The Johns Hopkins Gazette: June 8, 1998
June 8, 1998
VOL. 27, NO. 37


Professor In Thick Of Indonesian Crisis

World affairs: Steve Hanke offers prescriptions for economic growth in developing nations

Greg Rienzi
The Gazette

Johns Hopkins Gazette Online Edition

In early May, the violence on the streets of Jakarta, Indonesia's capital city, was front-page news. With the country's economy in major crisis mode and with little hope for the future, students demonstrated at the foot of the capitol building and demanded that President Suharto step down. The demonstrations soon escalated into a series of riots in which hundreds lost their lives and which ultimately forced Suharto to resign a post he had held for 32 years.

Meanwhile, Steve H. Hanke, professor of applied economics, who was in Geneva at the time, barely blinked.

Steve Hanke thought Indonesia's political climate would blow up in three or four months if Suharto didn't stabilize the economy. "Unfortunately," he says, "I was right."

Like a physician who tells a patient with high cholesterol and blood pressure to stay off the beer and sausages, Hanke, in an advisory position to President Suharto, had warned him of the consequences of not following his advice. So when soaring inflation was not kept in check, and interest rates and fuel prices began to soar--a sort of economic stroke--Hanke was anything but surprised by the results.

"I had said the thing was clearly going to blow up. They had nothing to stabilize the currency," Hanke says of the economic game plan the Indonesian government had signed in April with the International Monetary Fund. The IMF is a world lending and advisory agency, made up of 182 countries. "Unfortunately, I was right. I thought it would take three or four months, but as it turned out it didn't take quite that long."

Just as some doctors make house calls, Hanke uses his doctorate in economics to make, well, country calls.

Hanke received his Ph.D. in 1969 from the University of Colorado at Boulder and has been teaching since then at Hopkins, where he has a joint appointment in the Department of Geography and Environmental Engineering. In addition, he is a columnist at Forbes magazine, chairman of the Friedberg Mercantile Group Inc. and president of the FCMI NZ Financial Corp., which is based in New Zealand. Hanke was recently listed as one of World Trade magazine's 25 most influential people, a distinguished group that includes, among others, President Clinton, Bill Gates and Rupert Murdoch.

While teaching full time, Hanke has a booming practice, albeit an obscure one, as somewhat of a currency doctor. His most recent patient, Indonesia, has made Hanke a regular on the international news pages since the announcement four months ago of his appointment as special counselor to Indonesian president Suharto.

This is not, however, the first time that Hanke has been involved with influencing the economic policies of foreign nations. Since the early 1990s, Hanke has advised heads of state in developing nations such as Argentina, Estonia, Bosnia, Bulgaria, Lithuania and Yugoslavia.

As the author of several books on free-market economics and economic policy for developing nations, Hanke was a known commodity to Suharto and other leaders. He is also seen as one of the world's leading experts on currency boards, an economic system that fixes a nation's currency to a strong foreign currency. In fact, it was Hanke who helped establish currency boards in Argentina, Bulgaria, Estonia and Lithuania, all of whose economies have recently stabilized and are on their way toward economic growth, according to Hanke.

So in February, when Hanke was in Istanbul, it came as little surprise when the president of Indonesia, the world's fourth most populous country, wished to meet with him.

"I was just about to give a lecture when I got a message from his office that he wanted to see me in Jakarta. I had no contact with Indonesia before that, and I had never met Suharto," says Hanke, his trademark glasses perched upon his nose. "I wasn't surprised, but I was about to return home to testify before a House banking committee, so it was a logistical thing getting there."

Upon arriving in Indonesia, Hanke realized that he was certainly not in Kansas anymore.

"It was a strange place compared to most cities," Hanke says of the city of roughly 10 million people. It is home to many "new mega-skyscrapers," he says, "but then you look out the window [of a skyscraper] and see some guy with a water buffalo plowing through a rice field. It definitely left me with a strange feeling."

Hanke says Suharto and he "hit it off" immediately, and the president was very receptive to his diagnosis that a comprehensive currency program was needed to stabilize the economy. At the time, Hanke says, Indonesia had $80 billion in private external debt; the rupiah, Indonesia's currency, had lost 80 percent of its value; and people were losing jobs. Just prior to Hanke's appointment as Suharto's economic adviser, the nation had signed a second agreement with the IMF that left in place the nation's central banking system. According to Hanke, that was a big mistake.

"A central bank can create credit and expand or contract the money supply on its own," Hanke says. "That is dangerous in these emerging market countries that have weak institutions and weak laws. Once the government decides to spend a little more it can just say, 'Give us a loan.' That was part of the trouble in Indonesia."

Hanke says the system is not unlike giving a credit card to a 16-year-old.

"It's exactly the same thing. It can go along fine for years, but then something develops on the political horizon that makes the politician want to run out and use the thing," Hanke says. But the currency board system he recommends "in effect takes the credit card away; it puts handcuffs on the government."

Apparently, Hanke isn't the only one to think this way as the rupiah rebounded 28 percent following his appointment as Suharto's adviser.

As to why he offers his economic advice to developing countries, a service he does for free, Hanke says that in part it's the challenge.

"I really don't much like routine work. I prefer to get into the most difficult, biggest messes that I can possibly get into, and then try to get out of it," Hanke says. "It's the same thing as a medical doctor. Somebody is in a crisis and you're trying to save his life."

Hanke says he enjoys putting in place economic policies that will allow economies to grow. In today's global marketplace, he says, having strong economies in these developing nations adds stability to the world and also benefits nations like the United States because they in turn can sell more goods to and import more goods from these countries.

While Hanke was offering one diagnosis for Indonesia's economic situation, the IMF was offering another. On April 10 the IMF signed a third agreement with Indonesia, which, although it included about 75 percent of Hanke's suggestions, did not include a currency board and did mandate a fuel-price increase. Hanke says that rising prices and the doubling of short-term interest rates were the final straw for some Indonesian people.

"When people get thrown out of jobs and have no income they don't like to see rice prices go up 25 percent," Hanke says. "At that point, they were starting from an almost catastrophic level, and then things went further south."

Following the signing of the third IMF agreement, Hanke says that all that was left for him to do was contingency planning.

Then on May 21 in Paris, where he and his wife, Liliane, have a second home, he was awakened at 3 a.m. by an ABC Nightline producer to the news that Suharto was about to announce his resignation. At 4 a.m. he was in the ABC Paris studio preparing to comment on the developments.

Now Hanke is waiting for the next economic crisis to come along. And he admits that, at 55, he is having the "best time of his life." Part of his happiness, he says, is that in addition to his world travels he is able to enjoy spending time with his students, especially the undergraduates.

One of these students is Michael Katsnelson, a rising senior, who has served as Hanke's in-office assistant for the past year. Katsnelson says that the desk next to Hanke's in Ames Hall has certainly been an exciting place to be, especially in recent months.

"It gives you a different look at things. Outside of the theories you learn in class, I get to see how real world problems are solved," Katsnelson says. "It's been very interesting. He's sort of my mentor."

Of being a mentor, Hanke says it works hand in hand with his work abroad.

"If you're not developing seed corn, you can't plant it," Hanke says. "That is the core of my existence."