Area IV
Freedom to Use Alternative Currencies

A Freedom of Citizens to Own Foreign Currency Bank Accounts Domestically (weight .335)

B Freedom of Citizens to Maintain Foreign Currency Bank Accounts Abroad (weight .357)

C Freedom to Convert Domestic Currency to Foreign Currencies in Order (weight .308)
to Engage in Current and Capital Account Transactions

The three components in this area indicate how easy it is to conduct business in other currencies. If the purchasing power of the domestic currency is relatively stable and people have confidence that this will continue in the future, the freedom to use other currencies is generally less significant. However, when these conditions are absent, the freedom to use other currencies, maintain foreign currency bank accounts, and convert the domestic currency to other forms of money is extremely important.

Money offered by other monetary authorities is a substitute for money issued by the government of a given country. When residents are free to maintain bank accounts in foreign currencies, it is easier for them to avoid the uncertainties accompanying an unstable domestic monetary regime. Each of the three components in this area is binary, indicating that the condition is either present or absent (either legal or illegal). Countries that permit their citizens to maintain domestic bank accounts in other currencies freely are given a rating of 10 for Component IV-A. Those that prohibit (or establish various restrictions on) these accounts are given a zero rating.

Ownership of a bank account abroad provides another alternative method of storing purchasing power for future use. From a security standpoint, this option may be preferable to the domestic ownership of a foreign currency account because an account abroad is less vulnerable to confiscation by one's own government. Thus, countries that permit their citizens to maintain bank accounts abroad are given a 10 rating. Those that restrict these accounts are given a zero.

A citizen's ability to use alternative currencies in exchange and as a store of value is reduced substantially if the domestic currency is not freely convertible to other currencies. A currency is considered to be freely convertible if citizens are allowed to conduct both current and capital account foreign exchange transactions without having to obtain special permission from government authorities. Countries with freely convertible currencies are given a rating of 10 for Component IV-C. Those that impose restrictions are rated zero.

The numbers above in parentheses e.g., (weight .335), represent the portion of the area rating that is determined by a specific component. These values were determined by principal component analysis. The 1997 ratings for this area are presented on the following page.

Area IV Graphic: Freedom to Use Alternative Currencies, 1997

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Last Modified: Wednesday, October 20, 1999.