How an American Helped Spark a Tense IMF-Indonesia Feud

Economist Steve Hanke wins over Suharto to the idea of a currency board. IMF yesterday relented - maybe.

Who has the ear of Indonesian President Suharto?

Is it (a) officials from the International Monetary Fund (IMF) or, (b) a professor of applied economics at Johns Hopkins University in Baltimore?

The answer, which may be known soon, could affect economies all across Asia.

The professor, Steve Hanke, heads for Jakarta next week for his third visit in a month. He's been welcomed by President Suharto because of his speciality in setting up so-called currency boards, a monetary fix for nations with troubled economies.

What is a currency board?

A currency board, in short, allows a nation to fix the exchange rate of its local currency to the American dollar. The government cannot try to influence the rate, as many countries do now. But this unusual solution also forces a nation to give up its ability to control interest rates or to print extra money in a crisis.

Only a few places have adopted them. The ability of Hong Kong's currency board to fend off currency speculators recently has shown their worth.

"Currency boards are the only foolproof way to stop currency chaos, limit corruption, and establish stability," says Professor Hanke, who has advised several countries in establishing currency boards. "It's worked in Argentina and Estonia, and it will work in Indonesia."

Many, if not most, international economists disagree. But more importantly, the IMF, the Word Bank, and the United States adamantly oppose the immediate introduction of a currency board in Indonesia - at least until IMF reforms are implemented and the country's banks are revamped.

Suharto, faced with a cutoff of $43 billion in IMF assistance if he pursued the currency board, backed off from the idea. The IMF temporarily suspended the next $3 billion installment of its loan, but on Tuesday, IMF officials said they might support Indonesia's desire for a board if reforms in banking and other areas make steady progress within six months.

The Indonesian rupiah has plunged about 80 percent since July, when it stood at 2,400 against the dollar. The current stand-off with the IMF isn't making matters better.

IMF, World Bank, and Clinton administration officials agree that currency boards have worked well in some countries. But they assert that the idea is hardly a cure-all in every case.

"In order for a currency board to be successful, the domestic banking system must be strong and well-monitored and the political leadership must have the confidence of its citizens," says Chip Brown, a senior economist at Morgan Stanley Dean Witter in New York. "None of those conditions have been met in Indonesia."

So why has Suharto embraced Hanke's proposal?

"Personal financial reasons," speculates Lawrence Chimerine, chief economist for the Washington-based Economic Strategy Institute. "The currency board would give Suharto and his children the chance to trade their rupiah for dollars and deposit them overseas. Artificially fixing the rupiah's exchange rate would save Suharto billions. That's why Suharto views the currency board as a magic bullet."

But Hanke dismisses such concerns. "With a currency board, money will flow into Indonesia - not out - thanks to a new international confidence in the currency," he explains. "Interest rates will then move down - not up."

Hanke's other hat

Hanke wears another hat besides that of economic guru to Suharto. He is also vice chairman of a currency-trading firm - Toronto-based Friedberg Mercantile Group - that has profited from speculative bets on the collapse of the rupiah and other Asian currencies in recent months. While that may appear to be a conflict of interest, Hanke insists he was "up front [about his work] with the president." In addition, he says he refuses to be compensated for his government advisory work.