Saturday, August 25, 2007

The Currency Crisis in Zimbabwe

Currency crises have been a recurrent feature of the international economy ever since gold and silver coins were replaced by paper; currency crises played a large role in the economic turmoil of the interwar period, in the breakup of Bretton Woods, and in the early stages of the Latin American debt crises of the 1980s.

The latest of these crises is happening in Zimbabwe, but this has been no secret for several years. About four out of five people are estimated to be out of work--at least as far as the official numbers are concerned. 3,000 Zimbabwean refugees are crossing into neighboring countries, especially South Africa. Zimbabwe's currency has soared to 5,000% inflation this year, implying that a loaf of bread is 50 times more expensive today than it was a year ago. Wages are not keeping pace with rising costs, which are fueled by the rapid money velocity that ends up in store-owners' hands once wage-earners are paid. Goods are valued much more than money, which is ever decreasing in value.

Zimbabweans are paying for goods with more stable currencies, such as the US dollar, wherever possible. People exporting and importing goods do so on the black market, since a sizable piece of foreign currency exchanged at the official rate has to be kept in account which the government can use to feed its meed for foreign exchange. However, if the Mugabe government would stop printing currency, or implement a stable commodity-backed currency system, the crisis would end soon.

The key cause of this crisis is unusual. It's not linked to speculative attacks from foreign investors, or self-fulfilling currency crisis prophecies. The problem can be traced back to Robert Mugabe's land reform program. Even after Zimbabwe gained independence in 1979 most the of the country's productive farmland remained in the hands of whites, and through the 1990s the government worked to shift ownership to native Zimbabweans.

Robert Mugabe's government revealed in 1999 its plans to seize land without compensation. As hundreds of farms were taken over, production and export of grains and tobacco collapsed. The government also spent large amounts of money on the conflict in the Democratic Republic of Congo. The result was a food crisis. For exchange earnings began to fall, both from agriculture and tourism, amid violence surrounding the land reform program.

Always with currency crises politics is heavily invovled. Robert Mugabe's government deny that land reform had anything to do with the "economic meltdown." Instead they blame the West in general and the UK specifically (the former colonial power) for imposing sanctions on Zimbabwe. In fact, the sanctions were placed on government leaders who took economic aid from Britain and other donors into their own pockets. The sanctions were not placed on the Zimbabwe economy as a whole.

The government has done several things to curb this. All except the proper response to a currency crisis. It placed limits on foreign currency movements, which only scare foreign investors from wanting any involvement in the Zimbabwe Stock Exchange. It revalued the Zimbabwe Dollar, which is essentially re-pegging it to another unstable value. It then introduced vouchers instead of banknotes, which is essentially a banknote in the end. Most recently, it has imposed strict price controls, in an effort to force the right prices into the economy. Thousands of businesspeople are now being arrested for making profits on goods that are believed to be much cheaper than the price sold at. (It's always the business class that is to blame!) Meanwhile, the government is still trying to "indigenize" foreign-owned businesses by making sure black Zimbabweans have majority control.

To boot, Robert Mugabe plans to print more dollars if government project require it. Yet hyperinflation affects all commodities, raw materials, and wages. And printing only makes the value of money across the board less valuable. Businesses cannot operate at the prices the government is requiring them, by law, to produce at. So people are hoarding what commodities they can find, which also increases inflationary pressure.

If the government of Zimbabwe does not shift policy soon, it is inevitable it will lead to a complete collapse of the economy and the government by the end of the year.

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