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BINDURA UNIVERSITY OF SCIENCE EDUCATION

FACULTY
DEPARTMENT

:
:

COMMERCE
ECONOMICS

RESEARCH PROPOSAL :
AN ASSESSMENT OF POVERTY LEVELS
AND IMPLICATIONS FOR POVERTY ALLEVIATIONS STRATEGIES IN
ZIMBABWE
NAME

BASKET WILBERT M

STUDENT REG NO.

B0520905

SUPERVISORS

ABSTRACT
This research project sought to assess poverty levels in Zimbabwe and implications
for poverty alleviation strategies .
The purposive sampling technique was used were secondary data was used for the
years 2000-2006.Official statistics ,ZIMVAC, and CCZ data were used to provide
estimates as indicators .
There was triangulation of data from the three sources mentioned above.Simple
descriptive statistics aided by tables and graphs was used to analyze results
Findings indicated that poverty was worsening during the period under study .A multi
dimensional poverty assessment approach used in this research shows that poverty
continued to worsen between the year 2000 and 2006.

INTRODUCTION/BACKGROUND
This study is carried out to assess poverty levels in Zimbabwe .A set of official data
on individual private consumption, poverty data, and inflation rate, value of
agricultural output and fixed capital formation in agriculture and total fixed capital
formation is used .The data was examined by quantitative and qualitative methods in
order to assess the extent of poverty in the country. The economy of Zimbabwe has
been performing badly with an average decline in Gross Domestic Product of 4% for
the past three years (CSO 2007). The study is an interest area as it sought to explore
the impact of this decline to the people of Zimbabwe .It has also shown how the
people have suffered in the current inflationary environment.
BACKGROUND
Poverty is increasingly becoming an issue of concern in Zimbabwe .The current total
poverty level and food poverty level for an average household of five members have
risen in 2005 and 2006 from $5221.90 and $75507.51 respectively (CSO December
2006).THERE is hardly a single day that passes without an article in the local media
on hardships being faced by Zimbabweans due to deteriorating economic
conditions .The monetary premiers the Ministry of Finance ,the Reserve bank of
ZIMBABWE and indeed the Government as a whole ,have adopted many policies to
try and reign the current hyperinflation which was at 1281.1% in December 2006 and
other unfavourable economic indicators like official exchange rate of $250 to US$1,
TOTAL unemployment rate of 80% and excess capacity in most companies of 70%
(RBZ,CSO2006).The policies adopted so far include the Structural Adjustment
Programme(ESAP1991-1995),ZIMPREST 1996-2000,MERP 1999-2000,NERP
2001-2005,Macro economic policy framework 2005-06 and currently NEDPP and the
Look East Policy which was announced in 2003 .However, despite the
implementation of these policies ,the countrys inflation rate, food security and
consequently poverty seem to worsen. The international and regional declarations for
example the MDGs that seek to address the issues of poverty and sustainable
development, seem to be too high standards to be achieved in Zimbabwe given the
current inflation rates ,falling real income, decline in agricultural production and
consequently food insecurity.
Hyperinflation (1098.8% in November to 1281% in December 2006) impacted on
people in different forms, fall of output and investment in the agricultural sector due
to high cost of agricultural implements and inputs and generally food insecurity(1.4
million (17%) and cereal deficit of 91000Mt(ZIMVAC2006).Recent official statistics
from CSO show that the PDL REACHED in December 2006,to an all times high level
of $344.256 for a household of five members .The majority of Zimbabweans did not
earn that much which therefore means that most of them are deemed very poor.
Remuneration in Zimbabwe was not CPI indexed and always lagged behind the
inflation rate leading to continuing poverty and food insecurity.
The food insecurity in Zimbabwe was compounded by the current shortage of foreign
currency , and the looming sluggish pace tom find footing from the Agricultural Land
Reform .Worse still, the Zimbabwean currency has been subjected to official
devaluation and depreciation against major currencies.The exchange rate of
Zimbabwean dollar to the US$ has drastically fallen to all time low levels with a
recent exchange rate of 1US$ to Z$250.(RBZ,2007)

