Transcript Zimbabwe: A Country In Crisis

Zimbabwe: A Country In Crisis
Outline
Brief History of Leadership
 How Policy Started The Crisis
 Recent Economic Performance
 Hyperinflation
 Recommendations
 Conclusion

Zimbabwe’s Leadership

1980: Robert Mugabe becomes head of
Zimbabwe’s government

1987: Named Executive President

Reelected in 1990, 1996, 2002
How Policy Started The Crisis: Land
Reforms

February 2000: Zimbabwe voted on a
referendum for a new constitution that allowed
seizure of white-owned land for redistribution to
black farmers, without any compensation (no
Kaldor Hicks here)
– Referendum DEFEATED by the people

Mugabe: “I will abide by the will of the people”

April 2000: land reform amendment pushed
through by parliament

Immediately: land began to be seized
Africa’s Former Breadbasket
is Empty

In wake of land reforms, agricultural
production plummeted
– Zimbabwe now depends on help from other
countries to feed its people

Tax revenues fell sharply, lowering
government income and increasing debt
Recent Macroeconomic
Performance

Unemployment
– 2005: Unemployment estimated at 80 percent
of the labor force
 Continues today and is likely to worsen as
economy becomes even more unstable
– Zimbabwe ranks as the 197th worst country
for unemployment out of 200 countries total
Ten Worst Countries for
Unemployment
Rank
Country
% Unemployment
Year
190
Bosnia/Herzegovina
45.5
2004
191
Senegal
48.0
2001
192
Djibouti
50.0
2004
193
Zambia
50.0
2000
194
East Timor
50.0
2001
195
Keeling Islands
60.0
2000
196
Turkmenistan
60.0
2004
197
Zimbabwe
80.0
2005
198
Liberia
85.0
2003
199
Nauru
90.0
2004
Recent Macroeconomic
Performance

GDP
– 1960 to 1998: overall growth in GDP
– 1998 to 2005: GDP fell consistently
 $8.3 billion in 1998
 $5.5 billion in 2005
– 1998 to 2005: Per capita GDP also fell
 $675 in 1998
 $422 in 2005
 Still dropping
GDP in Zimbabwe, 1960 - 2005
9,000,000,000
Gross Domestic Product
(adjusted to USD in year 2000)
8,000,000,000
7,000,000,000
6,000,000,000
5,000,000,000
4,000,000,000
3,000,000,000
2,000,000,000
1,000,000,000
0
1955
1960
1965
Source: World Development Indicators 2006
1970
1975
1980
1985
Year
1990
1995
2000
2005
2010
Recent Macroeconomic
Performance

Debt
– 2006: estimated at 108.4 percent of GDP
– External debt, owed in foreign currencies, is
$5.26 billion.
– Major decrease in tax revenue due to massive
losses in the previously dominant agricultural
sector
Recent Macroeconomic
Performance

Money Supply
– Huge increases are responsible for hyperinflation
– Reserve Bank of Zimbabwe (RBZ) began printing
enormous sums of money to finance increases in
spending and meet debt obligations
– In the last 5 years, money supply increased by over
820 percent
– Demand for foreign currencies is high since
Zimbabwean dollar has lost nearly all value
Money Supply in Zimbabwe, 1975 - 2005
50,000,000
45,000,000
Money Supply (Millions ZWD)
40,000,000
35,000,000
30,000,000
25,000,000
20,000,000
15,000,000
10,000,000
5,000,000
0
1970
1975
1980
Source: World Development Indicators 2006
1985
1990
Year
1995
2000
2005
2010
Recent Macroeconomic
Performance

Interest Rates
– Distortionary macroeconomic policy keeps interest rates from
being market-determined
– Prior to 2004, kept at or below 100 percent
 However, inflation had reached over 600 percent by then, so
keeping the nominal interest rates around 100 percent led to
negative real interest rates of up to 500 percent.
– Reserve Bank of Zimbabwe governor Gideon Gono increased
interest rate to curb inflation
 October 2006: lending rate set at 500 percent
 May have been hiked as high as 785 percent in March 2006
– Result: stifled economic growth. Potential domestic investors
cannot afford to borrow funds. Also, debtors cannot pay
amounts owed, which generates significant losses for banks.
Recent Macroeconomic
Performance

Parallel Markets
 Zimbabwe’s official exchange rate is very different from the
informal market exchange rate, which its citizens actually
face.

