Group 12:
Adrienne Tiley, Thomas Morgan, Smilia Zibiri, and Robert Courage
Hyperinflation in Zimbabwe
Why Having Money Does Not Always Make a Person Rich
For nearly two decades, Robert Gabriel Mugabe was a leader of the black liberation
movement in Zimbabwe. But, in 1980, a dramatic political shift occurred in Zimbabwe. The people
elected Robert Mugabe as the nation’s first black Prime Minister, largely on a platform of land
redistribution. Since “the Land Tenure Act of 1969, almost half of the country's agricultural land
was allocated to Europeans, who had greater access to the regions considered suited to intensive
crop and livestock production.”1 The native African population had been moved onto reserves of
semi-arable land that could barely support subsistence farming, to make way for the European
settlers. By 1980, twelve million black Zimbabweans farmed sixteen million acres of land, while four
thousand five hundred white farmers held twelve million hectares of the most arable land in the
country. The European farmers developed large, industrialized farms that were roughly one
hundred times the size of farms owned by black Zimbabweans. These large modern farms
generated most of the economic output of the country, in the form of agricultural products exported
overseas. While land redistribution was expected by the native African population, the constitution
had provisions to prevent such a practice.
But, in May 1992, the Zimbabwean government rewrote the constitution to facilitate
resettlement. By 1993, the government had purchased “70 big commercial farms, covering 190,000
hectares, as the first step in a plan to redistribute some 5 m hectares of white-owned land to
blacks.”2 However, the black farmers were given no training on how to run a large, modern farm.
So they farmed their new land without the use of industrial farming methods. At first, the land
resettlement went well, with government supporting research and development to increase crop
1
Naldi, Gino J. "Land reform in Zimbabwe: Some legal aspects." Journal of Modern African Studies 31.4 (Dec. 1993): 585. Academic
Search Complete. EBSCO. University of Georgia Libraries, Athens, GA. 3 Oct. 2008
<http://search.ebscohost.com/login.aspx?direct=true&db=a9h&AN=9406160304&site=ehost-live>.
2
Naldi, Gino J. "Land reform in Zimbabwe: Some legal aspects." Journal of Modern African Studies 31.4 (Dec. 1993): 585. Academic
Search Complete. EBSCO. University of Georgia Libraries, Athens, Georgia. 3 Oct. 2008
<http://search.ebscohost.com/login.aspx?direct=true&db=a9h&AN=9406160304&site=ehost-live>.
yields. But soon, Mugabe used land redistribution as a way of shoring up political power, and
started passing out farms to his political allies. This brought the once prosperous economy to its
knees. The agricultural output of Zimbabwe declined seventy-five percent in three years. The
situation was exacerbated by a drought. The country that was once considered the breadbasket of
Southern Africa was forced to accept food aid. But the Prime Minister blamed the rising poverty
and hunger, not on declining output, but on collusion among the US government and white
commercial farm owners3. And he restricted food aid to card-carrying members of his political
party. In 2002, Robert Mugabe evicted the remaining few thousand white owners of commercial
farms from the nation, and began redistributing the land in earnest.
As output declined and tax revenues collapsed, the government could not pay its bills,
especially the government salaries and bribes designed to keep Mugabe in power. In addition, the
land redistribution encouraged small farmers to grow subsistence crops instead of the cash crops
grown by the larger farms. Thus, foreign trade collapsed. As the farms became less productive the
government offered subsidies to keep the agricultural output high enough to feed the country’s
people. The government started printing money whenever they wanted it. Soon, inflation was
spiraling out of control. At the end of 2003, inflation was at five hundred percent. By the first
quarter of 2004, the Zimbabwean finance minister estimated that the inflation would exceed seven
hundred percent, but would dissipate as new fiscal measures took effect.4 Those new fiscal
measures included an increase in government spending that would make actually worsen inflation.