According to the Reserve Bank of Zimbabwe(2007),hyperinflation has been fuelled


by the pestilent foreign exchanged black market ,which has survived all attempts by
monetary authoritys incessant attempts to eradicate it.There was also loss of
confidence in the local currency such that as soon as one got it,they wanted to get rid
of it before it lost value.Generally there was jostling for a few commodities in the
economy leading to demand push inflation.
Recently the central bank revalued the local currency by cancelling three zeros ,that is
from million to thgousand as one of remedial efforts to reign inflation and to
convenience business transaction which had become difficult as they involved very
high denominations .However this appeared to have brought temporary relief and
signs aboumnd that this monetary measure is short lived,inflation continues to
increase alarmingly
JUSTIFICATION OF THE STUDY
In the absence of recent sysyematic and comprehensive poverty asseement updates in
a changing macroeconomic environment in the country, the magnitude of problem has
never been fully unveiled.lt has not been given due attention at policy and operational
levels of government.A number of stakeholders have however observed the
worsening conditions and have called for an appropriate response to the plight of the
people as a matter of urgency.There has been thus mounting demand from decision
makers and practitioners for timely and accurate i9nformation and analysis of poverty
in the country.With the economic decline, humanitarian crisis and hiv and aids as
predominant features of the current situation, there was a need for a recent study that
would increase the understanding of poverty conditions.This called for the most ideal
study that would enable a comparison with the other assessments carried out
previously.This study therefore,aimed at filling gaps in information, through the
pursuance of a methodology that would add value to existing initiatives so far done in
Zimbabwe.The study would provide decision makers with essential information on
the changes in poverty levels and would help in the design of effective responses or
pre-emptive actions by the government
Zimbabwe has been facing economic and agricultural decline.lt has become clear that
this decline should have serious implications for food security prospects for recovery
in agriculture and other sectors of the economy in near future have been
encouraging.The Gross national product is expected to decline by 10% in 2007.This
would amount to a decline in per capita income for a third year in row with a
cumulative decrease of 18 percent during 2000-2007.ln addition the country has been
facing an acute foreign exchange crisis limiting its ability to import fuel, energy and
basic food grains to meet the looming food deficit
Inflation has ravaged the economy averaging.A recent survey indicated that a total of
400 companies(including 171 motor traders,92 steel manufacturers, and 45 clothing
and textile companies) closed during 2000.Business closures and the downsizing of an
additional 350 companies led to 10000 workers losing their jobs(Zimbabwe chamber
of commerce 2001)
This study can be used as a basis in the implementation of the governments po

PROBLEM STATEMENT

HYPOTHESIS
(a)

H0:Generally poverty levels have been worse


Hi:Poverty has remained static

( b)

H0:food security has been declining over the years


Hi:Poverty has not been declining over the years

c
H0:Private consumption has been declining
Hi:Private consumption has not been declining
(d)Ho:Output and investment has been declining in agricultural sector
Hi:Output and investment have not been declining in agricultural sector

RESEACH QUESTIONS
i)What is the impact of inflation on households food security in Zimbabwe?
ii) What has been happening to employment, consumption and other poverty
indicators in Zimbabwe?
iii) What has been happening to overall investment given the hyperinflation in
Zimbabwe?
iv) What has been the distribution of resources or the Gini coefficient like?
(v)ls the situation likely to persist or it is temporary?
AIMS
This study aims at developing an in-depth understanding of the causes of poverty
levels in Zimbabwe with a view to recommend viable solutions .lt sought to relate
poverty levels to food insecurity, hyperinflation, real income, and agricultural
production in Zimbabwe.The investigation would bring together areas of staple food
production (maize) and investment in agriculture that has been currently the subject of
a lot of attention in the country.The research would also assist to show the effects of
the inflationary environment on purchasing power and consequently total welfare of
the people .The study would also evaluate some recommendation by economists who
have recommended the indexation of income to Consumer Price Index (CPI)
OBJECTIVES
The overall objective of the study was to assess poverty levels in Zimbabwe .The
specific objectives were to :
1 To investigate changes to poverty over the years in order to better understand
factors that cause it.
2 To show the relationship between economic indicators and poverty

