Thursday, 8 February 2007

Monetary Policy – Zimbabwean Style

Read this today on the New York Times which incidentally represent a very good modern case study for development economics, political economy, macroeconomic mismanagement and hyperinflation. I will emphasise on the last one, hyperinflation – inflation level like you have never seen before. Well, at least in Malaysia.

Here, we currently have yearly inflation rate between 1 to 4%, which means that the average basket of goods that you purchase increase by 1 to 4% in price every year. Yes, it is inconvenient to have increasing prices, even at this rate – especially for poorer households.

Now, let’s look a Zimbabwe:


“…[T]his crisis — hyperinflation — reached an annual rate of 1,281 percent this month, and has been near or over 1,000 percent since last April. Hyperinflation has bankrupted the government, left 8 in 10 citizens destitute and decimated the country’s factories and farms.

… Citing a leaked central bank document, Reuters reported Tuesday that prices of basic items like meat, cooking oil and clothes had risen 223 percent in the past week alone.”


To illustrate the magnitude of these numbers, imagine that a typical trip to your favourite grocer last year for your weekly groceries cost you RM100. To buy the same thing this year, you need RM1000 or more. This how an inflation rate of 1000% will be like.

The second paragraph is even scarier – the chicken that you bought last week for RM10 – would now costs RM32. Next week, it will be RM103 and the next, RM334. In a month time, from RM10, the chicken will be RM1088. If the same inflation rate continues for another month, it will be RM118,473.

Now imagine if your savings account has got RM120,000 in January which could afford you perhaps a house in Ipoh. By the end of February, you could only buy a chicken with that money.

Ridiculous? Germany after WWI? (or closer to home, the Japanese Banana Money?)

So what is the Zimbabwean Central Bank doing to stop this from happening?


“The central bank’s latest response to these problems, announced this week, was to declare inflation illegal. From March 1 to June 30, anyone who raises prices or wages will be arrested and punished.”


Tragic.

Elanor

(All emphases added)

4 comments:

feliz said...

poor millionaire Z citizens..daily suffering would include long ATM queues to take out cash & tired shoulders due to carrying heavy bags of cash notes. What can save them now from their crippling foreign exchange woes and weak devalued Zim currency..

Elanor said...

From the same NST article, I believe that the Zimbabwean Governor is right when he said that only a “firm social contract” to end corruption and restructure the economy will bring an end to the crisis.

Or a perhaps a complete overhaul of the abusive political system. This economic crisis might ironically bring about a political revolution.

Trashed said...

Didn't Brazil and a few other LatAm countries experience this not too recently ago ?

What did they do to extricate themselves out of this vicious cycle ?

Elanor said...

Incidentally, wikipedia's entry provides a good summary of different cases, including the latin america ones: http://en.wikipedia.org/wiki/Hyperinflation

Conceptually, the solution most of the time require the complete change of monetary authority (or the perception regarding it), with strict commitment to stop the printing money altogether and the cutting of government spending. Reform of economic governance is often needed.

This is from Econlog by Arnold Kling:

Hyperinflation Trauma, 1-6-02

In an article on Argentina on the verge of currency devaluation, The Washington Post describes how traumatized the citizens are by memories of hyperinflation ten years earlier... Hyperinflation represents a serious betrayal of trust by a government. It is something akin to letting crime run rampant.