Tom Pepinsky

Category: Economics

  • The Rupiah’s Recent Troubles and the Old Currency Board Plan

    The Indonesian rupiah finds itself beset by international currency troubles. The word that jumps out to me in the Indonesian press coverage and on Twitter is anjlok, which means to plummet or to fall rapidly (see e.g. here). The last time that I saw the word anjlok used to describe the rupiah’s value this often was in old press clippings from the late 1990s, describing the Asian Financial Crisis, when the rupiah plunged from Rp2000/USD to Rp14000/USD in just a few months.

    By contrast, the current troubles don’t seem so bad.

    Source: Bloomberg

    The worry is about the latest jump in the IDR/USD exchange rate over the past two weeks, which is worrying for certain but not nearly comparable to the financial (and subsequently macroeconomic and political) catastrophe that accompanied the rupiah’s collapse in 1998.

    But it was in this context that an alert graduate student forwarded me this tweet:

    There is so much going on here.

    Take first the tweet’s author, Steve Hanke. Hanke has made a name for himself in the past thirty years as an ardent defender/proponent of the currency board system, a kind of exchange rate management institution in which a government body pledges to exchange local currency for benchmark foreign currency and keeps reserves on hand to accomplish this. Hanke is bullish on currency boards! Here he is tweeting on Turkey:

    The mind boggles at this sort of claim. It strikes me as much more credible to argue that currency boards rarely fail, or that when they fail it’s not so bad, but then again we live in the era of the Big Lie.

    The problem with any fixed exchange rate system is that without capital controls, domestic governments sacrifice macroeconomic policy autonomy (the old Mundell-Fleming Trilemma). There is nothing magical about calling the fixed exchange rate promise a “currency board” rather than “the moon and sixpence” or something else. And because currency boards are political institutions created by politicians, they are obviously inherit any credibility problem that a government might have when it faces a run on its currency. Of course, the idea behind the currency board is that the strict pledge not to interfere in the currency would itself become the source of greater credibility. But that pledge is also a political act, and requires a strong signaling and credibility logic to sustain (“only a government that’s really serious would pledge something like this, so we infer that it must be credible”).

    For Indonesia watchers, seeing Steve Hanke tweet about currency boards and Indonesia is quite the blast from the past. But there’s more! That tweet also conveys Hanke’s views about the fall of Soeharto as being not just the result of the crisis, but rather of plot by the US and the IMF to overthrow him. Why does he hold such beliefs? Because back in February 1998, Hanke was a key player in trying to convince Soeharto to implement a currency board system at the height of the crisis.

    I wrote about this a month and a half ago, in a discussion of recently declassified material from the last years of Soeharto’s New Order. Here’s President Clinton’s quote again:

    If the rupiah falls, you will lose your reserves. And if the currency board is caught short and falls, you will lose the reserves as well, just quicker.

    You can see how this sort of claim would annoy any proponent of a currency board system. In the end Soeharto didn’t go for the currency board proposal—and very clearly, both the US and the IMF were sharply critical of this proposal—but couldn’t hold onto power in the midst of dramatic economic collapse. Hanke thinks that this is evidence that the currency board would have saved Soeharto, and the rupiah too.

    If you’re wondering if Hanke maybe has a point (and he is not alone in his interpretations, see e.g. Ross McLeod here [PDF]), you might have a snicker at this February 16, 1998 article in Barron’s talking about successful examples that Indonesia might hope to emulate.

    Federal Reserve Chairman Alan Greenspan noted the currency boards in Hong Kong and Argentina have worked because “the political will and policies required” have been present.

    Hard to see how Soeharto possessed “the political will and policies required” to sustain a currency board. But this exchange rate policy footnote remains interesting when viewed with twenty years’ hindsight.

  • On American Exceptionalism and its Colonial Past

    This past weekend I participated in a fascinating conference entitled A Republic, if We Can Keep It, sponsored by Cornell’s Center for the Study of Inequality and New America. Participants included academics, journalists, analysts, and others, all brought together to debate the state of American democracy—with particular emphasis on understanding American democracy in comparative perspective.

    One issue that frequently comes up in such discussions is American exceptionalism. For the purposes of that particular discussion on the state of American democracy, the relevant question is, does the United States have some sort of exceptional quality that explains the durability of its democratic institutions over more than two centuries? The link earlier in this paragraph gives plenty of examples of what that exceptional quality might be: its religious history, its English cultural roots, the specific nature of the founding, the tradition of republicanism, and so forth.

    As someone whose research focuses on comparative politics (i.e., the rest of the world), I am duty-bound—professionally-speaking—to be skeptical of any claim of American exceptionalism. But there is one way in which I think that the United States really is exceptional, and it does matter for understanding American democracy, past and present. Specifically, the United States is the world’s only settler colony endowed with an enduring legacy of plantation slavery.

    It is possible to speak, in general terms, about two types of colonies. Settler colonies such as Canada, Australia, and Uruguay featured large-scale migration of Europeans, coupled with the near complete annihilation of their indigenous population. These are colonies in which European settlers were able to recreate European social and political institutions. Another type of colonial economy relied on large-scale plantation labor or commodity extraction, almost always supported by slavery (as in the Caribbean and Peru), significant forms of labor repression (as in Indonesia and Angola), or general neglect (as in Malaysia). These are colonies in which indigenous or African slave populations outnumbered the European population.

    The idea that there were difference in colonies based on whether or not Europeans settled en masse there is certainly not new. Acemoglu, Johnson, and Robinson’s landmark work on “The Colonial Origins of Comparative Development” relied on a simple distinction between those colonies where Europeans could settle (and hence built European institutions) and where they could not due to disease (and hence built extractive institutions).

    My point, however, is not about the origins of development or the mortality of settlers. It is about the legacies of such social structures after independence. The United States is unique—it is exceptional—in the specific sense that it combines both the institutions of settler colonialism and the legacy of large-scale plantation slavery. The closest analogues for the United States would be Brazil and (to a lesser extent) South Africa, and Anthony Marx’s Making Race and Nation takes up this comparative project explicitly. Other settler colonies, like Argentina, have slave histories but relatively few descendants of African slaves as a proportion of their total population today.

    Understanding American exceptionalism this way matters for understanding American democracy today because it reminds us that democratic institutions can coexist with racially exclusive policies and institutions, and that American democracy has always had to deal with this legacy. No other settler colony must confront a legacy of slavery in this way. Scholars of American politics from Hochschild, Weaver, and Burch to King and Smith have used the term “racial order” to describe “the beliefs, institutions, and practices” that define race and politics in the United States. In principle, every country has its own racial order; America is exceptional in how its racial orders must confront both European political institutions and the legacies of plantation slavery at scale.

    That confrontation between European institutions and plantation slave legacies has generally not favored the latter, and understanding why allows us to characterize just what it is that American democracy represents. Prior to the abolition of slavery, and then again under Jim Crow, and in various ways until today, American democracy has operated by restricting the very citizenship of black Americans. Dankwart Rustow’s argument that democracy requires mass agreement on who the members of a political community are has the uncomfortable implication that it might be that mass agreement about the non-membership or non-citizenship of certain groups provides the foundation for durable democratic institutions. But these democratic institutions do not represent all denizens of a given territory.