3 To relate food security and poverty


4 To provide recommendations on how to reduce poverty levels in the country.

METHODOLOGY
The literature on poverty levels in Zimbabwe was scarce ,partly because a few people
had undertaken to write about it.There was also conflicting information about the
poverty levels in the country , and possible reasons for it to reach such levels.This
study would bridge the data gap by providing several reasons for increasing poverty
levels in the country .The study would show what has been happening to real income
and purchasing power in the inflationary environment in Zimbabwe.The relationship
between poverty and hyperinflation would also be explored.The study would also
make some recommendations on whether there was need to index all remunerations
both in the private and public sector to Consumer Price Index (CPI) in order to
protect households purchasing power.It could also be used as a basis in the
implementation of the Governments programmes whose intentions are to serve as a
framework for targeting and the design of poverty alleviation activities .The study
would also consider spatial variances in poverty and also assessed the causes of
poverty as per discussions in the data upon which this study was based .Finally the
study also sought to make some recommenadations on steps that should be followed
to safe guard the welfare of the people in general and workers in particular.

CHAPTER TWO
2.1

LITERATURE REVIEW

2.2

INTRODUCTION

The reason for compiling this literature review was twofold. It was intended to
provide theoretical background to the work carried out in this study, setting the scene
by giving an in-depth understanding of all the disciplines that would be explored in
the study. More importantly, it functioned to show how the course of research
presented here had been shaped by the outcome of previous investigations. The
overview consists of the following two sections:

Section 2.2, the body, which

provides a brief and simplistic outline of the different approaches to food security,
current issues, such as core determinants of food security. It also looks at different
assets used both tangible and intangible which hedge household from food insecurity.
It also deals with issues including different approaches used by organization to
calculate poverty lines.

The section would also look at theories of inflation,

particularly the relationship between hyperinflation and real income.

Finally it

concluded with section 2.3, which is the conclusion of the whole literature review.
2.2.1

The poverty datum line

According to United Nations Development Programme UNDP (2006), three poverty


concepts have evolved, based on ideas of subsistence, basic needs and relative
deprivation. Historically, poverty has been related to income, which remains at the
core of the concept today. However, income is itself no less problematic a concept
than poverty, it too has to be carefully and precisely elaborated. Other resources
such as assets, income in kind and subsidies to the public services and employment
should be imputed to arrive at a comprehensive but accurate measure of income.
People can be said to be in poverty when the are deprived of income and other
resources needed to obtain the conditions of life the diets, material goods, amenities,
standards and services that enable the to play the roles, meet the obligations and
participate in the relationships and customs of their society. The determination of
poverty line cannot be based on an arbitrary selection of a low level of income. Only
scientific criteria independent of income can justify where the poverty line should be
drawn. The multiplicity and severity of different types of deprivation can constitute
those criteria. The key is therefore to define a threshold of income below which

