Expert tackles Montenegrin currency

Hopkins teacher draws wary eye from U.S.

August 08, 1999|By John Hancock | John Hancock,SUN NATIONAL STAFF

WASHINGTON -- Steve Hanke, the Johns Hopkins University economist who stirred political and financial waters last year by trying to revamp Indonesia's monetary system, has accepted a similar assignment in another politically sensitive spot: Yugoslavia.

A well-known monetary engineer for developing nations, Hanke is designing a currency system for Montenegro, the pro-Western junior partner to Serbia in the Yugoslav federation. Because a separate currency would represent a big step toward Montenegrin independence, and because the Clinton administration has said it favors a unified Yugoslavia, Hanke is again being watched warily in Washington.

Named an economic adviser to President Milo Djukanovic last month, Hanke is working to set up a new Montenegrin currency backed by reserves of German deutsche marks.

An economic conservative who favors ascots and smokes a pipe, Hanke teaches in Baltimore and writes a column for Forbes magazine in addition to his international ventures. Montenegrin authorities hope he can spark an economic revival similar to Bulgaria's, wherethe currency system he installed in 1997 laid the groundwork for zero inflation and healthy economic growth last year.

Push for independence

Developments accelerated last Thursday, when Montenegro demanded its own army command and greater representation in its joint legislature with Serbia. The plan, which includes previous proposals for a new currency, would eliminate the name "Yugoslavia" and produce something close to full Montenegrin independence.

While details of the Montenegrin plan hinge on the course of regional politics, "at the outside, something is going to happen within six months," Hanke said in an interview.

"I've essentially got the legal papers all drafted up."

Hanke, 56, riled the Clinton administration and the International Monetary Fund last year when he was retained to revamp Indonesia's currency during the waning regime of President Suharto.

He specializes in so-called currency boards, which are similar to a gold standard but employ an established currency -- such as the dollar -- as backing instead of precious metal. In Indonesia, Hanke argued that a currency board, which prevents a government from manipulating the money supply, was a powerful antidote to the devaluation and inflation sapping the economy.

The International Monetary Fund and the United States opposed the setup. They contended that Indonesia's banking system was too fragile to handle the fixed exchange rate that a currency board brings. Dropping the idea under the threat of losing international aid, and amid spreading rioting over his rule, Suharto soon resigned, and the Indonesian economy continued to self-destruct.

Spokesmen for the IMF and the Treasury Department, which were critical of Hanke last year, declined to comment on his Montenegro mission.

State Department spokesman James P. Rubin said Montenegro has "demonstrated a measured and rational approach to political and economic reform that we fully support."

But suggesting some displeasure with Hanke's mission, Rubin added, "It's doubtful to me, just on the surface, that [a separate currency] is absolutely necessary."

Eroding dinar

Under Djukanovic, Montenegro is trying to disengage from Serbia, a world pariah after its wars against minorities in the former Yugoslavia.

In July, Montenegro asked Serbia for control over its banking system, currency and economic laws while remaining in the Yugoslav state, whose dinar currency has been eroded by years of excessive inflation and international economic sanctions. With its proposals last Thursday, Montenegro increased the pressure.

Serbian President Slobodan Milosevic is widely expected to reject the proposal, and if he does Djukanovic has threatened to hold an independence referendum within the next six weeks.

A professor of applied economics at Hopkins who once worked in the Reagan White House, Hanke won bitter reprobation last year during his Indonesia assignment. MIT economist Paul Krugman called Hanke an "economic snake oil salesman" and the IMF bent over backward to scuttle his plan.

Hanke's supporters argue that the plan was fine and was opposed by the West only because it would have strengthened Suharto, whom they wanted toppled.

"Clearly, they did want to get rid of Suharto," said Joe Rogers, former U.S. ambassador to the Asian Development Bank. "One other reason [top U.S. and world economic officials] don't like currency boards is it takes away their ability to manipulate things. All these guys still think they are smarter than the markets."

Currency boards do have an impressive record of killing inflation and anchoring stability in several countries, including Argentina, Lithuania, Estonia and Bulgaria. Hanke has had a hand in many of them.

Anchor for stability

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