hyperinflation: Zimbabwe

Hyperinflation, as defined in economic terms occurs when the value of a country’s currency will continuously decrease as prices simultaneously increase. The movement towards equilibrium is essentially non-existent. Generally, hyperinflation occurs at a rate that is exponentially higher than the normal rate of inflation. The lasting effects that hyperinflation has on an economy are devastating. Causes of hyperinflation vary from corrupt governmental infrastructure to lack of proper and effective economic policies.

The Republic of Zimbabwe is a leading example of the effects hyperinflation has on an economy. Zimbabwe faced a disastrous period of hyperinflation for about a decade. Although, the dates vary because Zimbabwe is not exactly forthcoming, it was around 1998- 2008. As of 2008, “the Zimbabwe dollar has lost more than 99.9% of its value against the US dollar during the past year” (Hanke: Kill Central Bank to Fix Inflation in Zimbabwe). Prior to Zimbabwe, there have only been a little more than two dozen cases of hyperinflation. “Zimbabwe’s land and other poor economic policies have resulted in a 6 year economic recession, de-industrialization, loss of skilled labor through emigrating” (Hornes: IMF Contributes to Zimbabwe’s hyper-inflation). Furthermore, Zimbabwe has a great disregard for fundamental human rights and the rule of law. There is constant political instability and tumultuous violence. All of these factors make a case for Zimbabwe’s hyper-inflation.

According to the Cato Institute, Zimbabwe has been the first country to experience hyperinflation in the twenty-first century; a huge change from their position as one of the most booming nations on the African continent. In January 2007, the rate of inflation was at 1%; by February it was almost at 2%. The rate of inflation in Zimbabwe was phenomenal, nearly doubling in approximately one month. Since then the rate of inflation increased exponentially. In November 2008, Zimbabwe’s rate of inflation had reached approximately 90 sextillion percent. By the end of 2008, the numbers were off the charts nearly reaching the record made by Hungary in the early 1900’s. It also compares to the hyperinflation period of Germany as well.

The Republic of Zimbabwe has governmental policies that effect the economical growth of their country. The policies that are put into effect are not fully implemented. Furthermore, the major policies that need to be established are overlooked. Essentially, the government is not doing what it should be to protect its citizens and ensure them with basic rights and economic stability. Furthermore, the notion of central banking is not one that is working in Zimbabwe. “While central bank losses in most countries have not exceeded 10 percent of GDP, Zimbabwe’s flow of realized central bank quasi-fiscal losses are estimated to have amounted to 75 percent of GDP in 2006” ( IMF: Central Bank Quasi-fiscal Losses and High Inflation in Zimbabwe). Clearly, Zimbabwe is doing something that is extremely detrimental to their economic structure.

The International Monetary Fund estimated Zimbabwe’s budget deficit to be somewhere near a staggering sixty-percent. The IMF has a large role to play in Zimbabwe’s slip into hyperinflation. In 2001, Zimbabwe failed to pay their loan back to the IMF. When they defaulted, the IMF refused to offer Zimbabwe any further assistance. Since the U.S. is the number one contributor to the IMF, they blocked the IMF from being able to do anything further. More so, the U.S. placed heavy economic sanctions on the Zimbabwean government. There was a freeze placed on Zimbabwe that denied them access to credit. This freeze was mostly due to the United States growing angry over the politics regarding land of Harare. This is one of the main reasons that I do NOT like the IMF. They are an institution that is meant to offer loans to countries that are struggling. So why are they placing ridiculous restrictions on the loans. The IMF basically says "ok we will give you a loan but you owe us your life." Any country that borrows from the IMF is subjected to their political constraints.

If the IMF admits that its "American influenced position refusing to reschedule Zimbabwe’s IMF debt it must accept that it is partly responsible for the impoverishment of the ordinary Zimbabwean” (Hornes: IMF Contributes to Zimbabwe’s hyper-inflation). This is the very reason the IMF excepts (SORTA). Even though, the IMF was not the sole reason for effecting Zimbabwe’s hyperinflation that is essentially the role of the IMF. So when a country is in need, the IMF is supposed to offer assistance. However, the IMF, in the case of Zimbabwe turned their head the other way due to corruption by the U.S. Zimbabwe was looking for the support of the IMF to help them recover from the economic situation they were facing but due to corruption they slipped further into hyperinflation. Since Zimbabwe borrowed money from the International Monetary Fund, they are required to communicate with them. However, the IMF should have done the same as a protector and leader of the international community.

The World Bank, unlike the IMF, actually admitted to its failure in the Republic of Zimbabwe. The World Bank released a statement in 2001 noting that what worked for most of the world did not work for Zimbabwe. Zimbabwe is a special case that did not work following the following the status quo. For the World Bank to admit a mistake like that shows how intense the situation in Zimbabwe actually was. It was not enough for the World Bank to attempt to implement social programs in efforts to boost Zimbabwe’s economy; much more needed to be done. Zimbabwe needs smaller ventures to boost their economy. According to a World Bank representative “the real revival of the economy lies in agriculture. Currently most of the arable and fertile land is in the hands of only one percent of the total population. If land is equitably distributed, we will definitely see a change in the economy” (Shoko Zimbabwe: World Bank says we failed).

