Economists urge Indonesia to try currency board again

Economists urge Indonesia to try currency board again

TOKYO (AFP): Renowned economists are calling on Indonesia to try a currency board again to rebuild the devastated economy, and they are counting on support from opposition leader Amien Rais.

The appeal is contained in an article to appear in the U.S. Journal of Applied Corporate Finance by Johns Hopkins professor Steve Hanke, University of Chicago Nobel Prize-winning economist Merton Miller and Christopher Culp, director of Risk Management Services.

A currency board is the best solution for countries such as Indonesia and Brazil, suffering from monetary crises, they write.

"I can report that Amien Rais is in favor of a currency board for Indonesia," said Hanke in a telephone interview with AFP from Baltimore, United States.

Rais is general chairman of Indonesia's National Mandate Party and among the contenders to replace President B.J. Habibie when a successor is chosen by parliament before the end of 1999.

In their article, the authors denounce opposition to the monetary scheme from the International Monetary Fund and the administration of U.S. President Bill Clinton.

"The real tragedy may be the priceless lost opportunity for developing countries to redraw their social contracts," they write.

Brazil's situation, in which the financial crisis has been exacerbated by budgetary conflict between the federal government and local authorities, seems to illustrate the economists' point.

"Contending private interest in such countries cannot be expected to give up their choke holds on government budgets without compensation," the economists write.

"A firm commitment to eschew further debasing of the currency has proved to be such a compensatory promise, whose credibility would be ensured by the adoption of a currency board with a firm monetary constitution."

In other words, monetary stabilization through a currency board, which bars issuing currency not backed by foreign currency reserves, is needed to clean up the state finances of a country such as Brazil.

Commenting on the article, Hanke said he was "very skeptical" about the latest IMF-Brazil agreement. "Because of the political situation, the only solution would be either a currency board or dollarization," he told AFP.

Hanke's name caught the international spotlight in early 1998 when former Indonesian president Soeharto called on the currency- board expert to draw up an alternative to the IMF-prescribed reforms.

But the Fund, with support from Washington, threatened to suspend financial help for Indonesia if it followed Hanke's advice.

In the article, Hanke and his colleagues anticipate their adversaries key objection to currency boards in emerging economies -- their "susceptibility to political manipulation or interference."

"Especially in countries for which political corruption or credibility is a concern, the currency board law could contain several specific provisions designed to mitigate the potential for political interference," they write.

First, the board should have its headquarters and most of its members in a safe haven country, such as Switzerland, to "limit the possibility of local expropriations of reserve assets."

Further, the board administrators should be mostly non- residents, appointed for example by the Basle-based Bank for International Settlements, (BIS), the central banks' bank.

Finally, the board should issue regular independently-audited financial reports.

The authors say countries taking this route have historically experienced faster growth, lower inflation and better balanced budgets than those choosing pegged exchange rates, as was the case generally in Asia before the 1997 crisis.