In August 1997, upon urging from the International Monetary Fund, Indonesia adopted a floating exchange rate for its currency, the rupiah. In the ensuing months, the rupiah weakened significantly against the U.S. dollar. Inflation in Indonesia began to accelerate, sparking food riots across the country.
In February 1998, Indonesian President Suharto invited Hanke to serve as his economic adviser. On the day of Hanke's appointment as Special Counselor and a member of Indonesia's Economic and Monetary Resilience Council, the rupiah appreciated by 28% against the U.S. dollar. During his time as Suharto's adviser, Hanke had an unprecedented level of access to the Indonesian President and even played a role in the dismissal of Indonesia's Central Bank Governor.
Hanke recommended that Indonesia institute an orthodox currency board, linking the rupiah to the U.S. dollar at a fixed exchange rate. Hanke supported the reforms contained in the IMF's package. But, he argued that the IMF's program would fail unless it was coupled with a currency board arrangement.
Hanke referred to his alternative reform package for Indonesia as "IMF Plus." It garnered the support of notable economists, including Gary Becker, Rudiger Dornbusch, Milton Friedman, Merton Miller, Robert Mundell, and Sir Alan Walters. Hanke was also named one of the twenty-five most influential people in the world by World Trade Magazine during this time.
In 1998, during his State of the Nation address, Suharto announced his intention to adopt Hanke's currency board proposal. This plan was met with opposition by the governments of Germany, Japan, and Singapore, among others. Economists including Nouriel Roubini and Paul Krugman also entered the fray with criticism of Hanke's proposal. The fiercest resistance, however, came from the IMF and from U.S. President Bill Clinton – who threatened to withdraw $43 billion in aid if Indonesia adopted Hanke's proposal.
Later, officials including former U.S. Secretary of State Lawrence Eagleburger and former Australian Prime Minister Paul Keating conceded that criticism of Hanke's proposal did not stem from opposition to the economics of Hanke's proposal, but rather out of concern that a stable rupiah would thwart U.S.-led efforts to oust Suharto. As Nobel Laureate Merton Miller recalled in 1999, the objection to Hanke's proposal was "…not that it wouldn't work but that it would, and if it worked, they would be stuck with Suharto."
Under intense international pressure, Suharto ultimately reversed course and abandoned Hanke's "IMF Plus" proposal. On May 21, 1998, amid continued currency problems, as well as protests and reports of a brewing military coup, Suharto resigned as President of Indonesia.