The high level of inflation is causing a lot of strife,
particularly among poor rural and urban households and
those on fixed incomes (pensioners). Fighting inflation
should be the number one priority for the government
given the economic hardships that it is causing.
Regrettably, there is no serious attempt by the government
to address the crisis. In this article, I will outline
the causes and cures of hyperinflation and attempt to
draw some lessons for Zimbabwe from other countries
experiences with hyperinflation.
The most widely accepted definition of hyperinflation
among economists is that by Philip Cagan who, in his
1956 paper, classified hyperinflation as any inflation
exceeding 50 percent per month (or 12 875 percent per
According to this definition, Zimbabwes inflation
would not qualify as hyperinflation. However, the Zimbabwean
economy has already assumed features that are similar
to those of a country experiencing hyperinflation.
The most spectacular episode of hyperinflation in modern
history is that which occurred in Hungary in 1945 and
1946. In its final week, it is reported to have reached
a peak of 158 486 percent. In more recent times, Latin
American countries have gone through periods of very
high inflation, with the worst case being Nicaragua
which experienced inflation of 64 000 percent in 1991.
There have been some great debates in the past about
money supply growth as the cause of inflation. The majority
of economists nowadays accept the strong correlation
between money supply growth and inflation. Hyperinflation
is simply an extreme case of money supply growth exceeding
the growth in the production of goods and services in
an economy. Excessive money supply growth occurs because
the government spends more money than it collects through
taxes and charges, leading to the printing of money
to fill the gap between revenue and expenditure.
The excess money that the government creates causes
excess demand in the economy leading to an increase
in prices. Excess money supply also creates an excess
demand for imported products and, where there is a foreign
currency supply constraint, this translates into a depreciation
of the local currency. The depreciation may be implied
or actual depending on the foreign exchange regime that
the country operates.
Once inflation has been triggered by excess money supply,
it is sustained through various means and, if unchecked,
rises to hyperinflation levels.
Does money supply growth cause inflation or is the
direction of causation from inflation and exchange rate
adjustments to money supply growth? Some economists
(for example Fischer, Sahay and Vegh) have done some
empirical analyses, which show that causation may run
from inflation/exchange rate changes to money supply
growth. They argue that once inflation has been triggered,
monetary policy becomes accommodative. Inflation then
is driven by shocks and its own internal dynamics (inertia,
expectations). Thus, the longer an inflation persists,
the more difficult it becomes to bring under control.
If the root cause of inflation is so well known, the
obvious question to ask is: Why does inflation persist?
One reason why inflation persists is inertia. Once inflation
has become established, everyone wants to hedge against
it by increasing prices. This leads to a wave of price
increases that are unrelated to the original excessive
As inflation rises, workers demand indexation of their
wages to inflation. This tends to reinforce the inflation
spiral. Once inflation expectations have become entrenched
within society, the government may find it too costly
not to validate the publics expectations. It then
accommodates inflationary expectations through monetary
expansion, thereby fuelling the inflation.
Another explanation for the persistence of high inflation
is that provided by Alesina and Drazen (1991) in their
famed "war of attrition" model. The two examine
an economy experiencing high inflation with two groups
of economic agents. Each group is not prepared to act
to address the problem of high inflation but, instead,
expects the other group to make sacrifices on its behalf
in order to bring about stability. This game of "wait-and-see"
continues until one group can no longer bear the costs
imposed by inflation and decides to give in and make
sacrifices in order to bring about stability.
A practical lesson that can be drawn from this model
is that things must get worse before they get better.
In other words, countries need to go through a hyperinflation
crisis before a political consensus for a stabilisation
Brazil Brazil experienced a period of very high
inflation between 1987 and 1997 during which inflation
rose to 2 000 percent. Despite some credible attempts
to reduce the budget deficit, hyperinflation in Brazil
persisted throughout this period. During the 10-year
period, Brazil changed its currency five times, implemented
extensive price and wage controls and devalued its currency.
All this did not work. What eventually did the trick
constitutional amendment in 1994 which empowered the
Central Bank not to finance the budget deficit;
Central Bank made it illegal for regional banks to
buy government-issued bonds; and
were frozen and a new currency the real
was introduced as part of measures to de-index the
As a result of these measures, prices dropped dramatically
from July 1994 onwards and by 1997, inflation had been
reduced to standard international levels.
Argentina Hyperinflation exploded in Argentina
in 1989 after a chronic inflationary process dating
back to 1945. Annual inflation in December 1989 reached
4 923.3 percent. Government expenditure during 1989
reached 35.6 percent of GDP and the fiscal deficit was
7.6 percent of GDP.
In 1990 the Argentine government announced a stabilisation
plan which had the following elements:
liberalisation of foreign trade and capital movements;
of public enterprises and the deregulation of the
in the size of the public sector and reconstruction
of the tax system; and
of a new monetary system, including the establishment
of a Currency Board in April 1991.
Measures to instil greater fiscal discipline resulted
in a reduction in government expenditure to 27 percent
of GDP in 1995. Disinflation was gradual, with inflation
falling from 1 344 percent in 1990, 84 percent in 1991,
17.5 percent in 1992, 7.4 percent in 1993, 3.9 percent
in 1994 and 1.6 percent in 1995.
The law that created a new monetary system included
clauses that prohibited indexation. It became mandatory
for collective bargaining to be accompanied by agreements
Lessons for Zimbabwe
In conclusion, I will highlight some of the lessons
that we can draw from the economic literature on hyperinflation
as well as the country experiences in dealing with this
has its root cause in money growth, which is not supported
by growth in the output of goods and services. Usually
the excessive money supply growth is caused by financing
of the government budget deficit through the printing
political costs of stopping hyperinflation may be
high, leading to reluctance by the political leadership
to take decisive measures to deal with the problem.
in reform may also be explained in terms of a crisis
of expectations ("war of attrition") among
interest groups where one or several interest groups
are not prepared to make sacrifices and, instead,
expect others to make sacrifices on its/their behalf.
reductions in the fiscal deficit are always a critical
element of a stabilisation programme. It takes time
to achieve lower rates of inflation even when the
fiscal deficit has been reduced.
from money supply growth, hyperinflation is reinforced
by its own internal dynamics which include indexation,
inertia and expectations.
political leadership has to be prepared to make sacrifices
and to take away benefits from vested interests if
the war against inflation is to be won.
is no evidence that a stabilisation programme can
restore growth within an economy. What is certain
is that a stabilisation programme assists in achieving
a more stable economic environment.
Mufute is an economist at the Confederation of Zimbabwe
Industries. The views expressed in this article do
not necessarily reflect those of the Confederation.