INTRO TO MACROECONOMICS

Collapse in Zimbabwe
From Cornucopia to Bleak Dystopia in Thirty Years or Less

Scott Armato

JULY 2009
 I
n 1980, the sun finally set on the British Empire as Rhodesia gained independence as the new

nation of Zimbabwe. With miles of fertile farmland and rich in such raw materials as gold

and chromium, Rhodesia had long been considered the jewel of Africa. The rule of law was

secure as much of the population trusted the police and believed in equitable treatment in the courts. With

low crime, strong banking, a sophisticated manufacturing base, and booming tourism; real GDP growth

averaged a strong 4.3% (Richardson 1).

Prior to independence, Rhodesia had been administrated by Great Britain during the late 19th

century’s Race for Africa as part of the British South Africa Company. The Colony of Southern Rhodesia

was created in 1923, granting self-rule to the white colonists, while leaving blacks disenfranchised (Wikipedia).

In 1930, Rhodesia enacted the Land Apportionment Act, forbidding land ownership for blacks outside of

tribal reserve areas (Republic 2). During that time, the British built an agricultural empire in the colony,

developing one of the most sophisticated water delivery systems in Southern Africa. With only 7% of the

land, Rhodesia had 86% of the area’s dams and 93% of the reservoir surface area at the time of

independence, serving an agricultural sector that was the backbone of a thriving economy: strong enough to

feed all of its seven million people and export the rest to the world (Richardson 2).

For over a century, 70% of Rhodesia’s vast commercial farmland had been run by about 4,500 white

farmers, producing such cash crops as tobacco and cotton (Zim). The white-owned farms supported a

flourishing banking sector, loaning funds for machinery, seeds, tools, and, most importantly, the water

delivery system. The farms employed some 350,000 black workers and provided money for local schools and

clinics (2). With the Zimbabwean dollar replacing the Rhodesian dollar at par and trading for US$1.59

(Rukuni 1), the economic future looked bright for the fledgling democracy of Zimbabwe.

That is, until Robert Mugabe came to power.

Mugabe rose to prominence in the 1960s as Secretary General of the Zimbabwe African National

Union – a militant organization that fought the British in the Rhodesian Bush War throughout the 1970s. In

a nation where blacks outnumbered whites 22 to one, Zimbabwe hadn’t seen blacks in a position of power

until 1979 – and then only in lower ministerial positions. The ZANU fought this inequitable bi-racial rule
 Collapse in Zimbabwe |Armato |2

side by side with the Zimbabwe African People’s Union – comrades in arms united only by their desire to

expel the British from their country. Once that end had been achieved, the two groups had divergent

philosophies about the governance of the country: Mugabe’s group had Maoist beliefs, while the ZAPU was

Marxist (Wikipedia).

When the war concluded in 1979, Mugabe was hailed as a national hero, and won election to the post

of Prime Minister in the first election following independence. Since then, the two opposing groups have

been embroiled in a bitter civil war for control of the nation, with Mugabe’s ZANU retaining control through

force, intimidation, and outright murder. Elections are held from time to time; the results are usually rigged

by the ruling ZANUs. In 1987, the position of Prime Minister was abolished, with Mugabe seizing new

powers relegated to the position of Executive President of Zimbabwe and effectively becoming Dictator

(Wikipedia).

While Rhodesia’s white-owned farms thrived, as a result of the Land Apportionment Act some

840,000 black farmers were crowded into eroded and over-farmed land unconnected to the irrigation grid,

producing corn, groundnuts, and other staples. This land was without title, and squabbling over land rights

between villagers was rampant (Richardson 2). As part of the Lancaster House Agreement – the nation’s

independence agreement with Britain – the subject of land redistribution was blocked until 1990. Mugabe

sought to institute land reform, with the goal of redistributing the white-owned farms to black farmers. The

nation’s constitution forbade the seizure of land without proper compensation, and the electorate rejected a

1999 referendum to amend the constitution to allow it. In early 2000, Mugabe’s advisors at the Reserve Bank

of Zimbabwe, the nation’s central bank, attempted to dissuade him from land reform, saying that his

proposals would result in a pullout of foreign investment, defaults on farm bank loans, and a massive decline

in agricultural production (2).

