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.