Zimbabwe’s Economy Cannot Recover Without Drastic Monetary Reform

June 25, 2008

To stop hyperinflation, the Reserve Bank of Zimbabwe should be replaced with a currency board, “dollarization,” or free banking

AfricanLiberty.org – Zimbabwe’s economic crisis can only be overcome if hyperinflation is stopped. The only way to do this rapidly is to replace central banking — namely, the Reserve Bank of Zimbabwe (RBZ) — with a new monetary system, argues internationally renowned banking and finance economist Steve H. Hanke in a new study released by the Cato Institute, in conjunction with AfricanLiberty.org.

"Zimbabwe’s hyperinflation is destroying the economy, pushing more of its inhabitants into poverty and forcing millions of Zimbabweans to emigrate. The source of Zimbabwe’s hyperinflation is the Reserve Bank of Zimbabwe’s money machine. Any one of three options (dollarization, a currency board, or free banking) can rapidly slash the inflation rate and restore stability and growth to the Zimbabwean economy," writes Hanke in "Zimbabwe: Hyperinflation to Growth."

Hanke, a Johns Hopkins University professor and Cato senior fellow who successfully advised on how to stop three of the last hyperinflations of the 20th century, explains that regardless of the outcome of the current power struggle in Zimbabwe, the fastest way towards economic recovery is to abolish the RBZ, which has been used to print money at the government’s whim and to provide jobs for government supporters. Dissolution of the RBZ is necessary in order to restore stability to the Zimbabwean economy — a vital precondition for a return of economic growth.

Zimbabwean economic consultant Rejoice Ngwenya of the Committee for Market and Liberal Solutions and an AfricanLiberty.org Senior Advisor, said, “The RBZ is printing us into complete bankruptcy. No economy can stand hyperinflation of about 2.5 million percent per year. The RBZ has to be abolished. Hanke has a proven track record and I’m glad he’s turning his attention to my country, to offer us help in getting out of the mess Mugabe and his cronies have created.”

“Getting rid of the RBZ is not as radical an option as may seem,” according to AfricanLiberty.org editor Franklin Cudjoe of Ghana. “We have other options in Africa and we should use them when the central bank fails,” he added. "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 and in which foreign currencies circulated without problems. It is time for Zimbabwe to adopt one of these proven monetary systems and to discard its failed experiment with central banking," concludes the author.

The study is the first serious look at the Zimbabwean hyperinflation and provides a step-by-step guide for a transition from the current monetary system to a new one.

Hanke is a professor of Applied Economics at The Johns Hopkins University in Baltimore and a columnist for Forbes magazine. He played an important role in the currency reforms in Argentina, Estonia, Lithuania, Bulgaria, Bosnia-Herzegovina, Montenegro and Ecuador. In 1998 he was named one of the world’s twenty-five most influential people by World Trade magazine.

The full paper is available here