people are found to be thus deprived. The measure of multiple deprivations must be
decided on the basis of evidence about each and every sphere of the range of social
obligations. The degree of material and social deprivation relative to income is the
basis for ascertaining the threshold amount of income ordinarily required by
households of different compositions to surmount poverty (Hamelin A., Pieere H and
Beaudry M.,2000).
The Central Statistical Office (CSO, 2007) defines the food poverty line (FPL) as the
minimum consumption expenditure necessary to ensure that each household member
can (if all expenditures were devoted to food)consume a minimum food basket
representing 2 100 kilo calories. An individual whose total consumption expenditure
does not exceed the food poverty line is deemed to be very poor.
In Zimbabwe the total consumption poverty line (TCPL) which is naturally higher tha
the FPL was deprived using the data for 2000 Income Consumption and Expenditure
Survey (ICES). It was derived by computing non-food consumption expenditures of
the poor households whose consumption expenditures were just equal to the FPL.
The amount was added to the FPL, if an individual does not consume more than the
TCPL, he or she is deemed poor. The analysis uses the per capita consumption
expenditure, and an average of five persons is used based on the average size of the
households as established by the 2002 population Census. An increase in the FPL
means that an individual requires much more money to purchase food items. Over a
period of twelve months, the total consumption poverty line (TCPL) per person may
increase or fall. In case of an increase it means that an average household requires
much more money to purchase both food and non food items for them not to be
deemed poor.
The poverty lines vary by province as prices vary fro place to place. The quantities of
the commodities consumed at base year in the minimum needs basket which is
consistent with the preferences of the poor individuals and households in Zimbabwe
are fixed. The variations in the value of the basket are explained by the changes in
average prices. Although this method is plausible it has many weaknesses. The data
take a long time to be analyzed and the reports might not be reflective of the situation
on the ground. Zimbabwe is experiencing inflationary environment and calculating
data basing on 2001 reference year might be very deceitful as a lot of changes have

taken place. The survey is carried out every five years, which means the information
may be obsolete before the next survey.
Contrary to the poverty lines used by the CSO, the Consumer Council of Zimbabwe
(CCZ) uses the lower income urban earner monthly budget for a family of six (father,
mother and four children). The cost of living as depicted by the CCZs low income
urban earner monthly budget for a family of six, is calculated every month. CCZ
came up with a family budget which they update each and every month using data
collected from monthly surveys. This method of calculating poverty has the strength
that updates are done each and every month and appear more favourable to be applied
in inflationary environment like Zimbabwe.

However this method is not

comprehensive as a proxy of poverty analysis because the monthly budget is for urban
families only. The CCZ does not include the rural areas in their analysis of cost of
living. The analysis is also based on food consumption but does not look at family
ownership of assets. In times of distress families sell their assets and acquire food.
The Department for International Development (DFID) 2007 identifies core
components of the way in which many people understand poverty:

A state of dependence and lack of psychological well-being

A sense of isolation from services, markets, government institutions and


information

Powerlessness and lack of voice

Food insecurity

Lack of employment and insecure sources of income

Illiteracy

Lack of assets to protect against shocks ( i.e vulnerability)

Insecurity, including physical insecurity and helplessness in the face of


exploitation

Physical weakness, ill-health and lack of access to respectful, effective,


inexpensive and non time consuming healthcare

Social isolation, loss of culture, disintegration and lack of dignity or respect


in social life; and

Time poverty for women

This approach is very comprehensive as it incorporates all aspects of poverty.


However, the assessment of poverty using all aspects listed above is very
cumbersome. National institutions involved in assessing poverty prefer to use some
and not all aspects.
2.2.2

Theories of food security

Food security exists when all people, at all times, have physical and economic access
to sufficient, safe and nutritious food to meet their dietary needs and food preferences
for an active and healthy life (FAO 2006) and the food insecure being the proportion
of people whose daily food consumption is below the minimum daily requirement that
is 2 100 kilo calories.
The core determinants of food security include the following: availability, which
means the availability of sufficient food for all people through production and
purchases. It is determined by domestic food stock, commercial food imports, food
aid and domestic food production.
The other determinant access: is determined by the household resources, household
income, intra-household distribution of income, price food, bargaining power,
environment shocks- droughts, natural disasters and conflict. The last but not least
determinant is utilization which means the appropriate use of food.

The key

determinants of utilization are feeding patterns, cooking processes, womens time and
poor health.
From the determinants of food security supply utilization accounts (SUAs) can be
produced. (SNA93)
Supply utilization accounts show how statistics on supply (production, imports and
stock changes) and utilization (exports, seed, feed, waste, industrial use, food and
other use) which are kept physically together to allow the matching of food
availability with food use.

