Steve H. Hanke is a Professor of Applied Economics at the Johns Hopkins University in Baltimore and Father of the Bulgarian Currency Board System. He served as an advisor to former President Petar Stoyanov. His skills as an investor and currency trader have been noted on many occasions. In 1995, Prof. Hanke was President of the world's best-performing emerging market mutual fund, according to Standard & Poors Micropal.
Professor Steve Hanke answered questions of Sofia News Agency Editor-in-Chief Milena Hristova
Q: The International Monetary Fund, whose mission started a two-week visit to Bulgaria, is set to cool the generosity that Finance Minister Milen Velchev showed in budget 2005. What do you expect to be the denouement of the disagreements between Bulgaria and IMF, due in mid-December?
A: Since I don't know the bargaining strategies that will be employed by either the government or the IMF, it is very difficult to anticipate which particular budget issues might, at the end of the day, result in substantive disagreements. About the only thing that can be indicated with certainty is that any of the disagreements will -- if put in the proper perspective of Bulgaria's long-run growth -- amount to a little more than a tempest in a tea cup.
The amount of press generated by the IMF visits never fails to amaze me. IMF missions and associated meetings are truly unimportant and uninteresting -- unless, that is, you enjoy watching a cat play with a mouse.
Q: Do you approve of the government's determination to stand firm in its social commitments in the budget?
A: I do not approve, and have not approved, of the government's budget strategy, if one can even call it a strategy. The government's approach amounts to "a little more here", "a little less there," and at the end of the day, more total spending. In contrast, Lithuania has a real budget strategy -- one that has cut back the size of the government. This strategy has delivered a large confidence shock to the economy and rapid growth. It has also cut the possibilities for government waste, fraud, abuse and corruption.
Q: The IMF is expected to implement extra measures to curb bank lending in Bulgaria....
A: If Bulgaria's currency board system was orthodox, as I first proposed in 1991 and did again as President Stoyanov's adviser in 1997, the co-called bank lending problems would never have arisen. The current "problems" that have arisen with bank lending are the result of the IMF's meddling with the design of the system in 1997. It was clear to me at the time that neither the IMF nor the Bulgarians really understand the details of currency boards and that's why the BNB law ended up being flawed and "problems" have developed. For those who are interested in the analysis of these issues, see: Steve H. Hanke and Matt Sekerke, "How Bulgaria is Destroying Its Currency Board", Central Banking, August 2003 (also published in Bulgarian in IME Economic Policy Review, September 19, 2003.)
Q: How would you comment the allotment of BGN 135 M of extra education spending that the government traded with one of the parliamentary factions in exchange for its support for the 2005 budget bill?
A: How the budget is divided up and the horse trading that is required to arrive at that division are topics that I will refrain from commenting on because I view them as unimportant details. By keeping their eyes glued to particular line items in the budget, people can't see the forest for the trees. The budget's bottom line -- total spending -- is the most important item to focus on because it will determine the scope and scale of the government and a country's long-term prospects.
Q: Do you think the IMF is likely to approve a BGN 100 M increase of budget spending that Bulgaria's government is proposing for the next year?
A: I have no idea. Also, I have no interest because this is an unimportant issue. In five years, will anyone even remember?
Q: How would you comment the decision of Bulgaria's Finance Minister to raise the minimum monthly wage, despite the disapproval of the International Monetary Fund?
A: If the Finance Minister had the courage to apply sound economics, he would have proposed to abolish the minimum wage law. The IMF would have done the same. In principle, minimum wage laws are "bad." And in practice, minimum wages are never just right. They are either very low and irrelevant or too high, creating more unemployment.
Q: Experts fear this could hurt Bulgaria's image. Is this justified?
A: I think the retention of the minimum wage law and the increase in the minimum wage rate show that the Finance Minister is not a free-market reformer. This does not send a good signal.
Q: Could this be an indication of Bulgaria's recent break-up with the global lender?
A: I doubt it.
Q: You have suggested that Bulgaria scrap the minimum wage. Don't you think it is too risky to leave all to the regulation of free market measures?
A: I think keeping the minimum wage law is risky. Bulgaria risks setting the minimum wage too high and creating more unemployment. That is the risk. Indeed, it is always risky to have the government setting any prices because the government can't get prices just right. Also, the government price setting encourages corruption. Need I say more?
Q: How does the sliding dollar affect the European economy and Bulgaria in particular? What could be its impact on Bulgaria's debt?
A: The sliding dollar is going to throw cold water on the Euro area and Bulgaria. This appears to be just what the Bush administration hopes for. How nice it would have been for Bulgaria to have piled up what has become cheap dollar debt since 2000, instead of expensive euro debt?
Send to Kindle
Prof. Steve H. Hanke
