Steve Hanke is man on mission: U.S. economists

Steve Hanke is man on mission: U.S. economists

WASHINGTON (Reuters): Steve Hanke, the Johns Hopkins
University professor with a Messianic devotion to fixed exchange
rates, is a reputable economist whose advice to Indonesia's
President Soeharto could prove disastrous for the world's fourth
most populous nation, U.S. economists said.

While offering mixed reviews on the success of fixed exchange
rates in countries such as Hong Kong and Argentina, some of
Hanke's colleagues in academia and at private firms believe
inadequate reserves and lack of public support would make a rigid
currency peg unworkable in Indonesia right now.

Many fear Hanke's idea of establishing a currency board that
would fix the exchange rate -- and essentially subordinate all
other goals to the strength of the rupiah -- would bring sky-high
interest rates and soaring unemployment.

The result, they contended in interviews on Tuesday and
Wednesday, would be an explosion of the political unrest that is
already simmering in Indonesia.

Hanke, who has said such criticisms are "just wrong," is not
only outside the mainstream of U.S. economists on the subject of
Indonesia. He is at the center of a controversy involving the
International Monetary Fund and President Bill Clinton who oppose
Indonesia's adoption of a currency board and have threatened to
yank financial support if the country proceeds with it.

Amid the standoff, Hanke's friend and former colleague,
William Niskanen, was surprised at the extent of his influence
with Soeharto, particularly given that many on the Indonesian
leader's economic team oppose the currency board.

"I am intrigued that Steve appears to have brought the whole
international financial institution community down on him," said
Niskanen, chairman of the libertarian Cato Institute think tank.

"That's an extraordinary thing for a single economist."

Niskanen served as chairman of President Ronald Reagan's
Council of Economic Advisers while Hanke was an economist there
and has co-authored papers with Hanke.

"He's a very bright and able economist," Niskanen said, adding
that Hanke became a devotee of currency boards later in his
career.

Niskanen said he was uncertain whether the currency board
could work for Indonesia.

However, other economists, such as Claude Barfield of the
American Enterprise Institute and Princeton University economist
Peter Kenen, expressed grave concerns.

Barfield warned of "wrenching hardships" if Indonesia were to
adopt the currency board then find itself unable to sustain it.

Said Kenen: "This could impose a draconian deflationary regime
on the central bank and the economy as a whole.

Still, Kenen said Hanke is "not a crank" but a true believer
in the usefulness of currency boards. "I don't think my
colleagues would regard him as being in the front rank of
international monetary economics," said Kenen, who noted that
Hanke's specialty is applied economics.

However, he pointed out that Hanke has written extensively on
the subject of currency boards. He has advised numerous other
governments, including Argentina, Yugoslavia, Lithuania and
Bulgaria. Hanke also chairs a New York trading firm called
Friedberg Mercantile Group Inc. and writes a column for Forbes
magazine.

"He is a well respected international trade economist who is
somewhat monothematic on the idea of a currency board," Barfield
said.

American University economist Daniel Schydlowsky likened Hanke
to a doctor who prescribes only one medicine, "a magic pill"
intended to cure all ailments.

"There are probably about 5 percent of patients for whom the
pill might work but for the other 95 percent -- say those who
might have something like a broken foot -- it wouldn't work at
all."