Mugabe should have listened. He didn’t.

Between 2000 and 2003, Mugabe seized nearly all of the nation’s 4,500 white-owned commercial

farms. While the original goal was to divide the farms into thousands of smaller parcels for the nation’s black

farmers, the land that isn’t used as Mugabe’s personal domain has ended up in the hands of his political
 Collapse in Zimbabwe |Armato |3

cronies – many of whom haven’t the slightest idea of how to farm – or sit entirely denuded of crops

(Republic 3).

As predicted, this had devastating repercussions. Inflation in 2000 was reported at 55.2% – a

staggering number by any estimation. In the next four years, as a result of Mugabe’s land reforms, the

economy began to implode, shrinking faster than any other economy on the planet in 2003. Inflation was

near 500%, and the Zimbabwean Dollar lost more than 99% of their real exchange value (Richardson 2).

Financial investors have fled the country, concerned that other businesses may go the way of the farms, with

foreign direct investment falling 99% between 1998 and 2001. Since there were no more land titles, there was

no collateral for bank loans, causing dozens of banks to collapse. The farmland lost an estimated three-

quarters of its value between 2000 and 2001, amounting to $5.3B in losses. The collapse of the farmland led

to widespread famine and, since it no longer had any owners, the prized irrigation system was dug for scrap,

some being melted for coffin handles – one of the few growth industries left in the country (2).

Agricultural Output
1980-2005
Millions of 1980 ZW$ (UN)
900

800

700

600

500

400

300
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005

Figure 1

As Figure 1 shows, agricultural production declined sharply, with 2005 output being only slightly

above 1992 – one of the worst drought years on record. For years afterward, Mugabe used this drought to
 Collapse in Zimbabwe |Armato |4

explain the drop-off in production. Real GDP followed agriculture, as could be expected in a primarily

agrarian economy (Figure 2). In 2007, it returned to the level it had been at independence 27 years earlier.

Real GDP
1980-2007
Millions of 1980 ZW$ (IMF)
450

400

350

300

250

200
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Figure 2

Following the drought of 1992, the government of Zimbabwe began receiving loans from the

International Monetary Fund. As can be seen in Figure 3, repayment of these loans had been relatively steady

until 2000, when the confiscation of farms and the subsequent slowdown of production caused the

government to fall behind in its payments. The following year, in response to the deteriorating political and

economic situation in Zimbabwe, President Bush signed into law the Zimbabwe Democracy and Economic

Recovery Act of 2001, enacting sanctions against the nation by instructing the US Treasury and US members

of international financial institutions to oppose the extension of any loans to Zimbabwe. As a result, the IMF

declared Zimbabwe ineligible to access Fund resources and suspended the remaining payment support

(Chengu 1). Mugabe and the government of Zimbabwe have repeatedly cited these sanctions as the primary

cause of their economic collapse. In 2004, due to their inability to repay the loans, Zimbabwe was expelled

from the IMF, and repayments effectively ceased (IMF).

 Collapse in Zimbabwe |Armato |5

Outstanding Loans, IMF

1992-2009
Millions of SDRs (IMF)
160

140

120

100

80

60

40
1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008
Figure 3

In the first few months of 2000, the Mugabe government began an aggressive money-printing

campaign with ZW$30B, hoping to use the newly-minted money to purchase foreign currency to pay the IMF

arrears (Fidelity), as well as to fund massive amounts of government spending. Figure 4 charts the money

supply of Zimbabwe since independence – note the logarithmic scale. Monetary production remained

relatively linear until a veritable explosion in 2000, flooding the monetary supply and causing hyperinflation

the likes of which hadn’t been seen since Weimar Germany in the 1920s.

As the quantity theory of money – and common sense – tells us, the result of this excess printing

with GDP in decline was that the value of the Zimbabwean dollar collapsed exponentially. As a result, the

cost of living skyrocketed in tandem with the monetary supply. In the thirty years of independence, the cost

of living has increased by a factor of 97,072,150,785.138%, and 2,152,473,377.841% since January of 2000

(IMF). (For comparison, the United States CPI has increased 274.68% since 1980 and 126.69% since January

of 2000.)

