Why you should care

Because Johns Hopkins professor Steve Hanke has an innovative solution for the failed state.

Steve Hanke has spent much of his career passing through the executive palaces of fledgling countries, helping people in power to lift their nations from the dredges of economic collapse. Yugoslavian state media smeared him as a French spy. Indonesia’s military strongman executive assigned him a 24-hour security detail. In Kazakhstan, he zipped down city streets in a limo of the presidential motorcade.

Now, as a collapse unfolds in Venezuela, Hanke, 76, says he’s seen it all before. Just like the other 15 countries he’s consulted in, and another six whose fate he says he predicted from afar, Venezuela suffers from hyperinflation, the ever-tumbling devaluation of its currency.

A full Venezuela rescue — “it’s in my desk drawer,” Hanke says from his home in Baltimore — requires a legitimate head of state, which Venezuela now lacks. The sitting Nicolás Maduro and internationally recognized opposition leader Juan Guaidó both claim the presidency of the crumbling country. Maduro has blocked most foreign aid and has renounced most outside suggestions to reform the Venezuelan economy.

So Hanke, a 50-year professor of economics at Johns Hopkins University, is already dipping himself into the monetary fray, heading a project to sidestep authoritarian currency controls and deliver donated cryptocurrencies to Venezuelans as hard dollars. That project, titled AirDrop Venezuela, kicked off in January. Hanke partnered with Mexico-based smartphone app AirTM, an online platform connecting buyers and sellers of cryptocurrencies. 

Ninety-five percent of the material in economics journals is either wrong or irrelevant.

Steve Hanke

José Merino, a former student of Hanke’s and current director of the Hanke Institute for Applied Economics at the University of Carabobo in Valencia, says AirTM has already become a popular way for Venezuelans to receive money from family abroad. Using it to channel donations — Hanke hopes to raise $1 million — will push cash assistance directly to Venezuelans coping with the country’s widespread hunger. So far he’s raised about $130,000, and his talks with big donors suggest that sum could triple in the weeks ahead. 

More than 3 million people have migrated out of Venezuela in recent years, fleeing the effects of hyperinflation. In 2010, one U.S. dollar bought about two Venezuelan bolivars. By mid-2018, before the launch of a new Venezuelan currency that also quickly collapsed, $1 bought more than 9 million bolivars. As a result, any Venezuelans with savings inside the country saw their money evaporate and their salaries dive-bomb. A government-controlled “petro” cryptocurrency introduced last year and tied to oil, which Hanke calls “a complete failure,” has failed to stem the tide.

 

“In Venezuela, the [monthly] minimum salary is enough to buy one kilo of cheese,” says Junior Rios Olivero, 32, a former Venezuelan plastic factory worker, as he hikes the long highway into Colombia en route to Ecuador, about 1,000 miles away. “In Venezuela, people don’t eat.” Like most other migrants, Olivero hopes to find a job and send money home to his wife, two children and parents. For about $1 a day, his family can eat, he says.

Venezuelans like Olivero typically use apps like AirTM to move money around to avoid high bank or wire fees, and because access to foreign currency is highly restricted in Venezuela. AirTM gives anyone easy access to currency markets, so with a touch of a button they can cash out for bolivars in their bank accounts. While cryptocurrencies today are easy to own, Hanke says they are difficult to use, but he hopes this project will begin to demonstrate how they can be easily bought and sold. 

The project only serves to provide light and immediate relief to people suffering a vast humanitarian crisis. Until the question of leadership is settled, recovery remains on Venezuela’s far horizon. But even then, rebuilding the Venezuelan economy will be a mammoth task. Economists don’t even agree on where to start.

But Hanke’s two decades of lessons learned as a wandering currency reformer likely hold a few clues about what will be built atop the ruins of Venezuela’s economy. “The man who knows most about hyperinflation in the world is Steve Hanke,” Merino says. 

If Hanke takes the Venezuela project on, it will be only his latest in a long life of economic fiddling that started when the Midwestern egg seller’s grandson invested in livestock and grain markets as an adolescent. A devotee of supply-side economics, he served on President Ronald Reagan’s Council of Economic Advisers from 1981–82, but academia — not the government — has been his consistent home. 

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People bid farewell to relatives before boarding a bus at a station in Caracas as scores of disappointed Venezuelans who see no end to the crisis choose to leave the country.

Source FEDERICO PARRA/AFP/Getty

Hanke held his first faculty post teaching mineral and petroleum economics at the Colorado School of Mines in 1966 and still boasts a fierce frontier-style stubbornness of thought. “Ninety-five percent of the material in economics journals is either wrong or irrelevant,” he wrote in a 23-page compilation of his notes as a currency reformer. “To be right and relevant, you have to think most things through by yourself.”

There is one person he trusts above all, though: his wife, Liliane, whom he calls his “sage counsel … cultured and wise to the ways and art of statecraft.” On her advice, Hanke says, he has never charged for his currency consulting services so as to maintain his independence. 

Other economists might take different approaches to the Venezuelan problem. Opposition politicians there have suggested beginning with a restructuring of the national debt, a bailout from the International Monetary Fund and a steady drawback of consumer subsidies. “It’s much easier said than done,” says Dany Bahar, a Venezuela-born economist with the Brookings Institution. “People are really suffering right now, so the move toward a market-oriented economy must be done in a smooth way.” The key, he says, would be finding a credible “anchor” to hold the Venezuelan currency in place, suggesting an expansion of foreign reserves.

Hanke’s prescription? Convert foreign reserves to dollars, peg the value of the Venezuelan bolivar to the dollar and don’t print more money than is held in the reserves. Or simply adopt the dollar, like Ecuador did in 2000. That process requires a census of the government’s assets and liabilities, which might be a nightmare in the dilapidated Venezuelan bureaucracy.

The crucial first step in rebuilding the economy, Hanke says, will be for a new government to establish credibility. Backing its efforts by the credibility of the U.S. dollar is one way to do that. 

But a return from chaos seems a long way off in Venezuela, and political stability remains only a distant illusion. Someday calm will return and there will be time for rebuilding. Economists and philosophers will descend on the country to dictate what must be done, but Hanke has little confidence in them.

“There are many people that talk about currency reform. They have never stopped hyperinflation,” Hanke says. “I have. I know how it’s done.”

OZY’s 5 Questions With Steve Hanke  

  • What’s the last book you wrote or read? Wrote: A book translated into Farsi last year, Currency Boards for Developing Countries. Read: The Formula, by Albert-László Barabási. The universal laws of success, the science behind why people succeed or fail. 
  • What do you worry about? I don’t spend too much time worrying. I’m not a worrier. I’m a doer. 
  • What can’t you live without? The good company of Mrs. Hanke. 
  • Who is your hero? I have several. Friedrich von Hayek, a Nobel laureate in economics, also engaged to Mrs. Hanke’s great-aunt, but that didn’t work out. He was a family friend and a great economist.  
  • What’s on your bucket list? I have three book manuscripts in progress as we speak: one on finance, one on capital theory and the third on currency boards, a treatise underway for about 20 years.

Read more: India’s Narendra Modi trusts this accountant more than Ivy League economists.

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