By taking the data for a period, limiting it to food

commodities and converting the food into calories, proteins and afts (commodity by
commodity), it is possible to prepare food balance sheets (FBS). This document
promotes a particular report from the database in the form of food balance sheets.
The determinants are summarized as follows:
The Three Pillars of Food Security

Availability, Accessibility, Utilization


2.2.3

Food Balance Sheet

A food balance sheet presents a comprehensive picture of the pattern of a countrys


food supply during a specified reference period. The total quantity of foodstuffs
produced in a country, added to the total quantity imported and adjusted to any change
in stocks that may have occurred since the beginning of the reference period, gives the
supply available during that period. On the utilization side, a distinction is made
between the quantities exported, fed to livestock, used for seed, processed for food
use and non-food uses, lost during storage and transportation, and food supplies
available for human consumption.
The per caput supply of each food item available for human consumption is then
calculated by dividing the respective quantity by the related data on the population
actually consuming it; that is the meaning of the term-per caput. Data on per caput
food supplies are expressed in terms of quantity and also-by applying appropriate
food composition factors for all primary and processed products-in terms of caloric
value, protein and fat. The balance sheet can be represented by the equation. The
first equates the sum of the supply elements with utilization elements.
Opening stocks + production + imports = Exports + feed + seed + waste + processing
For consumption + closing stocks food
+ Food + other utilization

The balance sheet assumes that reliable and independent information is available for
each of its elements. Alternatively, if no information is available for one of the
elements, the residual will provide an estimate. In practice, however, the construction
of balances of this type is made difficult by the absence of adequate information on
opening and closing stocks. Experience, however, that information on changes in
stocks is made more readily available than on their actual size (FAO 2003).

Adequate food availability at the national level does not automatically translate into
food security at he individual and the household levels. Researchers and development
practitioners have realized that food insecurity occurs in institutions where food is
available but not accessible because of an erosion to peoples entitlement to food.
(Anderson S. 1997) theory on food entitlement has a considerable influence in this
change in thinking, representing a paradigm shift in the way that famine were
conceptualized. Food entitlements of households derive from their own production,
income, gathering of wild foods, community support (claims), assets, migration, food
aid and other unorthodox means. Thus a number of socio-economic variables have an
influence on households access to food. In addition, worsening food insecurity is
viewed as an evolving process where the victims were not passive to its effects.
Social anthropologists observed that vulnerable populations exhibit a sequence of
responses to economic stress, giving recognition to the importance of behavioural
responses and coping mechanisms in food crisis (Campbell C. 1996). It is therefore
important that donor organizations, local governments and Non Governmental
Organizations begin to incorporate socio-economic information in their diagnosis of
food insecurity.
Recently the household food security approach emphasizes both the availability and
stable access to food. This means that food availability at the national and regional
level and stable and sustainable access at the local level were both considered
essential to household food security. Attention should be centred on understanding
householders assets ownership, agricultural production which is subject to fixed
capital formation in agricultural sector and other factors that influence the
composition of food supply and a households access to that supply overtime. It also
important to consider the nutritional aspect of any food substance consumed by any
one individual member of the household (Ayalew M. 1998).
Household food security is a necessary but not sufficient condition for nutritional
security. It was discovered that there are two nutritional security aspects. The first
deals with access to resources for food for different households. This deals with all
stages from production or income to food.

The second process looks at the

conversion of food substances into satisfactory nutritional levels (World Bank 1998).

Many health, environmental and cultural/behavioural factors influence the nutritional


