How to cut inflation by 230 million percent

Nine months ago when the power-sharing government in Zimbabwe came into office, I must admit that I was pretty darn skeptical that they could meet their hyper-inflation-cutting goals. After a complete economic collapse, inflation last year about this time had reached 230 million percent; GDP "growth" was negative in all senses of the word. It ...

By , International Crisis Group’s senior analyst for Colombia.
DESMOND KWANDE/AFP/Getty Images
DESMOND KWANDE/AFP/Getty Images
DESMOND KWANDE/AFP/Getty Images

Nine months ago when the power-sharing government in Zimbabwe came into office, I must admit that I was pretty darn skeptical that they could meet their hyper-inflation-cutting goals. After a complete economic collapse, inflation last year about this time had reached 230 million percent; GDP "growth" was negative in all senses of the word. It was in this nasty environment that the new finance minister, Tendai Biti, came along and began what few would argue is the hardest job in the world. 

Now less than a year later, he was in Washington to tally the progress (and damn, Milton Friedman would be proud...)

- Inflation is completely gone, thanks to the abolition of the Zimbabwean currency in favor of a basket of other notes (including the dollar and the South African Rand). The highest rate seen in 2009 was a slim 1 percent.

Nine months ago when the power-sharing government in Zimbabwe came into office, I must admit that I was pretty darn skeptical that they could meet their hyper-inflation-cutting goals. After a complete economic collapse, inflation last year about this time had reached 230 million percent; GDP "growth" was negative in all senses of the word. It was in this nasty environment that the new finance minister, Tendai Biti, came along and began what few would argue is the hardest job in the world. 

Now less than a year later, he was in Washington to tally the progress (and damn, Milton Friedman would be proud…)

– Inflation is completely gone, thanks to the abolition of the Zimbabwean currency in favor of a basket of other notes (including the dollar and the South African Rand). The highest rate seen in 2009 was a slim 1 percent.

– The money supply has been cut by 1,000 percent  — effectively decapitating a nasty forex trade that the money-printers were previously using to enrich themselves

– Capacity utilization in the economy is up from 4 percent to nearly 50 percent, with some industries, including food and beverages, as high as 95 percent.

– GDP growth this year was probably around 4 percent; Biti expects 6 percent in 2010. 

Of course, it’s not all rosy. But just think about that for a second: the world’s most free-fall economy — the only one in history to see negative economic growth for a decade in which it was not at war — today is almost normal. In fact, it has the largest stock exchange on the continent, capitalized at $4 billion. 

Biti has an interesting theory about this.  The collapse of the economy, he said today at a Freedom House event, was in fact the reason why President Robert Mugabe’s government finally had to accept the power-sharing agreement in the first place. "Everything else they could deal with — the opposition, they could beat us up," he said, "but you cannot implement violence against the economy."

Now that progress is being made, it’s time for the equation to work the other way: "the cornerstone of any economic development is democracy." In Africa, he argued powerfully, "without democracy you cannot sustain the lives of the people." No matter how impossible the economy seemed, it’s the politics that will still prove the harder task.

Elizabeth Dickinson is International Crisis Group’s senior analyst for Colombia.

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