U.S. academic at center of economic storm over currency reforms<\/p>\n
By Rob Lever<\/p>\n
WASHINGTON (AFP): The economist tapped by Indonesia to map out
\na currency stabilization plan is a former adviser to the White
\nHouse and to other governments, and ironically a manager of a
\nhedge fund that has profited from the turmoil in Asia.<\/p>\n
Steve Hanke of Johns Hopkins University in Baltimore,
\nMaryland, has emerged as President Soeharto's chief economic guru
\nand defender of the idea of a currency board to stabilize the
\nrupiah, a plan opposed by the International Monetary Fund.<\/p>\n
Hanke, 55, was a member of U.S. president Ronald Reagan's
\ncouncil of economic advisers from 1980-81, and has advised
\ngovernments of Argentina, Lithuania, Kazakhstan and Estonia.
\nHanke is also a portfolio manager for Toronto-based Friedberg
\nCommodity Management, which operates hedge funds that make
\nspeculative bets on falling currencies.<\/p>\n
The group said it earned strong profits last year from \"short\"
\npositions on the falling Malaysian ringgit and the yen, with
\nsmaller amounts attributable to the Thai baht, Indonesian rupiah
\nand Czech koruna.<\/p>\n
Hanke told the Washington Post last week he discussed his
\ntrading with Soeharto, declining to give the president's
\nreaction, but saying, \"We hit it off quite well.\"<\/p>\n
Hanke recently described the currency board as a system where
\n\"the monetary policy is literally on autopilot with the money
\nsupply being determined by the balance of payments,\" saying this
\nhas worked elsewhere.<\/p>\n
He told a congressional hearing this month, \"This tends to
\nalso limit corruption because a currency board system can't issue
\ncredit either to the banking system or to the fiscal authority.\"<\/p>\n
Hanke is critical of the IMF, which is leading a US$43 billion
\nrescue package for Indonesia. In the congressional hearing, Hanke
\nsaid IMF officials \"have done nothing but make mistakes\" in Asia.<\/p>\n
\"They never warned us a crisis was coming. They diagnosed the
\npatient incorrectly. They've obviously given it the wrong
\nmedicine,\" he said.<\/p>\n
IMF officials have been equally critical of the currency board
\nplan, which is expected to peg the ailing rupiah to the dollar,
\nand some other economists are skeptical.<\/p>\n
Larry Chimerine of the Washington-based Economic Strategy
\nInstitute said he heard Hanke's congressional testimony and
\nnoted, \"I kept rolling my eyes because it sounded too simple to
\nme.\"<\/p>\n
\"It depends where you set the currency,\" Chimerine added. \"If
\nthey set it way above the market and the speculators rush in,
\nit's not clear they can defend it.\"<\/p>\n
The IMF is threatening to halt aid to Jakarta if the currency
\nboard is adopted.<\/p>\n
Critics of the plan say it will result in soaring interest
\nrates and could rapidly deplete Indonesia's less than $19 billion
\nin foreign exchange reserves.<\/p>\n
White House spokesman Michael McCurry said \"a lot of
\ncomplexities and technical issues ... have to be addressed before
\na currency board would be feasible.\"<\/p>\n
But Kurt Schuler, a former colleague of Hanke's who co-
\nauthored several reports on the subject, and now an independent
\nconsultant, said currency boards work better than \"politicized\"
\ncentral banks.<\/p>\n
A currency board would be required to have reserves equivalent
\nto the money supply, and make its records openly available to
\nensure transparency, Schuler said. But it would not be a lender
\nof last resort -- a situation that tempts governments to make
\nrisky loans, Schuler says.<\/p>\n
Schuler said Hong Kong successfully stabilized its economy
\nwith such a board in 1983 and that more recent success stories
\nare notably in Argentina, Estonia and Bulgaria.<\/p>\n
\"In all these cases, they've had a reversal from negative to
\npositive growth, inflation has come way down, currencies have
\nremained stable and in general they've had fewer problems than
\nother countries\" in similar straits.<\/p>\n
\"The big thing in favor of a currency board is that it can't
\nprint money for any government deficits or private companies ...
\nthe government has to raise money by taxation or by borrowing.\"<\/p>\n
Asked what would happen if the IMF pulled the plug on
\nIndonesia, Schuler declined to comment directly but said,
\n\"Argentina didn't get any help from the IMF in 1991 ... that
\nindicates the currency board can be established without IMF
\nhelp.\"<\/p>",
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