Currency boards still left on the drawing board<\/p>\n
By James T. Areddy<\/p>\n
HONG KONG (Dow Jones): It's back to the ivory towers for
\ncurrency board proponents.<\/p>\n
When exchange rate instability began rocking Asia two years
\nago, the relatively obscure method of locking one currency
\nagainst another was touted by many as a safe harbor from the
\nturmoil.<\/p>\n
But despite flirtation with the concept by Indonesia and
\npossibly other countries, the score for currency boards in Asia
\nremains exactly as it was before the crisis: Only Hong Kong has
\none.<\/p>\n
A workshop scheduled for next week in Hong Kong should show
\nhow much the enthusiasm for currency boards has retired back into
\nthe world of academia.<\/p>\n
\"This is not going to be an eye-catching sort of meeting. All
\nof this will be of relatively little popular interest,\" concedes
\nthe event organizer, Hong Kong Baptist University Economics Prof.
\nTsang Shu-ki.<\/p>\n
The situation is a far cry from early 1998 when currency board
\nproponents found themselves center circle in the raging debate
\nabout how to end Asia's financial crisis and drew followers with
\npromises of an easy route to stability.<\/p>\n
Steve Hanke, a Johns Hopkins University professor most
\nidentified with currency boards, was hired as a special adviser
\nto Indonesian President Soeharto at a time some of the
\npresident's own cabinet ministers said they were having trouble
\nscheduling meetings with him.<\/p>\n
When done by the book, a currency board should keep one
\ncurrency absolutely stable against an \"anchor\" currency, such as
\nthe U.S. dollar. The foreign currency is held in reserve by the
\nmonetary authority, backing the local currency 100 percent based
\non the set exchange rate.<\/p>\n
The currency board system is theoretically immune to breakage
\nbecause any weakening demand for the local currency triggers a
\nlift in interest rates, ultimately to a point that revives
\nconfidence in the currency. The mechanism works the same in
\nreverse, letting interest rates -- rather than the currency
\nexchange rate -- reflect changing monetary conditions.<\/p>\n
Malaysia took a slightly different route last year by
\nadministratively locking its currency exchange rate and making it
\nillegal to conduct trade at any rate but the fixed one. With a
\ncurrency board system, the exchange rate is supposed to hold
\nautomatically with virtually no administrative input.<\/p>\n
Hong Kong's currency board has provided the city a lot of
\nstability since it was adopted in 1983 and that was an attraction
\nin early 1998 around Asia.<\/p>\n
But the system has had only mixed success in the past few
\nyears. And because of the way it managed its currency board, the
\ngovernment was cornered into a costly -- and embarrassing --
\nfight with speculators in August, 1998.<\/p>\n
After some changes, the Hong Kong system is technically more
\northodox and stronger today. But persisting high money market
\ninterest rates suggest lingering concern about the Hong Kong
\ngovernment's political commitment to it, analysts say.<\/p>\n
Now, the recovery of Asian growth and currencies and the
\nreversal into deep recession for Hong Kong suggest that the
\ncountries wouldn't have been better off with currency boards.
\nSome currency board supporters don't see much opportunity for
\ntheir use in this region.<\/p>\n
Even Megawati Soekarnoputri, a leading candidate to be
\nIndonesia's next president, quietly dropped her backing for a
\ncurrency board immediately before Indonesia's June national
\nelection.<\/p>\n
Don Hanna, an economist at Goldman Sachs & Co., says currency
\nboard proponents start with a \"defeatist\" view that policy makers
\ncan't do a good job, since the currency board mechanism replaces
\nmany of the central banking functions.<\/p>\n
He says terrible mistakes were made by Asian policy makers in
\nrecent years, but the recovery shows that decisions \"by and large
\nhave been very good.\"<\/p>\n
Governments realize what they would have given up for that
\nstability, analysts say.<\/p>\n
Unlike the situation with Malaysia's currency controls,
\ngovernments adopting currency boards would have lost control of
\nsome of the policy tools that helped them revive, such as the
\nability to lower interest rates to boost economic activity. A
\ncurrency board is completely undermined if interest rates are
\nadjusted.<\/p>\n
Hanna says the loss of lender-of-last-resort functions with
\nthe adoption of a currency board would have left countries
\nwithout a key policy lever, which would have been dangerous amid
\na banking crisis.<\/p>\n
\"You need to have a very solid banking system to have a very
\nconvincing currency board,\" he says.<\/p>\n
Tsang says the Oct. 9 currency board workshop will lack the
\n\"high-level ideological debate\" of recent years.<\/p>\n
\"We are going to have a technical debate,\" he says, noting the
\nseven papers so far prepared focus on Hong Kong's system and
\ndiscuss issues such as lender-of-last-resort facilities and how
\nmuch of the money supply should be backed and guaranteed by U.S.
\ndollars.<\/p>\n
Tsang says currency boards may have dropped from the popular
\nagenda, but remain interesting to monetary experts.<\/p>\n
A paper published this month by the International Monetary
\nFund says \"the conventional wisdom\" is that emerging-market
\neconomies in Asia and elsewhere will increasingly migrate toward
\npure floating exchange rates or fully locked currency-boards or
\ndollarization.<\/p>\n
But the report adds, \"These extremes have the attraction of
\nlogical consistency, but suffer from a decided lack of political
\nrealism.\"<\/p>\n
Asia's financial crisis showed just how fraught with risk the
\ndecision can be.<\/p>\n
For example, when his currency slumped to more than Rp 15,000
\nagainst the U.S. dollar from a pre-crisis level of around Rp
\n2,000, Soeharto came so close to implementing a currency board in
\nIndonesia in the first quarter of 1998 that he ousted his
\nskeptical finance minister.<\/p>\n
But the dollar now buys Rp 8,250, so it's doubtful policy
\nmakers wish Soeharto had gone through with his plan.<\/p>\n
\"Commitment is a very delicate matter. Sometimes when you
\nstart from scratch, it's better,\" says Tsang.<\/p>\n
He explains that since there are such high stakes in making
\nthe decision to adopt a currency board, mostly over which
\nexchange rate is best, few countries are likely to try it.<\/p>\n
The exception would be new or war-torn states, he says,
\npointing to Albania as a possible candidate for currency board.<\/p>",
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