An Insider's View On the Fall of the Rupiah and Suharto by Steve H. Hanke

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An Insider's View On the Fall of the Rupiah and Suharto by Steve H. Hanke

(EconomicPolicyMonitor.com is pleased to announce that Dr. Steve H. Hanke, Professor of Applied Economics at the Johns Hopkins University and former Senior Economist on the Council of Economic Advisors, has agreed to contribute occasional columns to EPM.

Below, Dr. Hanke details his experience as Special Counselor in 1998 to then-President Suharto of Indonesia. His recommendation to Suharto to form a currency board met with major protests, including protests from U.S. President Bill Clinton and the Managing Director of the IMF, Michel Camdessus.

Dr. Hanke charges that the protests were not because those up in arms believed a currency board would not work, but because the United States wanted the Indonesian economy to collapse as a means to force the ouster of Suharto.....)

By late January 1998, President Suharto realized that the IMF medicine was not working and sought a second opinion. In February, I was invited to offer that opinion and began to operate pro bono as Suharto’s Special Counselor. Although I did not have any opinions on the Suharto government, I did have definite ones on the matter at hand. After the usual open discussions at the President’s private residence, I proposed as an antidote an orthodox currency board in which the rupiah would be fully convertible into the U.S. dollar at a fixed exchange rate. On the day that news hit the street, the rupiah soared by 28 percent against the U.S. dollar. These developments infuriated the U.S. government and the IMF.

Ruthless attacks on the currency board idea and the Special Counselor ensued. Suharto was told in no uncertain terms – by both the President of the United States, Bill Clinton, and the Managing Director of the IMF, Michel Camdessus – that he would have to drop the currency board idea or forego $43 billion in foreign assistance. He was also aware that his days as President would be numbered if the rupiah was not stabilized.

Economists jumped on the bandwagon too. Every half-truth and non-truth imaginable was trotted out against the currency board idea. In my opinion, those oft-repeated canards were outweighed by the full support for an Indonesian currency board (which received very little press) by four Nobel Laureates in Economics: Gary Becker, Milton Friedman, Merton Miller, and Robert Mundell.

Why all the fuss over a currency board for Indonesia? Merton Miller understood the great game immediately. As he wrote when Mrs. Hanke and I were in residence at the Shangri-La Hotel in Jakarta, the Clinton administration’s objection to the currency board was “not that it wouldn’t work but that it would, and if it worked, they would be stuck with Suharto.” Much the same argument was articulated by Australia’s former Prime Minister Paul Keating: “The United States Treasury quite deliberately used the economic collapse as a means of bringing about the ouster of President Suharto.” Former U.S. Secretary of State Lawrence Eagleberger weighed in with a similar diagnosis: “We were fairly clever in that we supported the IMF as it overthrew . Whether that was a wise way to proceed is another question. I’m not saying Mr. Suharto should have stayed, but I kind of wish he had left on terms other than because the IMF pushed him out.” Even Michel Camdessus could not find fault with these assessments. On the occasion of his retirement, he proudly proclaimed: “We created the conditions that obliged President Suharto to leave his job.”

To depose Suharto, two deceptions were necessary. The first involved forging an IMF public position of open hostility to currency boards. This deception was required to convince Suharto that he was acting heretically and that, if he continued, it would be costly. The IMF’s hostility required a quick about-face: Less than a year before the Indonesian uproar, Bulgaria (where I was President Stoyanov’s advisor) had installed a currency board on July 1, 1997 with the enthusiastic endorsement of the IMF, and Bosnia and Herzegovina (where I advised the government on currency board implementation) had followed suit under the mandate of the Dayton Peace Agreement and with IMF support on August 11, 1997.....

The above article originally appeared in the February 2007 issue of Globe Asia.
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Steve H. Hanke is a Professor of Applied Economics at the Johns Hopkins University in Baltimore and a senior fellow at the Cato Institute in Washington, D.C. In 1981 and 1982, during the Reagan administration, he was a Senior Economist on the Council of Economic Advisors.
Labels: IMF, Indonesia, SteveHanke

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