benefits of the food consumed, this is the route from food to nutrition (IFAD 1993).
Paradoxically, people postpone eating in order to preserve their assets and future
livelihoods. Therefore, it is rather ill-advised to treat food security as a fundamental
need independent of wider livelihood considerations (Kelty K. 1997).
It is in light of afore argument on household food and nutritional security that led to
the development of the concept of household security. The household livelihood
security model provides for broader and more comprehensive understanding of the
relationships between the inflation rates, incomes, assets and complex strategies that
the people use to negotiate survival. This model put more emphasis on households
behaviour with regards to its rational choices. Food is understood to be only one of
the priorities that people pursue. People are constantly being required to balance food
procurement against the satisfaction of other basic material and non-material needs
(Saul Morris S. 2000).
The risk of livelihood failure determines the level of vulnerability of a household to
income, food, health and nutritional insecurity. The greater the share of resources
devoted to food and health services acquisition, the higher the vulnerability of the
household to food and nutrition insecurity. Therefore, the livelihoods are secure when
households have secure ownership of or access to resources and income earning
activities including reserves and assets, to off-set risks, ease shocks and meet
contingencies (Chambers 1995).
Food and nutritional security are subsets of livelihood security; food needs are not
necessarily more important than other basic needs or aspects of subsistence and
survival within households.

Food insecure households deal with a range of

requirements, including immediate consumption and future capacity to produce.


2.2.4

Livelihood

DFID (2007) defines livelihood as comprising the capabilities, assets (including both
material and social resources) and activities required for a means of living.

livelihood is sustainable when it can cope with and recover from stresses and shocks
and maintain or enhance its capabilities and assets both now and in the future while
not undermining the natural resources base. In order for food security to prevail there
should be livelihood resources or assets. Livelihood resources or assets include both

tangible and intangible assets that allow house to meet their needs.

These are

enumerated below as:


Natural Capital consist of natural resource stocks from which resources flows useful
for livelihoods are derived (e.g land , water, wildlife, biodiversity and environmental
resources).
Social Capital is the quantity and quality of social resources (e.g networks,
memberships in groups, social relations and access to wider institutions in society)
upon which people draw in pursuit of livelihoods. The quality of the networks is
determined by the level of trusts and shared norms that exists between the network
members.

People use the networks to reduce risks, access services, protect

themselves from deprivation and to acquire information to lower transaction costs.


Human Capital consists of the skills, knowledge, ability to labour and good health
which are important to the pursuit of livelihood strategies.
Economic/Financial Capital is the financial resources (e.g savings, credit,
remittances, pensions, etc), basic infrastructure (e.g transport, shelter, energy,
communication and water system), production equipment and the means that enable
people to pursue their livelihoods.
The State also plays a major role of not only providing services but also providing
safety nets, change policies or limit freedoms that can be positive or adverse effects
on livelihood systems.
Similarly, Formal Civil Societies (i.e. NGOs, CBOs, parastatals and churches) can
provide support of enabling conditions or constrain opportunities for households.
Informal Civil Society (I.e. informal community networks) consists of the web of
networks within which individuals and households strategies that people pursue.
These networks can have positive or negative influences on the livelihood strategies
that people pursue.

The Private Sector can also create or limit households

opportunities. It is important in any analysis to take these various institutions into


account in the formulation of any sustainable interventions.
Livelihood Security Strategies: It has been observed that in most cases households
combine their livelihood resources and utilize their institutional relations and adopt a

number of different livelihood strategies.

These strategies include among other

things, various types of production and income-generating activities and or processing


and exchange activities.

In this case it is clear that households have different

livelihood strategy portfolios.


Livelihood Security Outcomes: These are indicators that capture needs or well-being
satisfaction. Nutritional status being the best indicators for overall livelihood security
captures multiple dimensions such as access to food, healthcare and education. This
indicator can complemented by other livelihood security outcomes which include
sustainable access to food, education, health, habitat, social networks, physical safety,
environment as well as life skills capacities. Despite this extensive discussion on the
importance of assets in food security, the DFID in its 1997 White Paper believes that
human rights is paramount in promoting food security. Rights based approaches to
development take as their foundation the need to promote and protect human rights
(those rights which have been recognized by the global community and are protected
by the international legal instruments). These include economic, social and cultural as
well as civil and political rights, all of which are dependant.

