U.S. Economist Unlikely Player in Indonesia-IMF Talks

When Indonesia signs its new accord with the International Monetary Fund a few days from now, a quiet-spoken American who has become an unlikely strategist in Jakarta’s three-month-long defiance of the IMF will be sitting out the ceremony in his Baltimore office.

To international policymakers, Steve H. Hanke, a little-known Johns Hopkins University economist, has played a villain’s role in the process, sidetracking the IMF’s agenda and forcing world leaders--including President Clinton--to scramble to keep Indonesia on course.

To no one’s surprise, the accord the two sides will sign is expected to omit Hanke’s controversial “currency board” proposal, which would tie the Indonesian rupiah to the dollar. The idea, the centerpiece of a broader strategy, was vehemently opposed by the IMF.

But to Hanke, losing the battle over the currency board is not necessarily a defeat. As a result of his efforts, he contends, Indonesia managed to persuade the IMF to soften or delay some of its more onerous prescriptions and to push the United States into offering more aid.

“I view it as a big-time win,” Hanke asserted.

By most standards, the fact that Hanke ended up as an important player in the flap between Indonesia and the IMF itself is something of an anomaly.

The blunt-talking, 55-year-old economics professor--a staunch free-marketeer who has specialized in such arcane fields as natural resources and metals markets--has been on few lists of would-be global policymakers.

During three trips to Jakarta in the last few weeks, however, Hanke has found himself doted upon by top Indonesian officials, summoned to frequent tete-a-tetes with President Suharto and pressed to meet the media to provide more details about his plan.

Hanke’s proposal is a simple one: Indonesia would transform its central bank into an independent currency board whose main mission would be to peg the value of the rupiah to that of the U.S. dollar and keep it there no matter what.

The board always would keep enough reserves on hand to convert rupiahs into dollars on demand and it could not print more money unless the country ran a sufficient trade surplus. If the rupiah started to fall, interest rates would shoot up, hopefully arresting the plunge.

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The idea itself is conventional enough. The currency board approach has been used successfully in a handful of countries, from Hong Kong and Argentina to Bulgaria, Lithuania, Estonia and Albania. Even the IMF has recommended it from time to time.

Where Hanke and his critics part is over the question of which should come first--the currency board or IMF-mandated reforms in Indonesia. Hanke wants the currency board first. The critics say that would be disastrous, worsening Indonesia’s recession and intensifying civil unrest.

Not surprisingly, Hanke has found himself the target of some formidable critics. His currency board plan, for example, has been roundly pooh-poohed by top IMF officials, most of the world’s leading finance ministers and the bulk of economists.

Critics also have suggested that Hanke’s involvement in the Indonesian talks was arranged by Suharto’s well-heeled children, who were looking for a way to save their own financial holdings, which were hit hard by the rupiah’s decline.

And he has been lambasted because his firm--he is vice chairman of the Friedberg Mercantile Group, a Toronto-based currency-trading firm--has made sizable profit in the markets by speculating against the rupiah while Hanke has been advising Suharto.

Hanke denies any improprieties. Suharto’s children, he asserts, had “nothing to do with” bringing him to Jakarta.

He says that he has maintained an arm’s-length relationship with Friedberg during his consultations. He even has refused any pay from the Indonesian government, he says.

How Hanke got to be a key advisor to Suharto still is a mystery to him, he insists.

The way he tells it, the invitation, issued in late January, came out of the blue, reaching him in Istanbul, Turkey, where he was delivering a lecture.

Suharto had been stunned when an earlier accord that he signed with the IMF failed to stem the slide of the rupiah, and he was desperately searching for a fast-acting alternative. He had heard that Hanke was an advocate of the currency board approach and wanted to discuss it.

A few days later, Hanke checked into Jakarta’s prestigious Shangri-La hotel, registering as “Simon Holland” (an assumed name dreamed up by the Indonesian government) and made plans for a 7 p.m. meeting with Suharto--the Indonesian president’s favorite time for such talks.

As Hanke relates it, the session was an instant success and the 76-year-old Indonesian leader ordered a full-fledged proposal, promising Hanke the complete cooperation of his government. A week later, Suharto himself publicly embraced the concept.

But the proposal never saw the light of day. Almost as soon as Suharto announced that he was considering such a plan, top IMF officials and Western economic policymakers launched a massive campaign to persuade him to drop it.

The IMF even threatened to cut off further loans.

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After giving conflicting signals, Indonesia finally indicated last week that it was abandoning the currency board plan in favor of a compromise that would delay or suspend some of the IMF’s harsher demands. Details are expected to be made public in the next few days.

Hanke harbors no bitterness over Indonesia’s turnabout. And he staunchly defends Suharto, who is often portrayed as a doddering old man.

“The idea that the guy is some ga-ga who doesn’t know anything is absolutely false,” Hanke says.