Bulgaria’s Currency Board versus Ukraine’s Chaos
Currencies / Fiat Currency Feb 27, 2014 - 08:30 PM GMTBy: Steve_H_Hanke
When Communism inevitably and finally collapsed, Bulgaria’s economy was a basket case – behind almost all other communist basket cases, including Ukraine’s. Indeed, Bulgaria defaulted on its debt in 1990. By February 1991, Bulgaria had broken out in a bout of hyperinflation, with the inflation rate at 123% per month. And in February 1997, Bulgaria experienced the agonies of hyperinflation again, with the inflation rate reaching 242% per month.
As he looked into the abyss, President Petar Stoyanov decided against taking the plunge and appointed me as his advisor in January 1997. I immediately prescribed a currency board system to put an end to Bulgaria’s malady, something I had laid out for Bulgaria back in 1991 (Steve H. Hanke and Kurt Schuler, Teeth for the Bulgarian Lev: A Currency Board Solution. Washington, D.C.: International Freedom Foundation, 1991.).
Bulgaria installed a currency board in July 1997. The lev was backed 100% by German marks and traded freely at a fixed rate of 1000 leva to 1 mark. Inflation and interest rates fell like stones. The economy stabilized, and the Bulgarians learned that, even though stability might not be everything, everything is nothing without stability. Discipline at last.
Yes, the main feature of a currency board is the fiscal and financial discipline that it provides. No more running to the central bank for a fiscal bailout. A currency board ties the hands of those meddlesome monetary authorities. And forget the silly theoretical and obscure arguments made by economists who don’t embrace fixed exchange rates. A currency board regime is all about discipline.
As we watch Ukraine melt down once again, we can see what could have been (and what could be) if Ukraine would have only embraced a system of discipline (read: currency board) – like Bulgaria did in 1997. The following table tells the tale:
Bulgaria versus Ukraine |
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Country |
GDP per Capita (USD) |
Fiscal Balances %GDP |
Current Account Balances %GDP |
General Govt. Gross Debt %GDP |
Gross Borrowing Needs %GDP |
Import Coverage Ratio (FX Reserves / Imports) |
W.B. Ease of Doing Business 2014 Rank |
Bulgaria |
$7,623 |
-1.9% |
1.5% |
16.0% |
2.6% |
6.7 |
58 |
Ukraine |
$4,011 |
-8.7% |
-8.9% |
42.8% |
11.0% |
1.9 |
112 |
| Sources: Bulgarian National Bank, National Bank of Ukraine, J.P. Morgan (Emerging Markets Research), International Monetary Fund (IFS), World Bank (Doing Business).
Prepared by Prof. Steve H. Hanke, The Johns Hopkins University. |
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By Steve H. Hanke
www.cato.org/people/hanke.html
Twitter: @Steve_Hanke
Steve H. Hanke is a Professor of Applied Economics and Co-Director of the Institute for Applied Economics, Global Health, and the Study of Business Enterprise at The Johns Hopkins University in Baltimore. Prof. Hanke is also a Senior Fellow at the Cato Institute in Washington, D.C.; a Distinguished Professor at the Universitas Pelita Harapan in Jakarta, Indonesia; a Senior Advisor at the Renmin University of China’s International Monetary Research Institute in Beijing; a Special Counselor to the Center for Financial Stability in New York; a member of the National Bank of Kuwait’s International Advisory Board (chaired by Sir John Major); a member of the Financial Advisory Council of the United Arab Emirates; and a contributing editor at Globe Asia Magazine.
Copyright © 2014 Steve H. Hanke - All Rights Reserved
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