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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