Economists urge Indonesia to try currency board again<\/p>\n
TOKYO (AFP): Renowned economists are calling on Indonesia to
\ntry a currency board again to rebuild the devastated economy, and
\nthey are counting on support from opposition leader Amien Rais.<\/p>\n
The appeal is contained in an article to appear in the U.S.
\nJournal of Applied Corporate Finance by Johns Hopkins professor
\nSteve Hanke, University of Chicago Nobel Prize-winning economist
\nMerton Miller and Christopher Culp, director of Risk Management
\nServices.<\/p>\n
A currency board is the best solution for countries such as
\nIndonesia and Brazil, suffering from monetary crises, they write.<\/p>\n
\"I can report that Amien Rais is in favor of a currency board
\nfor Indonesia,\" said Hanke in a telephone interview with AFP from
\nBaltimore, United States.<\/p>\n
Rais is general chairman of Indonesia's National Mandate Party
\nand among the contenders to replace President B.J. Habibie when a
\nsuccessor is chosen by parliament before the end of 1999.<\/p>\n
In their article, the authors denounce opposition to the
\nmonetary scheme from the International Monetary Fund and the
\nadministration of U.S. President Bill Clinton.<\/p>\n
\"The real tragedy may be the priceless lost opportunity for
\ndeveloping countries to redraw their social contracts,\" they
\nwrite.<\/p>\n
Brazil's situation, in which the financial crisis has been
\nexacerbated by budgetary conflict between the federal government
\nand local authorities, seems to illustrate the economists' point.<\/p>\n
\"Contending private interest in such countries cannot be
\nexpected to give up their choke holds on government budgets
\nwithout compensation,\" the economists write.<\/p>\n
\"A firm commitment to eschew further debasing of the currency
\nhas proved to be such a compensatory promise, whose credibility
\nwould be ensured by the adoption of a currency board with a firm
\nmonetary constitution.\"<\/p>\n
In other words, monetary stabilization through a currency
\nboard, which bars issuing currency not backed by foreign currency
\nreserves, is needed to clean up the state finances of a country
\nsuch as Brazil.<\/p>\n
Commenting on the article, Hanke said he was \"very skeptical\"
\nabout the latest IMF-Brazil agreement. \"Because of the political
\nsituation, the only solution would be either a currency board or
\ndollarization,\" he told AFP.<\/p>\n
Hanke's name caught the international spotlight in early 1998
\nwhen former Indonesian president Soeharto called on the currency-
\nboard expert to draw up an alternative to the IMF-prescribed
\nreforms.<\/p>\n
But the Fund, with support from Washington, threatened to
\nsuspend financial help for Indonesia if it followed Hanke's
\nadvice.<\/p>\n
In the article, Hanke and his colleagues anticipate their
\nadversaries key objection to currency boards in emerging
\neconomies -- their \"susceptibility to political manipulation or
\ninterference.\"<\/p>\n
\"Especially in countries for which political corruption or
\ncredibility is a concern, the currency board law could contain
\nseveral specific provisions designed to mitigate the potential
\nfor political interference,\" they write.<\/p>\n
First, the board should have its headquarters and most of its
\nmembers in a safe haven country, such as Switzerland, to \"limit
\nthe possibility of local expropriations of reserve assets.\"<\/p>\n
Further, the board administrators should be mostly non-
\nresidents, appointed for example by the Basle-based Bank for
\nInternational Settlements, (BIS), the central banks' bank.<\/p>\n
Finally, the board should issue regular independently-audited
\nfinancial reports.<\/p>\n
The authors say countries taking this route have historically
\nexperienced faster growth, lower inflation and better balanced
\nbudgets than those choosing pegged exchange rates, as was the
\ncase generally in Asia before the 1997 crisis.<\/p>",
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