This approach is

plausible since the rights based and sustainable livelihood approaches are
contemporary perspectives that seek to achieve many of the same goals; for example
empowerment of the most vulnerable and a strengthened capacity of the poor to
achieve livelihoods hence food security. This approach is holistic as it attempts to
identify the most pressing constraints faced by and comprising opportunities open to
people regardless of where these occur. The frame work helps to organize the various
factors which constrain or provide opportunities to cope with extreme poverty.
However the major problem of the approach is that it has a lot of political
implications. It can be confrontational in countries where human rights are believed
not to be observed.
The overlap between various existing perspectives
a) Social perspectives: This looks at important differences in access, power, etc
between social groups. It also looks at values attributed to different livelihood
assets and outcomes. It also promotes the need of and participation by the
poorest and the vulnerable groups
b) Economic: This deals with the economic environment in which people operate
including asset and economic prices, economic incentives, returns on different

strategies, the local effects of economic policy, production and consumption


decisions and household budgets. It also deals with the economic factors
behind organizational or institutional behaviour.
c) Institutional: This looks at the institutional context of livelihoods, including
the role and performance of structures and the appropriateness of the process
adopted to support the livelihood.

It looks at the quality of governance

systems and the nature of policy-making processes and the local impact of
policy.
d) Environmental: This deals with the impact of livelihood strategies on the
environment; including health, pollution, etc.

It looks at the impact of

environmental factors on livelihood and poverty.


According to DFID the discussion on food security should be premised on:
a) Economic information which looks at:
o Production and consumption levels
o Income (cash or in-kind) and seasonal wages for different tasks
o Non cash costs
b) Assets which looks at:
o Productive assets and household labour
o Access to training and education
o Access to infrastructure
c) Livelihood Strategies which include remittances received:
o
o
o
o
o

Remittances received
Migration patterns
Income by source of various household members
Access to rural resources for urban dwellers ( and vice versa)
Seasonal variation in coping strategies

d) Access to services which include the following:


o Service providers
o Standards of delivery
o Fees and charges
2.2.5

Theories of inflation

In discussing poverty issues one of the important economic prices is inflation.


According to the United Nations Department of Statistics, inflation is measured using

the Consumer Price Index (CPI). CPI is defined as the average of the prices of a wide
range of goods purchased by an average household.
CPI is generally calculated as:
Costofamaarketbasketofproducts atcurrenty earprices

CPI = cos tofthesamemarketbasketofproduc tsatbaseyearprices x100

The market basket is a representative bundle of goods of the typical consumer, such as
sample of food items, clothing, other purchases, household bills, medical expenses,
education etc.
The year-on-year inflation rate is given by the percentage change in the index of the
relevant month of the current year compared with the same month in the previous
year.

Annual rate of inflation =

CPIinagivenyear CPIinprevi ousyear


x100
CPI int heprevious year

The month-on-month inflation rate is given by the percentage change in the index of
the relevant month of the current year compared with the index of the previous month
in the current year.
The direction and magnitude of the rate of change in year on year inflation for a
relevant month depends on how both the numerator and the denominator (the base)
change during the same month in the current and previous year.
The Central Statistical Office (CSO) is responsible for compiling and publishing the
Consumer Price Index (CPI) and in Zimbabwe. The CPI basket weights are derived
from the Income Consumption and Expenditure Survey (ICES) and are classified in
accordance with the international guidelines. The classification is based on Individual
Consumer by Purposes (COICOP). There are 428 items in the CPI basket.
The adoption of the COICOP classification follows the harmonization project of
Consumer Prices Indices in the SADC region. The harmonization project enables
inter country comparisons of the CPI and the rate of inflation.

