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."