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Prof. Steve Hanke On Lebanon’s Current Economic Policies – Interview

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Le Commerce du Levant Magazine published an interview with Steve H. Hanke, Professor of Applied Economics at the Johns Hopkins University, on September 22, 2020.  This interview was conducted by journalist Salah Hijazi. The following is an excerpt of Prof. Hanke’s statements in English.

What’s hyperinflation? And how did you calculate that Lebanon became the first Middle Eastern country to experience it?

“Since I use high-frequency data to measure inflation in countries where inflation is elevated, I define a hyperinflation as an inflation in which the inflation rate exceeds 50% per month for at least thirty consecutive days. When I measured Lebanon’s inflation rate on July 22nd, it was a sizzling 52.6% per month. That was the 30th consecutive day in which Lebanon’s monthly inflation rate exceeded 50%. So, on July 22, 2020, Lebanon entered the record books with the dubious distinction of recording the world’s 62nd episode of hyperinflation — the only episode to ever occur in the Middle East and North African (MENA) region. 

On August 31st, the annual inflation rate was 337% per year. And, on September 21, 2020, the annual inflation rate was 359% per year.”

How do you calculate inflation, knowing that the consumer price index (CPI) of the central administration of Lebanese statistics was up 120% in August?

“Just how do I measure hyperinflation? The most important price in an economy is the exchange rate between a country’s local currency and the world’s reserve currency, the U.S. dollar.”

 “As long as there is an active black market (read: free market) for a currency and data are available, changes in the black-market exchange rate can be reliably transformed into accurate measures of countrywide inflation rates for countries experiencing hyperinflation. The economic principle of purchasing power parity (PPP) allows for this transformation. And, the application of PPP to measure elevated inflation rates is straightforward.

Evidence from Germany’s 1920-23 hyperinflation episode — as reported by Jacob Frenkel in the July 1976 issue of the Scandinavian Journal of Economics — confirms the accuracy of PPP during hyperinflations. Frenkel plotted the Deutschmark/U.S. dollar exchange rate against both the German wholesale price index and the consumer price index. The correlations between Germany’s exchange rate and the two price indices were very close to one throughout the period, with the correlations moving closer to one as the inflation rate increased.

Beyond the theory of PPP, the intuition of why PPP represents the “gold standard” for measuring inflation for countries experiencing elevated inflation rates and/or hyperinflation is clear. All items in these economies are either priced in a stable foreign currency (the U.S. dollar) or a local currency. If goods are priced in terms of the local currency, those prices are determined by referring to the dollar prices of goods and then converting them to local prices after checking with the black-market spot exchange rate. Indeed, when a price level is increasing rapidly and erratically on a day-by-day, hour-by-hour, or even minute by-minute basis, exchange-rate quotations are the only source of information on how fast inflation is actually proceeding. That is why PPP holds, and why we can use high-frequency (daily) data to calculate inflation rates for countries experiencing hyperinflation.

Prof. Steve Hanke. Photo Credit: https://twitter.com/steve_hanke
Prof. Steve Hanke. Photo Credit: https://twitter.com/steve_hanke

Unless the exchange rate regime changes, the central bank subsidization mechanism will not last for long because the central bank will soon burn through all of its reserves, and the Lebanese pound will collapse further.” 

In addition, Prof. Hanke’s calculation takes into account “all goods in the economy, all services in the economy, and all assets in the economy. It’s an all-encompassing basket of everything in the economy.”

The Johns Hopkins’ University professor states that: “Lebanon should do exactly what I did in 1997 in Bulgaria, where I was President Petar Stoyanov’s chief adviser. Hyperinflation was raging at 242% per month in Bulgaria. I designed an orthodox currency board system that was proposed to the International Monetary Fund, and the fund accepted the proposal immediately. A currency board is a monetary institution (or a set of laws that govern a central bank) that issues a domestic currency that is freely convertible at an absolutely fixed exchange rate with a foreign anchor currency. The domestic currency, which is issued by a currency board, is backed 100 percent with anchor currency reserves. So, with a currency board, the local currency is simply a clone of its anchor currency.”

Peter Tase

Peter Tase

Peter Tase is a freelance writer and journalist of International Relations, Latin American and Southern Caucasus current affairs. He is the author of America's first book published on the historical and archeological treasures of the Autonomous Republic of Nakhchivan (Republic ofAzerbaijan); has written, published four books on the Foreign Policy and current economic – political events of the Government of Azerbaijan.

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