Zimbabwe is best remembered as the country that clocked up a jaw-dropping inflation rate of 231 million percent a year.
That insanity came abruptly to an end in 2009 when the country adopted the US dollar and South African rand as the official means of exchange.
How did it get to this Olympian inflation rate? The same way it always happens, by rampant money printing.
Less well known is what happened immediately after this. The ruling Zanu-PF party lost its outright majority in the 2008 election and was forced to share power with the opposition Movement for Democratic Change (MDC). In came opposition member of parliament Tendai Biti as finance minister, and in a 30 minute speech to parliament he announced the end of virtually any form of government interference in the economy. No more exchange controls, no more price controls, no more import permits needed. Government was getting out of the business of trying to regulate the economy.
Within weeks, shortages of fuel and food had vanished and once-empty supermarkets were stacked to the roof. Inflation, which just a year previously had been doubling every few hours, fell to minus 7 per cent. Within two years, Zimbabwe’s inflation rate was the lowest in the southern Africa region. The economy grew at an average 8% a year over the next four years, albeit off a bombed-out base. Zimbabweans could scarcely recognise the country in which they were living. Entrepreneurs were making money hand over fist. They were buying cars, going on overseas holidays and sending their kids to the best private schools.
This free market experiment came to an end in 21013 when Mugabe won outright control in an election most believe was stolen, and reverted to form, reintroducing exchange and other controls.
If crisis makes its own opportunity, here is a case in point. Zimbabwe had hit such a low ebb, it was ripe for the kind of radical free market economics that frighten the bejeezus out of other countries.
Regulators have an innate fear of anything that moves freely and without hindrance. Take exchange controls, which we Africans have endured our entire lives. South Africa has had exchange controls since the apartheid years, a policy mindlessly extended under the African National Congress-led government.
The great fear is that removing exchange controls will lead to a flight of capital and all the attendant dangers that implies to the balance of payments, inward investment and tax revenue.
Zimbabwe’s experience is quite the opposite. Government tax revenue shot up nearly eight-fold in four years, and there was no shortage of foreign currency. The balance of payments did deteriorate, but this was partially offset by much higher inward investment flows.
MDC opposition member of parliament Eddie Cross, an economist by training, says this flowering of economic prosperity should be heeded by other countries. “We could solve Venezuela’s problems (with inflation and shortages) in an hour,” he told Moneyweb.
That’s right. He is saying we should look at Zimbabwe as a model for economic reform.
Two months ago, Robert Mugabe was deposed in a soft coup after 37 disastrous years at the helm. His successor, Emmerson Mnangagwa, through cut from the same party political cloth as Mugabe, made a decent impression at the recent Davos confab, promising sweeping reforms and respect for democratic outcomes. Though as Cross points out, he hasn’t followed this up with substantive reforms.
Zimbabwe’s next election comes up in June, and there is a real chance the country will have an opposition party in government, or at least a coalition. That holds out the exciting prospect of a free market finance minister such as Tendai Biti once again taking over the country’s purse strings.
If that’s the case, Zimbabwe, with a population among the best educated in Africa, is a miracle waiting to happen. I’d put money on it.