Sunday, April 06, 2008

Black (Real) Market to the Rescue in Zimbabwe

ZIMBABWE--With inflation estimated at 200,000% - easily the highest in the world - Zimbabwe's currency is barely worth the paper it's printed on (see chart above). (The largest Zimbabwean note, 10 million dollars, can't buy more than a couple of sodas.) Foreign currency runs this economy now, mainly the U.S. dollar and the South African rand, nearly all of it traded on the black market. (MP: Hey, somebody wants the USD!)

Remittances from Zimbabweans living overseas drive the economy, pumping as much as $1 billion in foreign currency into the country each year, nearly all of it coming through the black market. "There is absolutely no way that the economy could function without the inflows of money via the black market," said Tony Hawkins, a leading independent economist in Harare.

Comment: What would 200,000% inflation actually mean? It would translate to an hourly inflation rate of about 23%, and a daily rate of about 550%. An item that costs $10 today would cost $65 tomorrow. Prices would be doubling about every 4 hours. In other words, if you're planning a leisurely dinner at a restaurant, you might want to pay in advance, to avoid a possible doubling of menu prices by the time you're done!

There's also a lesson here about the power, adaptability and resiliency of the market. Regardless of how bad the official economy is in countries like Zimbabwe due to a "government disaster," and no matter how serious any natural disaster is (earthquake, hurricane, etc.), the market always survives and prospers and actually prevents the situation from being even worse! Without Zimbabwe's black market money dealers, and without "price gougers" after a hurricane, things would be a lot worse.


(HT: Ben Cunningham)

13 Comments:

At 4/06/2008 9:21 AM, Anonymous Anonymous said...

Will the incompetent, carbuncle, Mugabe relinquish power?

What level of degradation can a leader impose on his country that will illicit a response from the international community beyond a few noises? If the UN cannot address any problem even genocide, just why isn't it shut down? Why does the US keep shovelling money at this moribund organization?

 
At 4/06/2008 10:00 AM, Anonymous Anonymous said...

About 300 people rallied Sunday outside Cambodia's parliament to protest against double-digit inflation and to demand wage increases to deal with soaring food costs.

The protesters, led by Cambodia's main opposition Sam Rainsy Party, carried banners reading: "We want pay raises. Government must stop inflation."

"The current government is unable to curb inflation ... We are pushing them to reduce the prices of essential items or to increase salaries in line with inflation," opposition leader Sam Rainsy told reporters.

Cambodia's inflation cracked into double digits late last year, hovering around 11 percent, driving up the cost of food and other staple goods.

The dollar as the worlds reserve currency is fueling global inflation, while Zimbabwe is just a banana republic with a printing press, the US in not all that different and the only reason it can pull this crap is due to the dollar being the worlds reserve currency. This is going to end and when it does Americans may find a mere 10% inflation a back breaker.

 
At 4/06/2008 12:25 PM, Anonymous Anonymous said...

Continental Bank Note
1776

"Not worth a continental"
This 1776 note is typical of the paper money issued by the Continental Congress to pay for the costs of the American Revolution. Due to over-issue and lack of confidence in the government, the notes were soon nearly worthless-"not worth a continental." Eventually, Congress redeemed them at 1/100th of their original value in bonds, which did not mature until 1811.

http://historywired.si.edu/object.cfm?ID=437

Coming again to country near you.

 
At 4/06/2008 12:50 PM, Anonymous Anonymous said...

"We want pay raises. Government must stop inflation."

I'll bet the irony is lost on them.

skh.pcola

 
At 4/06/2008 7:36 PM, Anonymous Anonymous said...

"Black (Real) Market to the Rescue in Zimbabwe"

To the rescue or just prolonging the misery?

 
At 4/07/2008 8:21 AM, Blogger juandos said...

anon @ 7:36 PM says: "To the rescue or just prolonging the misery?"...

Well YOU can always pull some money out of YOUR socialist treasury and bail out a few of the miserable...

Or you can wait until the black market morphs into the real, everyday market where everyone will get a chance to make something for themselves...

I'm betting that YOU won't do a thing...

 
At 4/07/2008 9:36 AM, Blogger Chris said...

I think you should have done those calculations assuming compound interest (i.e. 200,000 ^ (1/(365*24) )- 1 = 0.14% hourly inflation rate).