Typically, when a nation increased the money supply, three things occur: interest rates
decrease, the foreign exchange rate declines, and inflation increases. The current theory about why
inflation increases is that people find a reason to spend money if they have it. And, if there is not an
increase in the goods and services upon which to spend the money, then prices go up. Another way
to say it is that the demand for goods is greater than the supply of money required to buy them.
3
Lovgren, Stefan. "Land, politics, race." U.S. News & World Report 128.18 (08 May 2000): 30. Business Source
Complete. EBSCO. University of Georgia Libraries, Athens, GA. 3 Oct. 2008
<http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=3039615&site=ehost-live>.
4
"...going down." Business Africa 12.21 (16 Nov. 2003): 3-4. Business Source Complete. EBSCO. University of
Georgia Libraries, Athens, GA. 3 Oct. 2008
<http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=11642021&site=ehost-live>.
Interest rates reached 160%, and the government refused to devalue the Zimbabwean dollar.
Instead the government artificially pegged the exchange rate at the level that the market could not
justify. Now the crippling inflation and high interest rates pushed many of the small scale farmer’s
that were supposed to benefit from land redistribution into pennilessness. The fertile land that
provided most of the economic output of the country was left fallow, because the inflation made it
impossible to grow food at yields high enough to keep pace with inflation. It also ran many of the
miners and commercial ventures out of business, which further decreased tax revenue. By 2007,
unemployment in Zimbabwe reached eighty percent, a record number of people were starving and
even more were emigrating to neighboring South Africa and Zambia. The government’s response
to this crisis was to institute price controls at artificially low levels. Companies that refused to
comply with the price controls were seized by the government. The price controls cause most basic
foodstuffs to disappear from shops in a few months. The government’s official line on the
inflationary pressure was that increasing prices are responsible for inflation, not the other way
around.5
Today in Zimbabwe, the infrastructure is crumbled to the point where electricity only runs
for four hours a day. It was recently calculated that prices doubling every three days; Coca-cola
costs fifteen billion dollars. If someone accepts a check, they will typically double the bill to account
for inflation in the three days needed to process the transaction. The most valuable banknote
available was for 50 billion Zimbabwean dollars is now worth barely 70 American cents on the black
market. People convert their local currency to a more stable foreign on as often as three times a day,
often at inflated black market rates, because the banking system limits the number and amount of
cash withdrawals a person can make. In some instances, the economy is switching over to a barter
economy, where Zimbabwean dollars are a commodity used only to pay taxes.
Recently, President Mugabe has been force to give up a significant amount of his power in a
deal whereby he will be sharing responsibilities with Morgan Tsvangirai, the leader of Zimbabwe’s
opposition party. While the details of the power-sharing deal are still unclear, the two parties have
agreed that achieving economic stability will be a primary focus of the agreement. Reversing a
hyperinflationary environment that pervades an entire country is a highly complex task.
5
"Hyperinflation -- breaking the camel's back." Accountancy 140.1368 (Aug. 2007): 112-113. Business Source
Complete. EBSCO. University of Georgia Libraries, Athens, GA. 3 Oct. 2008
<http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=26221508&site=ehost-live>.
An oversupply of currency is at the heart of the problem. Zimbabwean authorities should
stop spending money they do not have and they should no longer use printing presses to cover
shortages. That may be exactly what happens to Zimbabwe, whether the government likes the
policy or not. Bowing to international political pressure, the German press that used to print
Zimbabwean currency has stopped producing its production. In addition, the country can no longer
afford to buy the paper required to print its money. The days of the government printing all the
money it could possibly need are quickly coming to an end.
Also, the government should cut its government spending. One of the reasons that
Mugabe’s regime has been printing so much money recently has been to cover overwhelming
spending deficits. The government has been suffering budgeting deficits for two separate reasons.
The open corruption of the Mugabe regime has required increased military and security spending.
Corruption has also caused the farming production to drop precipitously, and as a result, the tax
revenues to the government. In order to bring Zimbabwe back to prosperity, measures must be
taken to make the countries farm land productive again.