Estimates vary to the extent of this hyperinflation, as measuring such a behemoth has become all but
 Collapse in Zimbabwe |Armato |6

impossible. In November of 2008, prices were doubling every 24 hours (Hanke 2). The calculation of the

CPI in Zimbabwe is an extremely precarious endeavor, as many of the goods in the basket are nowhere to be

found. Supermarket shelves once full of meat, grain, and supplies have become completely empty (Chakuria).

Residents of Zimbabwe have taken to substituting whatever is available for the disposable goods they once

purchased: instead of using newspapers for fire kindling, residents use the abundance of worthless banknotes;

instead of using toilet paper, residents have again taken to banknotes (Kransdorff). It is literally cheaper to

wipe one’s ass with money than it is to buy toilet paper.

Monetary Supply and CPI

1980-2008 (IMF)
1,000,000,000.0
100,000,000.0 1000
10,000,000.0 100

Index 100=Aug, 2007

1,000,000.0 10
100,000.0 1
10,000.0 0.1
Millions of ZW$

1,000.0 0.01
100.0 0.001
10.0 0.0001
1.0 0.00001
0.1 0.000001
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008

Money and Quasi-Money CPI

Figure 4

To keep up with this rampant inflation, the methods used for computing the exchange rate have

changed rapidly. For the first several years of independence, the official exchange rate was determined by a

differing number of factors, until March of 1999 when it was pegged at 38 against the US dollar. Not long

after, the black market emerged as the primary economy of Zimbabwe, determining the actual value of the

currency at levels much lower than those maintained by the government. This was disastrous for the official

economy, as the participants of that economy – primarily agriculture, mining, and the government – were
 Collapse in Zimbabwe |Armato |7

forced to use the official rate. In the first half of the 21st century, Mugabe’s government tried several

exchange rate policies in an attempt to keep a check on rising prices, none of them coming particularly close

to the parallel black market rate (Makochekanwa 11-12). In November of 2003, the official rate was pegged

at 853 (IMF), while on the black market US$1 was fetching 6,000 Zimbabwean dollars (Makochekanwa 12).

Exchange Rate
2006-Present
Un-redenominated ZW$ (Millions) to US$ (Makochekanwa)

1E+22
1E+21
1E+20
1E+19
1E+18
1E+17
1E+16
1E+15
1E+14
1E+13
1E+12
1E+11
1E+10
1E+09
10000000
10000000
1000000
100000
10000
1000
100
10
1
0.1
0.01
2006 2007 2008 2009

Official Rate Parallel Rate

Figure 5
 Collapse in Zimbabwe |Armato |8

As a result of increasingly worthless bills, Mugabe’s government has been printing ever larger

denominations. In 1980, denominations of 2, 5, 10, and 20 dollars were printed, with the addition of a $50

banknote in 1994 and a $100 note in 1995. When inflation started becoming problematic, $500 notes were

introduced in 2001 and $1,000 in 2003. When inflation started becoming systemic, denominations up to

$100,000 were introduced in 2006 – and by July, these were trading for less than US$0.20 on the black

market. When inflation started becoming endemic, the central bank of Zimbabwe issued a $10,000,000 bill in

January of 2008 – at the time insufficient to buy a hamburger in a Harare restaurant (Mail Online). It was

followed by a $100,000,000,000 note in July of 2008 (Zimbabwe introduces), and a $100,000,000,000,000 bill

– the world’s first – in January of 2009. At the time of its issue, it was worth about US$30 (Zimbabwe rolls)

– a stark contrast to the $1.59 the Zimbabwean dollar was worth at independence – and no cash register on

the planet is capable of ringing up so many zeroes (Philp 2). Figure 5 charts the exchange rate since 2006,

again in a logarithmic scale.

In August of 2006, Mugabe’s government undertook the first of several redenominations of the

Zimbabwean dollar, removing three zeroes: ZW$1,000 was now ZW$1 (Zimbabwe devalues). At the same

time, Mugabe’s government pegged the exchange rate at ZW$250, though this lagged behind the parallel rate

of 550. In July of 2008, the government redenominated the dollar once again, this time removing ten zeroes

(Zimbabwe to revalue), followed by the removal of another 12 zeroes seven months later (Zimbabwe

revalues). Had the Zimbabwean dollar not been redenominated, as of July of this year, one would need

37,338,000,000,000,000,000,000,000 – 37 septillion, 338 sextillion – Zimbabwean dollars to equal one United

States penny (xe.com). This is a number over 4 quadrillion times the size of the aggregate real GDP of

Zimbabwe since independence. Expressed in grams, this number is almost twenty times the mass of Jupiter.