While that may sound like a good idea, there is still one problem with that; Zimbabwe has a government operated land reform program that distributes lands disproportionately and unfairly. Therefore, the wealth would not be distributed evenly and prosperity would not be as widespread and far reaching as it should be. Furthermore, the Republic of Zimbabwe has a practice that is not in the best interest of commercial farming; in fact, it brings disorder to it. Zimbabwean farmers experienced their farms being seized and given to others. Also, there were numerous instances of prosperous white farmers getting their land seized in order to give it to blacks who did not have any land. This is not a productive idea at all. They took away the land from farmers who could produce fruits and vegetables to give it to people just because they had no land. That is just not economically or socially responsible. This policy is actually stripping any opportunity or betterment for farmers and Zimbabweans as a whole.

Due to Zimbabwe’s hyperinflation, the lack of respect for the rule of law is astounding. There is a total disregard for human rights as well. In 2007, during one of the worst periods of Zimbabwe’s hyperinflation crisis, Zimbabwean citizens were peacefully protesting the careless policies and weakened government systems when the protesters were attacked by security forces. This is only one instance of a human rights violation linked to hyperinflation. Just as recent as June 2009 the situation in Zimbabwe was still dismal. Their disrespect for the rule of law can be seen through, as mentioned already, forcing white farmers off their land. The United States had called on Zimbabwean, in specific, Robert Mugabe to return to the rule of law. No one is above the law and the United States asserted that in order for Zimbabwe to live sanction free from America it must stop their disrespectful practices against the rule of law.

Zimbabwe also experienced a great reduction in their labor force due to emigration. The agriculture industry was hit the hardest by hyperinflation, experiencing a large decrease in the amount of hectares available. About a quarter of the hectares of land were made unusable because of vandalism and sheer neglect. The production of maize dropped 40% in over the course of a decade due to Zimbabwe’s high inflation. De-industrialization also proved to be quite an issue in the Zimbabwean government with a decline of over forty-percent in production. They experienced not only a very drastic decrease in the amount of goods being produced but also the number of people employed in an industry due to the fact that:

“the economic and political crisis engulfing the country from the mid-1990s onwards was primarily the result of the de-industrializing effects of World Bank/International Monetary Fund (IMF) structural adjustment policies, combined with the absence of a competitive electoral system” (Carmody and Taylor: Industry and the Urban Sector in Zimbabwe’s Political Economy).

The fiscal policies and the monetary policies of Zimbabwe also led to the rate of hyper-inflation that occurred. They had what is known as “quasi fiscal expenditures” which are basically “off budget expenditures supposedly to offset the impact of monetary policies on certain favored economic actors” (Robinson: Zimbabwe’s Hyperinflation). However, this is where the problem exists; these quasi fiscal expenditures were only meant to be a marginal item in the budget. Due to the lack of regulation, marginal spending or the quasi fiscal expenditures strongly competed with the Republic of Zimbabwe’s official budget for the entire country. Because of such large spending, “Zimbabwe’s total public sector deficit has been estimated by the IMF to be more like 60% of GDP” (Robinson: Zimbabwe’s inflation). Zimbabwe experienced eight years of consecutive decline in the Gross Domestic Product (GDP) while employment had nearly a fifty-percent decline as well.

There is clearly a lack of fiscal responsibility occurring in Zimbabwe. The central bank governor took actions that were outside his mandate and caused Zimbabwe’s economy to fluctuate so much it resembled that of a rollercoaster ride. In 2003, inflation was near 600% percent; nearly two years later they were able to reduce it to 124%. However, recently it has been exceeding over 1000%, leaning closer to 1200%. Another issue arose when it came to lending money to people. The rates were so high and it discouraged borrowers from wanting to borrow money. Most banks avoided even lending money due to rates that were 170% per annum. So essentially, these banks were highly ineffective institutions because their main objective is to lend out money to borrowers. If this is not possible, there is really no point in the bank even existing. The amount of economic activity that occurred in Zimbabwe was, therefore, unable to flourish in the suppressive environment.

Zimbabwe was once one of the most thriving nations in Africa but once lack of fiscal responsibility and government accountability came into play, Zimbabwe faced hyperinflation at record highs. If Zimbabwe implemented better government policies and followed the rule of law more carefully maybe their hyperinflation would have not spiraled out of control. Also, clearly listening to the IMF and World bank did not work for Zimbabwe. In fact, it was probably more detrimental to their economy than productive. The IMF kind of stabbed Zimbabwe right in their chest and left them there to bleed. Not that the World Bank was much better; they stabbed them in the back and then admitted to their mistakes. What Zimbabwe needs is better government oversight (that is not corrupt) and economic policies that are not half-backwards and ones that are actually implemented properly.