 
At 4/07/2008 10:13 AM, Anonymous Anonymous said...

juandos my miserable little friend, I have no interest in bailing out anyone with my money or your money.

On the other hand my plate is full already providing a "hand up" (quietly and privately, with my own money) to a few unrelated people that are willing to work to better their future.

You see I like to work within the law and advocating a black market in another country hardly supports equal application of the rule of law and property rights.

Black markets by their nature attract people that are willing, for what ever reason to violate the law. That is why we call them "black markets."

Given that there are likely to be turf battles in a country served by black markets (much like the gang turf wars we see here in the U.S.) how could I or any thinking person be in favor of a black market.

Can you give one post-1950 example of a black market morphing into a real, everyday market in a way that benefited a large percentage of people in the specific country? I didn't think so.

 
At 4/07/2008 3:45 PM, Blogger juandos said...

"On the other hand my plate is full already providing a "hand up" (quietly and privately, with my own money) to a few unrelated people that are willing to work to better their future"...

Sure and the sun rises in the west where you live, right?

"Given that there are likely to be turf battles in a country served by black markets (much like the gang turf wars we see here in the U.S.) how could I or any thinking person be in favor of a black market"...

"Black markets by their nature attract people that are willing, for what ever reason to violate the law"...

Get a grip on reality lad! What law?!?! There's no law in Mugabe land...

I was in Rhodesia when they had real markets and now that Zimbabwe has had years of Mugabe largesse and made a once thriving African bread basket into a starvation hole any market is more market than they have now...

 
At 4/08/2008 8:37 AM, Blogger OBloodyHell said...

> The dollar as the worlds reserve currency is fueling global inflation, while Zimbabwe is just a banana republic with a printing press, the US in not all that different and the only reason it can pull this crap is due to the dollar being the worlds reserve currency. This is going to end and when it does Americans may find a mere 10% inflation a back breaker.

Uh, yeah, sure. Nice to know someone is an unsung expert on Economic theory and all that. Yep.

The US's money supply certainly is increasing noticeably. Problem is, it's not doing what anyone's theory really says it should be doing at this point. So the real fact is, the three main schools are all suffering from a lack of foundation. Keynesianism is bogus, pure and simple. The Austrians say we should have long-since tanked. I'm not sure what the Monetarists are claiming, they aren't saying much at all. Mark? You probably have a better idea what they are saying than I do, they aren't being particularly vocal in the non-professional circles from what I have noticed.

I think the problem is that we're in a phase change, like the one between the Ag economy and the Industrial one. We're well into an IP & Services economy. And few economists seem to have grasped just how different IP is from so-called "real property". I think someone's going to get a Nobel Prize for quantifying that.

We ARE in a "new economy". It just doesn't work the way that everyone thought it did in the 90s.

There are rules.

They just aren't the exact same rules as the old ones.

 
At 4/09/2008 9:13 PM, Anonymous Brad S said...

"And few economists seem to have grasped just how different IP is from so-called "real property". I think someone's going to get a Nobel Prize for quantifying that."

Frankly, all current economic theories are worthless due simply to the number of economic "players" (Brazil, Russia, China for starters) that have come onto the global economic scene. All those players need a reserve safehouse to park their assets, and that is US Treasury bonds.

And that won't change until India and China can both issue a bond the world can halfway-trust. Japan's experiences so far to date suggest that India/China are a LONG way from doing so.

 
At 4/09/2008 9:16 PM, Anonymous Brad S said...

BTW, for a country that continues to bear the scars from the Pol Pot days, 11% annual inflation is quite the accomplishment for Cambodia.

 
At 4/10/2008 4:01 AM, Anonymous scotchcart said...

Zimbabwe certainly tests my mathematical abilities. I get daily inflation at 2.2% compounded over 365 days is 200000%.

$2 on day one is $4000 dollars on day 365 assuming that the rate of inflation stays the same.

It's a good exercise for students (and us) because it is mind boggling - as is doing the maths when you go shopping.

Students might also like to connect up with students at universities within Zimbabwe and ask them to say what they are paying for food (and books) on a daily basis. They might learn a lot about real life economics. Why for example do people still continue to use the currency? Why can you still buy a coke? Why can you still buy a beer? It might be challenging for Zim students to answer these questions too.

 

Post a Comment

<< Home