2.5 months of imports and offset a 14 percent reduction in tourism receipts that was due to security concerns in the midst of political unrest. Perhaps most important has been the extensive dollarization of Cambodia's economy—as much as 70-90 percent of all transactions are carried out in dollars, and commercial bank assets and liabilities are denominated almost exclusively in foreign currencies. This has helped limit the exchange rate impact of the external shock and inflationary pressures."
The use of the United States dollar, not only by foreign investors and businesses, but also its spontaneous adoption by regular people who go about their daily lives frequently conducting transactions using this foreign currency, is a testimony to the success of the dollar as a foreign institution in the country.
Would Messrs Boettke, Coyne and Leeson see this as an example of a “foreign-introduced endogenous institution”? Why or why not? You may comment below.