There’s been remarkable interest in what Steve H. Hanke, Professor of Applied Economics at the John Hopkins University, writes about Ghana’s economic indices and situation; especially since the period of crisis began. His tweets, controversially themed in undermining either official exchange rate depreciation figures or inflationary rates, have predominantly featured on Ghanaian online portals – sometimes making waves in traditional tabloids.
I attempt in this piece to throw more light on who he is, and what his advocacy considerably represents.
Who is he?
His resume says Steve has since the age of 24 been teaching courses in economics or related subjects. It also adds that he is one of few people to have had a fast rise to professorial rank at the University of California, Berkley. He has taught in several other faculties over a period that sums to well over five decades.
At age 79, his area of interest in contemporary times has moved away from water resource economics (his PhD interest) to these: dollarisation, currency boards and hyper-inflation.
Of course, all these three have a relationship in which Steve is superbly versed to both the theoretical and empirical depths.
He played an important role in establishing new currency regimes in Argentina, Estonia, Bulgaria, Bosnia-Herzegovina, Ecuador, Lithuania and Montenegro. He has served as advisor to countries including Albania, Kazakhstan, the United Arab Emirates and Yugoslavia, per his resume.
His Philosophy?
From the 90s through to this day, his philosophy in currency and inflation deliberations has attracted the scorn of several respected national and global economic institutions – like the Federal Reserve Board and IMF. These firms aside, other modern authorities in the economic study field have found his ideas bewildering. One of such is the iconic Paul Krugman. Paul described him as a snake-oil salesman.
The catch is that Steve has a singular panacea he unreservedly prescribes for all economies facing currency and hyperinflation crisis. And that is dollarisation. It’s that simple.
To us the laymen, dollarisation is a currency system in which a nation adopts the US currency (USD) as its official or unofficial currency in order to stem rising inflation. Of course, the US inflation is often more stable; and since inflation is simply a reflection of a currency’s value, adopting the US dollar would inspire some price stability. But that is rather simplistic.
To operate such a policy, an economy would often require a currency board. And Steve, unsurprisingly, is the leading fan of currency boards. That idea is not tolerated by many hardcore economists like Paul Krugman, and that’s why he maintains Steve is only skilled in selling snake-oil.
But Steve is well-grounded in the economics of currency boards, and he argues forthrightly of its essence. Currency boards don’t superintend the financial space like central banks do. The latter is a lender of last resort, but Currency boards don’t lend to governments through printed notes like central banks. Thus, with the presence of these boards, fiscal dominance is absolutely a zero-phenomenon.
Then also, currency boards employ a reserve standard. This means for every unit of local currency issued, there should be a corresponding reserve backing; either with a global high-worth commodity like gold, or with a basket of internationally convertible currencies.
So when Steve led his colleagues to advocate this policy for adoption by Argentina in the late nineties, the peso’s decline was halted; however, interest rate challenges persisted – and that eventually led to collapse of the policy and an interesting u-turn.
And there have been several other u-turns.
When Indonesia, Asia’s 3rd-largest country, faced economic challenges in the late 90s, their president was on the brink of accepting the Hanke idea of currency boards – dollarisation – until a superior mix of policy and initiatives intervened.
In summary, dollarisation is an expensive panacea and far more costly to a troubled economy. However, Currency boards are not an entirely fictional concept as they sometimes appear; they stem inflationary pressures. Yet you wouldn’t easily prescribe that idea to a nation with a slim reserve bed.
Hanke’s inflation measurement?
I surmise there are many of us interested in how Prof. Hanke arrives at his inflationary measure, which is often a double-portion of or far-off the local official rate.
But who else has realised that he is yet to publish figures disputing US, UK or Eurozone inflation rates?
Okay, his method is quite mesmerising and I’m sure it astounds even the IMF. He merely fixes on the concept of relative purchasing power parity to transform the exchange rates between two economies: mostly the US$ and another – weaker – one.
The Concept of Relative Purchasing Power Parity supposes that the exchange rate between two countries is effectively discounted by the amount of goods a unit of an international currency can purchase locally.
By that concept, as at end of 2021 the real purchasing power equivalent of 1 dollar was 2.34 cedis as computed by the World Bank. At the time, a dollar exchanged averagely for 6 cedis on the market.
However, Hanke avers that the most important ‘priced commodity’ in any open-economy is the exchange rate. And not merely the exchange rate between the US dollar and a local currency, but actually the black-market price. The rationale is that even in trade-liberal economies like Ghana, there is some notable disparity between the official exchange rate and real market rate. And it is the black (read ‘unofficial’) market price that gives the true market rate.
He employs the spot exchange rate depreciation of USD/Local Currency – USD/GHS in Ghana’s case – within the year in percentage terms, and transposes that with the prevailing US inflation value to determine the supposed inflation rate of a local currency; just as is used to determine purchasing price parity against a basket of goods. Hence the formula:
Local inflation = (US (CPI) Inflation rate x USD/GHS depreciation rate)-1
Thus, on September 1, 2022 he published a rate of 81% as Ghana’s inflation rate per his dashboard. This is how he arrived at that figure:
On 1st September 2021, the dollar was trading for 6.02 cedis on the market (not official rates). On 1st September 2022, it traded for 10.04 cedis on the same market. This constitutes a price change of roughly 67%.
Now, using September 2021 as base, the price of USD is calculated at 167% against the cedi in September 2022. [167% ~ 1.67]
The US inflation rate prevailing is 8.5%. This simply means prices have generally risen to 108.5% from same month last year to same time this year. [108.5% ~ 1.085]
Thus, Hanke’s inflation for GHS => (1.085 x 1.67)-1 = 81%.
However, for this figure to suffice, and render bogus the Ghana Statistical Service’s monthly CPI rate – which considers the price change in a basket of over 39,000 products across 14 consumer divisions ranging from healthcare, education to transport – some assumptions must be discussed and highlighted.
Does the GSS factor-in the price of imported goods for their CPI calculation? As a matter of fact, since February 2022 imported inflation has trounced local inflation month on month in this CPI index. From the July CPI figures published, inflation of imported products stood at 33.9% while local inflation was recorded at 30.9%.
Is Hanke’s calculation an embellished approach aimed at provoking our attention toward his Currency board/dollarisation panacea, or is it actually about time for this?
The writer holds a Master of Science in Economics. He can be contacted through email: [email protected]
