80 Billion Percent

Hi team,

Over the weekend it came out that Robert Mugabe, the ruthless ruler of Zimbabwe, was put under house arrest by the country’s military. Hopefully over the coming days we will hear that there has been a successful and peaceful transfer of power from him to someone else. If that happens it will be a breath of fresh air in a country that so badly needs it, after being effectively destroyed during his 37-year reign.

A while ago I said that a little bit of inflation is a good thing. It encourages people to bring their spending forward to now (while prices are cheaper) which is good for businesses and good for jobs. Mugabe however missed that memo. Or at least misread it. For much of his rule, the country has suffered from something economists call “hyper-inflation”, which is basically the pepsi-max of inflation. For some context, the current inflation rate in Australia is ~2% and our central bank (the Reserve Bank of Australia) targets a level of between 2-3% a year. In Zimbabwe, during November 2008 alone, it’s rate of inflation was nearly 80 billion percent. Yes. 80,000,000,000%.

How on earth did that happen?

*** THIS IS A MASSSIVE OVERSIMPLIFICATION***

As with most countries in Africa, the white man came in, divided, conquered and ruled for a long time. There was significant racial inequality, with the white man (those with European ancestry) owning almost all the farmland, while those with African ancestry worked it. Over time, the workers fed up with this, revolted against the land owners and eventually seized control of the country, installing then teacher Robert Mugabe as their leader supreme.

Initially all was well, but over time, Mugabe, seeking to reverse the centuries long injustice of the indigenous Zimbabweans, gave them farm land by confiscating it from its white owners. The problem was, none of the “new” farmers had the skills to manage a farm and food and crop production promptly fell. As an example, in 1990, Zimbabwe produced 300,000 tonnes of wheat. Come 2007 it was down to just 50,000.

This was a massive problem. First, exporting agriculture was a huge income stream for the country and second, people need food to eat. Life expectancy dropped (cause there was no food), unemployment rose (cause Zimbabwe’s primary industry farming was not making any money) and hundreds of thousands of people fled the country.

So, what did Mugabe do? He made it rain. He instructed his central bank to print money. Lots of money. He essentially flooded the country with it as otherwise he couldn’t afford to pay his staff, his military or his people. Like we’ve said before though, when you increase the supply of something its value you falls. And the more Mugabe printed money, the less valuable the money became. The less valuable it was, the more you needed of it to pay for things. And this my friends is inflation. A really crappy kind of inflation, but inflation nonetheless.  Prices were rising because the currency was getting more and more worthless.

To cut a long story short, it got so bad in Zimbabwe, that if you were to go to a café to order a coffee, you would be better off paying for it when you ordered, rather than when you were finished as prices were going up that quickly. At its worst, inflation hit 80 billion %.

Zimbabwe needs change. Serious and significant change. Hopefully the ousting of Mugabe is the first step towards improvement for its people.

The more you know
Zimbabwe used to be called Rhodesia, named after one of this biggest racists to ever grace our planet, Cecile Rhodes. He died an extremely rich man, having formed the company De Beers, the largest diamond company in the world. The Rhodes Scholarship, a post-graduate scholarship to Oxford is his legacy.

Anyway, that’ s 5 minutes. Hope it helped. 



Categories: Macro Economics

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