Zimbabwe’s Economy Cannot Recover Without Drastic Monetary Reform

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

June 25, 2008

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WASHINGTON — 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 renowned economist Steve H. Hanke in a new study released by the Cato Institute.

“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 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.

Getting rid of the RBZ is not as radical an option as may seem. “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.