Types of inflation rates


Henderson and Poole (1991) argue that: basically there are three types of inflation
namely creeping inflation, double digit and hyperinflation.
Creeping inflation: is when three is a steady rise in the general price level. It ranges
from 1 to 9%. This type of inflation is generally acceptable.
Double digit inflation: is that inflation which has reached double figure level,
ranging between 10 and 99%. This level of inflation is unacceptable.
Hyperinflation: This inflation is the worst and ranges from hundred and beyond, in
other words it is out of control, a condition in which prices increase rapidly as
currency loses its value. There is no universally accepted definition of hyperinflation.
However, the definition used by most economists is an inflationary cycle without any
tendency toward equilibrium. In this case a vicious circle is created in which more
and more inflation is created at the beginning of each cycle. Despite a great deal of
debate about the root causes of hyperinflation, more often than not, it becomes visible
when there is an unchecked increase in the money supply or drastic debasement of
coinage, and is often associated with wars (or their aftermath), economic depressions
and political or social upheavals.
According to the International Accounting Standard 29 the following four signs show
that an economy may be in hyperinflation:
1. When the public economy prefers to keep its wealth in non-monetary assets or
in a foreign currency which is stable. The economy also experiences a drastic
fall in purchasing power leading to large amounts of local currency held to be
immediately invested to maintain purchasing power.
2. When the public value monetary amounts not in terms of the local currency
but in terms of a relatively stable foreign currency. Consequently local prices
may be quoted in that foreign currency.
3. When the credit transactions take place at exorbitant prices in order to
compensate for the expected loss of purchasing power during the credit period,
regardless of the length of the period.

4. When most of the economics prices that is, interest rates, wages and goods
prices are linked to a price index and the cumulative inflation rate over three
years approaches or exceeds 100%.
The Wikipedia Free Encyclopaedia gives historical examples of countries that
experienced hyperinflation. In Germany in the early 1920s the rate of inflation hit
3.25 x 106 percent per month (prices doubled every 49 hours) and Greece during its
occupation by German troops (1941-1944) with 8.55 x 10 9 percent per month (prices
doubled every 28 hours).

The most severe known incident of inflation was in

Hungary after the end of World War II at 4.19 x 10 16 percent per month (prices
doubled every 15 hours). More recently, Yugoslavia suffered 5 x 10 15 percent per
month (prices doubled every 16 hours) between 1 October 1993, and in Africa,
Zimbabwe. In most case hyperinflation is associated with paper money since it is
very simple to increase the money supply with paper money. The method is simply to
add more zeros to the plates and print or even stamp old notes with new numbers.
2.2.6

Effects of Hyperinflation on real income and purchasing power

The World Bank International Comparison Programme (ICP 2006) real income is
defined as nominal income adjusted for the effects of inflation. It is calculated aas
follows:

Real income =

No min alincome
x100
CurrentCPI

CPI further defines purchasing power as the value of a currency expressed in terms of
the amount of goods or services that one unit of that currency can buy. Purchasing
power is important because, all else being equal, inflation decreases the amount of
goods or services you would be able to purchase. For example, the Purchasing power
of the dollar can be determined by comparing an index of consumer prices for a given
base year to the present. If inflation rises faster than the households nominal income,
purchasing power and real income will decline.
Hyperinflation unlike inflation, which is widely considered to be normal in healthy
economy, is always regarded as destructive. It drastically reduces the purchasing

power o households real income and distorts the economy in favour of extreme
consumption and hoarding of real assets, leading to the monetary base whether specie
or hard currency to flee the country, and makes the afflicted area unfavourable to
investment. It reduces the real value of households wealth in the same way it reduces
the real value of their incomes.
According to Wikipedia Encyclopaedia, hyperinflation is obviously a monetary
phenomenon, models of hyperinflation hinges on the demand for money. According
to economists both a rapid increase in the money supply and an increase in the
velocity of money, either one or both of these pro up inflation and hyperinflation. A
dramatic increase in the velocity of money as the cause of hyperinflation is central to
the crisis of confidence model of hyperinflation, where the risk premium that sellers
demand for the paper currency over the nominal value grows rapidly. The second
theory is that there is first a radical increase in the amount of circulating medium,
which can be called the monetary model of hyperinflation. In either model, the
second effect then follows from the first either too little confidence forcing an
increase in the money supply, or too much money, destroying confidence.
In the confidence model, some event, or series events, such as defeats in battle, or a
run on stocks of the specie which back a currency, removes the belief that the
authority issuing the money will remain solvent whether a bank or a gvt.