This article appeared on page B2 of the Kuala Lumpur edition of the International Herald Tribune on Monday, 29 September 2003.

Commentary: What about the ringgit peg?
By David DeRosa (Bloomberg)
Monday, September 29, 2003

Malaysia may be waking up to the impracticality of its idea for a gold dinar to replace conventional foreign currency. The timing is delicious. Prime Minister Mahathir bin Mohamad, who has promised to resign next month, has been the leading advocate of the gold dinar. Now it looks as though his successors have tossed the idea overboard.

Last Tuesday, the news agency Bernama quoted the Finance Ministry’s parliamentary secretary, Hashim Ismail, as saying that “the gold dinar does not have a legal value and cannot be used for trade purposes in the country.”

But what can you do with the gold dinar if you can’t make purchases or pay debts in Malaysia?

Hashim said his government would continue trying to convince other Muslim countries of the benefit of using gold as an alternative to conventional currencies for international trade.

It is an interesting concept, this gold dinar. It has zero practicality. The only reason it matters is because it caught Mahathir’s eye during the Southeast Asian currency crisis in 1997 and 1998. Mahathir was looking for a way to attribute his country’s difficulties to currency speculators - an accusation he never proved - when along came the idea of bypassing the foreign exchange market entirely by going to gold.

Yet no one has explained how this would work. Hashim’s statement last week is the closest we have come to understanding what the foreign exchange experts in Kuala Lumpur have in mind.

In some places the gold dinar has been called the Islamic dinar, though it isn’t clear why any particular religion should monopolize the use of gold as currency.

Meanwhile, economists will wonder what it means to have an international medium of exchange that is not legal tender in the domestic economies of the countries that participate in that currency.

Since the participants - identified by Hashim as Muslim countries - have a variety of exchange rate regimes, ranging from floating to fixed, it’s logical to assume that the conversion rates to gold will fluctuate wildly over time.

Wouldn’t that blow up the gold dinar? Movements in the dollar, the euro and the yen would still influence trade flows in the dinar-zone because of the implied movements in the price of gold.

According to Hashim, the ringgit would remain as legal tender inside Malaysia. More interesting is that the ringgit has been pegged at 3.80 to the dollar since 1998.

Now we know why Mahathir’s successors are backing the ringgit - the dollar’s fall against the euro and the yen means that the ringgit has also fallen, as has the yuan. That means payday for Malaysian exporters.

Now where have we heard something like this before? Wasn’t that what the Group of 7 was supposed to address in Dubai - Asian countries with inflexible foreign exchange regimes?

Yet Malaysia’s currency regime was ignored at the Dubai meetings. China was scathed for pegging the yuan to the dollar, but Malaysia wasn’t even mentioned, at least not directly, for pegging the ringgit.

Where is Senator Charles Schumer, the New York Democrat? Schumer has spoken of putting tariffs on Chinese goods because China is “manipulating” the yuan.

To Schumer and some other legislators, pegging the yuan to the dollar is the same as manipulating the foreign exchange market to steal American manufacturing jobs.

The logic is nonsensical, though the rhetoric has gained political traction.

So, senator, what are you going to do about Malaysia?

Malaysia is in the exact same situation - another Asian country that keeps its currency pegged to the dollar and exports lots of manufactured goods like those also made in the United States. Any ideas, senator?

  

Posted on September 29th, 2003 by jl
Filed under: Intl Currency