Johns Hopkins Gazette: September 9, 1996

Bosnia To Test
Hanke's Plan For
Economic Reform

Currency board:
A successful track
record encourages

Christine A. Rowett
News and Information

Whatever fate awaits war-torn Bosnia in the aftermath of this week's scheduled elections there, its future will be constructed on a new economic foundation included in the Dayton/Paris Treaty and orchestrated by Hopkins professor of applied economics Steve H. Hanke.

Hanke, an adviser to several foreign governments, was instrumental in the construction of the central banking provision of the accord, which was signed last year in Paris. Under the provision, Hanke said, the country's central bank will act as a currency board. It will issue Bosnian money that is fully backed by a foreign reserve currency and freely convertible into that reserve currency at a fixed rate. Additionally, the central bank will be allowed neither to lend money to the government or any private enterprise nor to create credit.

Hanke began researching the currency board system in the 1980s. By 1990, Hanke had developed a blueprint for Argentina to return to a currency board system.

Since then he has been named a state counselor on monetary and financial issues in Lithuania, and an official adviser to Argentina's minister of economy and to the governments of Venezuela, Estonia and the former Yugoslavia. His 1993 book, Russian Currency and Finance: A Currency Board Approach to Reform--written with Lars Jonung and Kurt Schuler--remains the only book-length treatment of currency boards.

Hanke has researched and authored more than 20 monographs on currency reform, and engineered currency reform in Argentina, Estonia, Lithuania and, most recently, Bosnia. The overall success of these programs has given Hanke the ability to pick up the phone and talk directly to many governments' highest ranking officials, who regularly call on him to personally explain his ideas about economic and currency reform. Aware of his influence, he does not take the responsibility lightly.

"We're not talking about some trivial piece of legislation," Hanke said, describing the economic changes required for currency reform. "Usually, central banking laws have to be completely changed. And many times it involves actually changing the constitution of the country."

Hanke never sees himself as a political figure. Mostly, he likens himself to both a salesman and a physician.

"It's just like selling shoes or vacuum cleaners or anything else. The bottom line is, if you're talking to politicians, you have to have a product, a book containing your ideas," he said.

"It's just like being a medical doctor. You've got a patient in the office that's sick as hell, and to be effective you have to be able to make a diagnosis of a country's current situation and propose a cure for getting them out of their economic problem. "You've got to be able to prescribe something that's going to fix them up," Hanke said. "In this way, there's almost no difference between being a medical doctor and being a professor of economics."

Hanke's exhausting schedule of international travel, meetings, presentations and writing keeps him away from Baltimore much of his spare time. But he says the results are worth the effort.

"At this stage of the game, I've been rather successful with this," he said. "The proof of the pudding is in the eating. Inflation in Argentina, Estonia and Lithuania has been eliminated."

His studies have been translated and widely distributed so those responsible for controlling inflation and stabilizing their countries' economies can follow the prescribed methods. He also has been asked to conduct workshops in this country for leaders of prospective client countries.

Last month Hanke hosted a delegation of bankers and business leaders from Bosnia for an afternoon lecture at the Homewood campus as part of a training program sponsored by the U.S. Agency for International Development.

"From a financial point of view, the country is a disaster," he told the group through an interpreter. "I'd get on with straightforward banking work."

Lending institutions should first get involved with builders and lumberyards, Hanke said, in order to repair some of the 64 percent of homes that have been damaged or the 18 percent that have been destroyed during the civil war.

"Everyone wants credit to fix or build a house," he said. "This is a golden opportunity for commercial banks."

Since the first currency board was established in the 1800s, Hanke said, none of the 70 has ever failed.

"Hopefully, at least, you are going to have the best monetary system in that part of the world," he told his Bosnian audience. "The currency board system mandated by the Dayton/Paris Treaty is foolproof."

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