Zimbabwe: From Hyperinflation to Growth

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The hallmark of Zimbabwe’s economic collapse ishyperinflation. The most recent official inflation figureis for February 2008: a whopping 165,000 percentyear‐​over‐​year. At present (early June 2008), inflation is unofficiallyabout 2.5 million percent a year. Not surprisingly, theZimbabwe dollar has lost more than 99.9 percent of its valueagainst the U.S. dollar during the past year.

Zimbabwe’s hyperinflation is destroying the economy,pushing more of its inhabitants into poverty, and forcingmillions of Zimbabweans to emigrate. Between 1997 and2007, cumulative inflation was nearly 3.8 billion percent,while living standards fell by 38 percent.

The source of Zimbabwe’s hyperinflation is the ReserveBank of Zimbabwe’s money machine. The government spends,and the RBZ finances the spending by printing money. TheRBZ has no ability in practice to resist the government’sdemands for cash. Accordingly, the RBZ cannot hope to regaincredibility anytime soon. To stop hyperinflation, Zimbabweneeds to immediately adopt a different monetary system.

Any one of three options can rapidly slash the inflationrate and restore stability and growth to the Zimbabweaneconomy. First is “dollarization.” This option would replacethe discredited Zimbabwe dollar with a foreign currency, suchas the U.S. dollar or the South African rand. Second is a currencyboard. Under that system, the Zimbabwe dollar wouldbe credible because it would be fully backed by a foreignreserve currency and would be freely convertible into thereserve currency at a fixed rate on demand. Third is free banking.This option would allow commercial banks to issue theirown private notes and other liabilities with minimum governmentregulation.

Central banking is the only monetary system that hasever created hyperinflation and instability in Zimbabwe.Prior to central banking, Zimbabwe had a rich monetaryexperience in which a free banking system and a currencyboard system performed well. It is time for Zimbabwe toadopt one of these proven monetary systems and discardits failed experiment with central banking.

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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.