American economist Steve Hanke does not think highly of central banks. He blames them for fueling inflation, loss of wealth and destabilizing growth. The professor of applied economics at The Johns Hopkins University and senior fellow at the Cato Institute believes that central banks are never as independent as they try to make it seem; they are government-controlled and they abuse monetary policy without thinking about the consequences of their actions.
The currency crises gripping some emerging market countries give Hanke more reason to question the desirability of central banking. Central banks are armed with discretionary powers to print more money during economic crises; which they often do. When this happened in Zimbabwe, hyperinflation set in, with the peak month of inflation estimated at 79.6 billion percent. The Southern African country eventually stopped printing its currency in 2009. In 2011, a 100 trillion Zimbabwean dollar was worth just $5. Hanke says central banks are the engine that generates inflation and he believes a lot of countries would be better off without one.
Asked what he thinks about African central banks, the professor of economics says “most are terrible”.
There are four African central banks on Hanke’s list of 10 which are flunking his inflation test.
For countries whose central banks are “obviously” not doing well, Hanke advises dollarization, because if inflation has exceeded 35 percent—the threshold for a failing grade, of what use is such country’s currency? He also advocates the use of currency boards.
“They have a perfect record, and were widely used in Africa. They deliver lower inflation and higher GDP growth rates than central banks. Budget deficits and debt levels are lower, too,” Prof Hanke says.
The last known African country to use a currency board is Djibouti.
A currency board is a monetary authority which is required to maintain a fixed exchange rate with a foreign currency.
There have been several calls by the father of currency boards Steve Hanke for struggling economies with skyrocketing inflation to try out currency boards, but as Charles Enoch and Anne-Marie Gulde, both of the International Monetary Fund (IMF) concluded in their article, currency boards have achieved lower inflation and stabilized expectations in many countries, but it does not automatically make them suitable for other countries in crisis.
“First, the success stories largely reflect the experiences smaller countries have had with currency boards, whose applicability to larger countries has yet to be fully demonstrated,” they wrote. “Second, and equally important, the successful establishment of a currency board arrangement requires time for building consensus, as well as for careful planning and implementation of important legal and institutional changes.
“Third, countries with one or several weak banks may have to rehabilitate them before changing their monetary regimes. These prerequisites to establishing a currency board may, in many cases, be too involved and take too much time to make it advisable for a country to attempt to do so during a macroeconomic crisis.”
Meanwhile, experts will continue to debate the importance of central banks or currency boards and which is better suited to bringing and keeping countries out of crisis. But for countries like Turkey whose currency crisis is threatening to destroy businesses, Hanke says “You can’t formulate intelligently any kind of economic policies or reforms if everything is unstable. If you’re in the middle of a currency crisis you have to stop the currency.”