As one might imagine, Mugabe’s monetary policies have been phantasmagoric for the people of

Zimbabwe. Having previously enjoyed one of the highest standards of living in all of Africa, unemployment

is currently at 80% (#3 in the world), and life expectancy has dropped to near 40 after a high of 62 in 1992.

In a country where one of the most common minerals is gold, the percentage of the population living below

the poverty line tripled between the years of 1990 and 2002 (CIA). This country, once a net exporter of grain
 Collapse in Zimbabwe |Armato |9

and considered the “breadbasket of Africa”, has been reduced to a nation where the highest denominated bill

is insufficient to buy a loaf of bread.

While the nation may be in rubble, Zimbabweans as a people steadfastly refuse to give up hope.

Through the chaos, they’ve been able to maintain one of the highest literacy rates in Africa. With 90% of the

population able to read and write (CIA), the people of Zimbabwe may be down, but they are far from being

out.

In the past few months, Zimbabwe has abandoned its currency, now allowing all commerce to

transact in a currency other than the Zimbabwean dollar (Zimbabwe abandons). This had been happening

illicitly for several years, due to Mugabe’s reluctance to admit to himself and to the world that his monetary

policies have been completely disastrous. As a result, Zimbabwe is now experiencing some much-needed

deflation, -1% in June of this year (ZimOnline).

Within their discipline, economists are constrained by the inability to perform an experiment to

prove the theories they write. The situation in Zimbabwe can be considered an experiment – an outrageously

expensive one – in reverse. The quantity theory of money? Proven. Monetary neutrality? Quod erat

demonstrandum. In one broad incompetent swoop, Mugabe has proven nearly every macroeconomic theory

posited since Smith.

As for the immediate future of Zimbabwe, that is truly anyone’s guess. The country would be smart

to adopt another nation’s more stable currency – any other currency on the planet will safely fit that

description – and allow the economy to settle down for a few years. While some may consider this a step

backward, these past few months have seen Zimbabwe do precisely that. A step backward, yes, but as Kurt

Vonnegut wrote in Player Piano, “A step backward, after taking a wrong turn, is a step in the right direction.”

Ousting Mugabe and dragging him to The Hague to stand trial for crimes against humanity should be

top priority, but seeing as how he’s objectively lost the past few elections without relinquishing power, this is

substantially more difficult than it might appear. At a conference last year, the South African leaders asked

Mugabe and his delegation to leave the room while the subject of Zimbabwe was discussed. Mugabe refused

(Harare diary). How can you force him to give up a country when you can’t force him to give up a chair?
 C o l l a p s e i n Z i m b a b w e | A r m a t o | 10

Zimbabwe’s economic disaster is entirely due to one obstinate man under the mistaken belief that

running a government equates to a license to print money, while the people of Zimbabwe have repeatedly

called out for a change in regime. Their cries apparently fall on deaf ears as the international community

busies itself securing a constant flow of petroleum, meting economic disaster with economic sanctions. This

mad dichotomy will have an eternal outcome: the endurance of a ruthless dictator who was once the hope of

a nation, the destruction of a nation that was once the hope of a continent, and the devastation of a people

for whom hope is their last and most cherished possession.

For most Americans, Africa is not much more than a large landmass south of Europe with

unpronounceable country names and problems even more incomprehensible. Add Zimbabwe to the list that

names Darfur, Ethiopia, Lesotho, Somalia. On Judgment Day, these names will be our legacy, our downfall,

and our ultimate undoing. The Race for Africa has never really crossed the finish line; no winners have been

declared, nor will there be in the foreseeable future. Instead, an entire continent has been lost.
 Works Cited |Collapse in Zimbabwe |Armato |1

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 Works Cited |Collapse in Zimbabwe |Armato |2

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