Currency Devaluation
– Since money supply increase, exchange rate has
fallen dramatically
 2003 exchange rate: 0.824 Zimbabwean dollars (ZWD) for
one US dollar
 July 2006 OFFICIAL exchange rate: 250 ZWD per US dollar,
pegged to US dollar
 July 2006 NON-OFFICIAL exchange rate: 5,000 ZWD per
USD
Recent Macroeconomic
Performance

Currency Revaluation
– In August 2006, central bank both redenominated
and revalued the Zimbabwean dollar
– 1,000 old ZWD = 1 new ZWD
– Bank also devalued the foreign exchange rate of ZWD
by 60 percent to the US dollar
More convenient for consumers to carry less
paper, but system of pricing is still based on
informal market
 Policy changes will have little to no effect on
Zimbabweans

Recent Macroeconomic
Performance

Inflation
– The single biggest problem in Zimbabwe
– Historically high rates
– 1998 inflation began to spiral out of control mains the
single biggest problem in Zimbabwe.
– 1996 to 2006: Prices have grown at an average rate
of 132.6 percent
– 2006: Prices reached 1000s of percents
– April 2007: rates projected to exceed 2500 percent
by end of the month
Inflation in Zimbabwe, 1960 - 2005
400
Percent Inflation (with GDP Deflator)
350
300
250
200
150
100
50
0
-50
1960
1965
1970
Source: World Development Indicators 2006
1975
1980
1985
Year
1990
1995
2000
2005
Major Problem #1:
Hyperinflation


Quantity theory of money says we need some growth in
money supply to support growth in production. Just not
this much.
Government’s policy worsens things:
– Regulation of exchange rates and interest rates within certain
ranges (so never reach real market values)
– Price controls and ‘official’ exchange rates don’t keep pace with
devaluing ZWD, so people use South African Rand, Euro, and
USD for informal market transactions

Hyperinflation amplifies all the customary costs of
inflation
– menu costs, resource allocation inefficiencies, and destabilization
caused by constantly changing prices and black markets
Major Problem #2
Recommendation One:
Curb Inflation

Under current hyperinflation, any attempts
at stabilization are likely to be completely
ineffective

Increase money supply  hyperinflation

Contract money supply  back to normal
Short Term Effects
Are Painful (But Necessary)

Sticky short run prices mean contracting M will change domestic interest
rates and output (IS-LM model)

Money supply curve shifts to the left; money demand constant

Nominal and real interest rates increase
– However, expectations for inflation will remain high, so nominal increases more
than real

LM curve will shift to the left, resulting in lower overall output (holding
expenditures constant)
– This will be difficult for Zimbabwe, since output is already so low

As output falls, unemployment increases

Contract until domestic interest rate = world interest rate to promote
equilibrium between the current and capital accounts.
IS-LM Model
LM2
LM1
R*
r1
IS
Y2
Y1
Long Term Effects: Back to Normal

Unemployment increase due to drops in output are short
term

In the long run, output will be restored to precontraction levels as price stabilizes (Classical Model)

As money supply decreases, aggregate demand will fall,
shifting the curve down and to the left

New equilibrium will be established at a lower price
level, where aggregate demand equals long-run supply
Long Run Aggregate Supply Model
LRAS
P1
AD1
P2
AD2
Y
Recommendation Two:
Repair Relationships with Everyone





Zimbabwe has been in arrears with the International
Monetary Fund (IMF) since early 2001
February 2007: IMF review resulted in continued
suspension of financial support and Zimbabwe’s voting
rights
Need to follow comprehensive IMF/WB suggestions for
economic stabilization
Also need to fix rifts with neighbors: Zimbabwe needs
help during reforms to keep order and to provide
humanitarian aid to its people
The soured relationship between now isolated Zimbabwe
and the international community needs repairing for
Zimbabwe to have any hope of full and long-term
recovery
Unofficial Recommendation Three:
Oust Mugabe
Conclusion

Zimbabwe is in a state of total
macroeconomic disrepair
BUT

All hope is not lost
– Need to curb inflation
– Get leadership that is serious about recovery