Zimbabwe's Hyperinflation Poses Unique Challenges

Zimbabwe's government estimates its inflation rate was 66-thousand percent for 2007. The African nation suffers chronic food and fuel shortages and rampant joblessness due to its dizzying economic condition. Harvard economist Ken Rogoff explains what causes hyperinflation and what can be done about it?

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ROBERT SIEGEL, host:

This is ALL THINGS CONSIDERED from NPR News. I'm Robert Siegel.

Zimbabwe holds elections this weekend. President Robert Mugabe has run the African nation for 28 years and he's facing his most serious challenge ever. His opponents accuse him of wrecking the economy, which is suffering from hyperinflation, poverty and high unemployment. Zimbabwe's inflation rate is astounding.

A Newsweek correspondent wrote this week that dinner for six at an unassuming cafe there costs 581 million Zimbabwean dollars. Such numbers bring to mind the school-book images of Germany in the 1920s when it took a wheelbarrow full of cash to pay a bill. In two years there, the price of the loaf of bread went from 10 marks to a couple of hundred billion marks. We wondered how such a thing can happen. So we contacted Ken Rogoff, he's a professor of economics at Harvard University.

Professor KENNETH ROGOFF (Economics, Harvard University): Well, it's pretty basic. Usually, governments desperate for money start printing currency, lots and lots of currency and go out buying things. And that makes everybody else's currency worth less and all this money flooding the system drives up the price. We see it in the small and normal times with inflation of a few percent. Our government is printing money all the time. But here we're talking about doubling the money supply maybe every two days, four days.

SIEGEL: Because one consequence of that is that if you've been very prudent and not very adventurous with your money but left it either under the mattress or in a bank account, you could be quite well-off one year and broke a couple of years later.

Prof. ROGOFF: Well, you can wallpaper your room with it, it's not going to be worth much else. I mean, if you don't go out and spend the money right away, it will be worthless. We're talking about situations where the price of everything doubles every couple of days.

SIEGEL: Do you think hyperinflation has an impact on a culture, on an entire society beyond just its economic impact?

Prof. ROGOFF: It's clearly had a profound impact on the Germans. Germany is the most anti-inflation country in the world. There's an incredible national consensus. We never ever want to experience that again. They don't even want 5 percent inflation, much less the five billion billion inflation that they had after World War I.

SIEGEL: Now, the one instance I can recall in my adult life of hyperinflation being controlled was in Serbia, where it have been colossal for quite a while and then somehow it was brought back to Earth. What do you do to stop hyperinflation?

Prof. ROGOFF: Well, the easy thing is you stop printing money and stabilize the central bank. That will work. The problem is that usually the government was doing it for a reason. They were desperate for money. These are usually happening in countries where the government isn't really in control, so the government needs another source of revenue. It has to set out taxes. You have to stabilize things. That's why we're seeing it in Zimbabwe today, a hyperinflation like this with 66,000 percent inflation last year, 100,000 percent reportedly in January. That's a sign that the government has just completely lost control of things.

SIEGEL: But can those numbers be meaningful, or do they really mean that somewhere along before 6,600 inflation - whatever it was - that people just stopped using money and they have been effectively bartering or using foreign currency all the time?

Prof. ROGOFF: Well, fair enough, I have a student from Zimbabwe, and she says she can't figure out how they figure out what the inflation rate is because when her family goes into the stores, there's nothing for sale there. But I think in many of these instances, people - of course, they try to avoid holding any money but the government maintains a monopoly. They insist your wages be paid in the money. So if you go back to World War I Germany, there are these stories that the children would wait at the factory gates on payday. Their father would get paid and then they'd bike as fast as they could to town to try to spend the money.

SIEGEL: Before it's lost too much value.

Prof. ROGOFF: Before it's lost too much value.

SIEGEL: By the way, the Newsweek reporter who described that the meal in the cafe said that the black market rate for the meal in U.S. dollars was $21. If he had gone to the bank and use the official bank exchange rate for Zimbabwean dollars, it would have cost him - in U.S. currency - $19,000 to pay for dinner. So clearly, the underground economy takes over at some point.

Prof. ROGOFF: Well, believe it or not, they have a fixed exchange rate against the dollar in Zimbabwe despite the fact they have this going on with their prices, so it's a bit of a joke. And if you're a tourist, it just means the government just basically taking your money if you're paying for it in dollars. I gather the opposition candidate in Saturday's election has said he will free up the currency if he's elected. That certainly needs to be done as a part of the process of breaking the back of this thing.

SIEGEL: Well, Professor Rogoff - Kenneth Rogoff, Harvard University economist, thank you very much for talking with us.

Prof. ROGOFF: Thank you.

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