by Steve H. Hanke
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."
The hallmark of Zimbabwe’s economic collapse is hyperinflation. The most recent official inflation figure is for February 2008: a whopping 165,000 percent year-over-year. At present (early June 2008), inflation is unofficially about 2.5 million percent a year. Not surprisingly, the Zimbabwe dollar has lost more than 99.9 percent of its value against the U.S. dollar during the past year.
Zimbabwe’s hyperinflation is destroying the economy, pushing more of its inhabitants into poverty, and forcing millions of Zimbabweans to emigrate. Between 1997 and 2007, cumulative inflation was nearly 3.8 billion percent, while living standards fell by 38 percent.
The source of Zimbabwe’s hyperinflation is the Reserve Bank of Zimbabwe’s money machine. The government spends, and the RBZ finances the spending by printing money. The RBZ has no ability in practice to resist the government’s demands for cash. Accordingly, the RBZ cannot hope to regain credibility anytime soon. To stop hyperinflation, Zimbabwe needs to immediately adopt a different monetary system.
Any one of three options can rapidly slash the inflation rate and restore stability and growth to the Zimbabwean economy. First is "dollarization." This option would replace the discredited Zimbabwe dollar with a foreign currency, such as the U.S. dollar or the South African rand. Second is a currency board. Under that system, the Zimbabwe dollar would be credible because it would be fully backed by a foreign reserve currency and would be freely convertible into the reserve currency at a fixed rate on demand. Third is free banking. This option would allow commercial banks to issue their own private notes and other liabilities with minimum government regulation.
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. It is time for Zimbabwe to adopt one of these proven monetary systems and discard its failed experiment with central banking.
Steve H. Hanke is a professor of applied economics at Johns Hopkins University in Baltimore and a senior fellow at the Cato Institute.
Full Text of Development Policy Analysis no. 6
( PDF, 302 KB )
