Zimbabwe: From Hyperinflation to Growth

Zimbabwe: From Hyperinflation to Growth

by Steve H. Hanke

Steve H. Hanke is a professor of applied economics at Johns Hopkins University in Baltimore and a senior fellow at the Cato Institute.

The hallmark of Zimbabwe’s economic collapse is
hyperinflation. The most recent official inflation figure
is for February 2008: a whopping 165,000 percent
year-over-year. At present (early June 2008), inflation is unofficially
about 2.5 million percent a year. Not surprisingly, the
Zimbabwe dollar has lost more than 99.9 percent of its value
against the U.S. dollar during the past year.

Zimbabwe’s hyperinflation is destroying the economy,
pushing more of its inhabitants into poverty, and forcing
millions of Zimbabweans to emigrate. Between 1997 and
2007, cumulative inflation was nearly 3.8 billion percent,
while living standards fell by 38 percent.

The source of Zimbabwe’s hyperinflation is the Reserve
Bank of Zimbabwe’s money machine. The government spends,
and the RBZ finances the spending by printing money. The
RBZ has no ability in practice to resist the government’s
demands for cash. Accordingly, the RBZ cannot hope to regain
credibility anytime soon. To stop hyperinflation, Zimbabwe
needs to immediately adopt a different monetary system.

Any one of three options can rapidly slash the inflation
rate and restore stability and growth to the Zimbabwean
economy. First is "dollarization." This option would replace
the discredited Zimbabwe dollar with a foreign currency, such
as the U.S. dollar or the South African rand. Second is a currency
board. Under that system, the Zimbabwe dollar would
be credible because it would be fully backed by a foreign
reserve currency and would be freely convertible into the
reserve currency at a fixed rate on demand. Third is free banking.
This option would allow commercial banks to issue their
own private notes and other liabilities with minimum government

Central banking is the only monetary system that has
ever created hyperinflation and instability in Zimbabwe.
Prior to central banking, Zimbabwe had a rich monetary
experience in which a free banking system and a currency
board system performed well. It is time for Zimbabwe to
adopt one of these proven monetary systems and discard
its failed experiment with central banking.

Full Text of Development Policy Analysis no. 6

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