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When Robert Mugabe came to power in 1980 and liberated Zimbabwe from Rhodesian rule, it seemed Zimbabwe's future was bright, but this was far from the truth. Mugabe's government, Zanu-PF, would commit genocides and practice widespread corruption. The government's economic policy would cause some of the greatest and most dangerous hyperinflation ever, altering the social and economic fabric of the nation for generations to come.
Hyperinflation is an extremely rapid and out-of-control increase in prices, typically exceeding 50% per month, causing a significant erosion of a currency's value and devastating economic stability.
For more, check out this great 1-minute explainer below:
Mugabe had taken inspiration from Marxist and Leninist theories, characterised by mass nationalisation. The government gave itself huge subsidies in order to drive out competition from private companies and force consumers to buy goods and services from them. On top of this there was an immense amount of corruption, with the comedic example of Mugabe himself ‘winning’ the state lottery in 2000.
Nationalisation is the process by which a government takes control and ownership of private sector assets, industries, or enterprises.
Such corruption, alongside mass killings led to Zimbabwe being cut off from the rest of the world. As a result, the entire economy became solely dependent on domestic demand. Consequently, if Zanu-PF could not sell goods and services to their population, the entire economy would collapse.
However, because the majority of Zimbabwe's population were subsistence farmers, national incomes were relatively small. Consequently, most people could not afford to buy the government's products, leading to low domestic demand and the inevitable sharp decline of the Zimbabwe economy.
To further consolidate the decaying state of the economy, Mugabe also implemented unsuccessful agricultural reforms by redistributing white-owned farms to new black farmers. However, these new owners lacked the necessary farming experience, leading to a significant decline in agricultural output. Food prices soared, and famine spread across the country due to the low yields.
At the same time, Mugabe was funding the Second Congo War, which severely strained Zimbabwe's finances. He spent millions each month to support President Laurent in an increasingly unpopular conflict.
The Second Congo War, also known as the Great War of Africa, was a multi-nation conflict in the Democratic Republic of Congo from 1998 to 2003, involving nine African countries and resulting in millions of deaths, primarily from disease and starvation.
It is reported that over the course of the conflict, Zimbabwe spent a staggering $260 Million in military support.
Further compounding the situation, in an attempt to address the food crisis, low domestic demand, and the costs of the foreign war, Mugabe resorted to printing more money. Over time, the government became dependent on this practice, developing an addiction to money printing. According to the Fisher equation (MV=PQ), increasing the money supply (M) leads to a rise in the price level (P). This resulted in hyperinflation, which peaked at an astronomical 79 billion percent month-on-month in November 2008.
The Fisher equation, expressed as MV = PQ, states that the money supply (M) multiplied by the velocity of money (V), which is the rate at which money changes hands, equals the price level (P) times the quantity of goods and services produced (Q). If the money supply increases dramatically while the velocity of money and quantity of goods and services remain constant, it leads to higher prices (inflation) because more money is chasing the same amount of goods.
For a more in-depth explanation, check out this below:
At the peak of the crisis, 100 trillion Zimbabwean dollar notes entered circulation. Black markets became the only place where people could find affordable goods, often using the US dollar or the South African Rand. A loaf of bread cost 10 million Zimbabwean dollars, and in many cases, the paper used to print the money was worth more than the notes themselves. People's savings were completely eroded and the economy shattered.
Solving the Inflation
To combat the hyperinflation, Zimbabwe employed several techniques. Initially, the government attempted to make inflation illegal by prohibiting companies from increasing prices. Although there were some successful arrests, many companies ignored this regulation. Eventually, Zimbabwe allowed the use of other currencies, but many salaries were still paid in Zimbabwean dollars. This made jobs hardly worth the effort, as even though monthly salaries reached into the trillions, the money was essentially worthless.
Interestingly, the government employed very few traditional monetary or fiscal policy changes, which are typically used to control inflation. The policy that ultimately worked was to abandon the Zimbabwean dollar altogether and adopt the US dollar. However, this move meant that Zimbabwe could no longer control its own monetary policy, leaving it at the mercy of the US Federal Reserve.
An economy has two major levers: fiscal policy, which involves government spending and taxation, and monetary policy, which involves controlling the money supply and interest rates.
Adopting another country's currency removes the lever of monetary policy, leaving the country unable to control its own money supply or interest rates, which can limit its ability to respond to economic crises and influence inflation.
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