Steve Hanke has a three-part prescription to cure what ails Russia and the other countries of the former Soviet Union -- the institution of private property, the rule of law needed to ensure that, and a stable currency.
It was an invitation to discuss his plans for currency that took Dr. Hanke to Moscow earlier this year for a meeting with Russian President Boris N. Yeltsin, a trip he has been invited to make again in June.
Dr. Hanke, a professor of applied economics at Johns Hopkins University, is a free-market, supply-side economist who was among President Ronald Reagan's original Council of Economic Advisers. He wrote the parts of the Reagan economic plan on converting various federal lands and other holdings to private management.
Among his proudest accomplishments, he says, is getting the word "privatize" into the dictionary, though among his bigger disappointments is not getting more privatization programs adopted.
Q. As you know, Richard Nixon recently called for a massive aid program to Russia to ensure that the country does not collapse. Do you think this is what's needed?
A. Certainly not. For one, I don't understand why anyone would give any credence to anything Nixon says about economics. He never had a coherent economic plan, never even understood the issues. You might remember we had price controls when he was president.
Q. So you would oppose the Bush administration's proposal for a $24 billion aid package?
A. Yes. You have to look at the history of foreign aid. Usually it blocks any attempts to liberalize an economy and on balance causes economic harm. In Russia, some currency speculators and former Communist bigwigs will fill their pockets with the aid from Western countries' taxpayers, and then a year later they will be back again asking for more.
All it will do is raise the ire of the general population and help the opponents of Yeltsin. The aid is being given in the name of helping Yeltsin, but it will probably be a death wish for him.
Basically, Russia doesn't need the money. Estimates of the worth of the money the Soviet Communist Party and other previously state-owned enterprises have moved overseas in 1991 alone is $15 [billion] to $40 billion. Private investigators are now trying to track that money down, the same ones who found the Marcos money for the Philippines, by the way. [Former Soviet President Mikhail] Gorbachev is currently being questioned about where that money is. What you need is an environment conducive to attract that money to come back into the country.
Q. How would you go about setting up that situation?
A. One reason the money is not coming in is because Russia doesn't have a hard, convertible currency. The ruble is now so unstable that no one -- and that includes foreign investors who are needed to jump start an economy like this -- wants to convert hard money into rubles.
To correct that, I advised that Russia set up what is called a currency board. Rubles would be issued that would be backed 100 percent by a hard currency, like the dollar, which would be held in a foreign bank, perhaps in Switzerland. It would take only about $4 billion to set up this institution, a sum easily financed by Russia itself.
These rubles would be convertible to that currency on demand at a permanently fixed exchange rate. After it is established, the currency board will have only one function, to exchange new rubles for the reserve currency and vice versa. It is a simple idea that has worked everywhere it has been tried.
Q. Where has it been tried?
A. They have currency boards now in Hong Kong and Singapore. In fact, Russia had one in 1918 and 1919 in the north. The British couldn't get anyone to unload ships at Murmansk because the Russians didn't want to get paid in rubles. Everyone was issuing rubles at the time, there were something like 2,000 different types of rubles in circulation, and no one trusted any of them. Not knowing what to do, the British officers cabled for instructions.
What happened was the British government set up a currency board, issuing rubles that were backed by sterling that was kept in London. I had a feeling that John Maynard Keynes was involved in this -- he was working in the British Treasury
at the time -- and the one bit of academic news I made was to discover that that was the case. Buried in the British archives, I found two letters, one that he had typed himself, the other handwritten, that he wrote setting this thing up. None of his biographers knew about this, nor was it mentioned in his 30-volume collected works.
These British-backed rubles quickly became the trusted currency throughout northern Russia, and even when the Bolsheviks got there, though the local office of the currency board was closed down, no one lost any money. The money backing the currency was still safe in England. Everyone just got the rubles to London, where they were redeemed into sterling until 1920.
Q. What was the reaction of the Yeltsin government to this proposal?
A. They didn't decide to set one up I think because they don't want to go against the current plans for loans and foreign aid. But they indicated that they had no problem with the republics of the [Commonwealth of Independent States] issuing such rubles, regions within the Russian republic issuing local currency with a local currency board.
I think you will see a currency board in one of the smaller republics fairly soon. In fact, my new book I've written with Kurt Schuller of George Mason University and Lars Jonung, the Swedish prime minister's new chief economist, sets out a plan for an Estonian currency board. Even a city could do it. In May, I am going to talk to the mayor of St. Petersburg about setting one up.
Q. But certainly when you have people selling their possessions on the streets to survive, some humanitarian foreign aid is called for?
A. The only reason you see so much of that is because The Sun is writing about it every time you turn around. Russia is a poor country, and these types of things have always gone on; it's just that they are visible now. The fact is that there is plenty of food in Russia, but right now it makes more economic sense to keep it in storage than to sell it for rubles. The food is going up in value; the rubles are going down. If you had a stable currency, the food would move onto the market.
Q. As you certainly know from the rhetoric of the current presidential campaign, the economic policies of Reaganomics with which you are associated are now widely criticized and often blamed for the high deficit and the recession. Do you find it ironic that you are now advising these countries on setting up their capitalist systems?
A. That is rhetoric indeed, not reality. People tend to conveniently forget that Reaganomics generated the largest peacetime boom this country ever had while at the same time reducing inflation.
The politicians who are criticizing these policies literally don't know what they are talking about. The economic establishment is now coming around to the free-market views that economists such as myself have held for years.
In the World Bank's "World Development Report" for 1991, it says that the "emerging consensus is in favor of a 'market-friendly' strategy for development." I'm glad that the faceless technocrats who run these multinational organizations are coming around to this view.
Unfortunately, all the candidates for the U.S. president are not only completely out of touch with reality but also out of touch with the consensus of the economics profession.
Q. What do you think of the present state of the American economy?
A. The problem with the current nasty recession and the bleak outlook for the '90s is that the Bush administration has spent the last four years undoing the few real pieces of Reaganomics that Reagan was able to implement, and it is clear to me that all the political candidates want to continue to undo what little is left of Reaganomics.
If you look at the statistics, a higher percentage of this recession is driven by consumer pessimism than almost any other. And I think the consumers are justified in their pessimism. All you see in the current crop of candidates is the tax-and-spend, over-regulated approach.
Bush has been a disaster. Federal spending has risen as a percentage of the gross national product and has reached postwar highs. And if you look at the regulations he has put into effect, just the Clean Water Act, the Clean Air Act and the Disabilities Act will together take 1 percent off the GNP's potential.
Q. But don't you think you might look at those differently if, say, you were in a wheelchair?
A. No one's arguing that these acts have no benefits. The point is that there is also a cost associated with these programs.
The evidence shows that the costs outweigh the benefits by significant margins, and that's why all these programs act as drags on the United States' economy's growth potential.