Special counsellor to the Centre for Financial Stability in New York and Professor of Applied Economics and co-director of the Institute for Applied Economics, Global Health, and the Study of Business Enterprise at the Johns Hopkins University, is a mark of honour for Professor Steve Hanke, is also a contributor at Forbes. By this standard, Hanke who is among the leading world experts on measuring and stopping hyperinflation. He has been studying Zimbabwe for many years. He speaks to our Washington DC-based correspondent Pearl Matibe (ND) about the changing landscape of Zimbabwe’s economy. Below are the excerpts:
By Pearl Matibe
ND: Zimbabwe’s in a hole, how do we dig ourselves out?
SH: The best way to dig out of the hole in Zimbabwe is for the government to get out of the way, so that Zimbabweans can dig. If the government stopped trying to control Zimbabweans, they would dig pretty fast.
ND: Zimbabwe’s economy is quickly and sharply falling apart and in need of a major overhaul. You’re an applied economist. In layman’s terms and for the benefit of the Zimbabweans that may not have studied economics, what’s the difference between an economist and an applied economist?
SH: What differentiates many economists from applied economists is that economists tend to spend most of their time and energy thinking about economic problems and the theories and tools that might be used to solve them. Applied economists apply the theories and tools of economics to solve problems. There is both an art and a science involved in the application. Let’s say the distinction is a bit like the difference between an architect who designs a building and the builder who actually builds the building.
ND: What do you find more valuable in your day as you measure hyperinflation?
SH: Alas, the word “hyperinflation” is thrown around carelessly and misused frequently in the financial Press. Indeed, the debasement has gone to such lengths that the word ”hyperinflation” has almost lost its meaning. The most valuable thing in measuring hyperinflation is first understanding what hyperinflation is. I use high-frequency data to measure inflation in countries where inflation is elevated; I have been able to refine Phillip Cagan’s 50% per month hyperinflation hurdle rate that was adopted back in 1956. With improved measurement techniques, I now define a hyperinflation as an inflation in which the inflation rate exceeds 50% per month for at least 30 consecutive days.
ND: You’re also a senior fellow and director of the Troubled Currencies Project at the Cato Institute in Washington, DC Briefly, what is this project and what’s its relevance to Zimbabwe?
SH: The Troubled Currencies Project was founded to solve the following problem: For various reasons — ranging from political mismanagement, to civil war, to economic sanctions — some countries are unable to maintain a stable domestic currency. These ”troubled currencies” are associated with elevated rates of inflation, and in some extreme cases, hyperinflation. Often, it is difficult to obtain timely, reliable exchange-rate and inflation data for countries with troubled currencies. To address, this my Project collects black-market exchange-rate data from these troubled currencies and estimates the implied inflation for each country.
In the case of Zimbabwe, the Trouble Currencies Project has tracked both Zimbabwe’s first episode of hyperinflation in November 2008 and its second episode in September 2017. In both cases, Zimbabwe’s monthly inflation rate exceeded the 50% per month threshold for 30 consecutive days. I am proud to say that I, along with my team, were the ones who accurately measured both of these hyperinflation episodes and published the results in scientific journals.
ND: Why should people be worried about Zimbabwe’s inflation?
SH: I would write a book on this topic. Lacking time or space, I will simply say that inflation is a form of State-sponsored theft. Just ask anyone who has been forced to accept a bond note or an RTGS if they haven’t been robbed by the government.
ND: In 2008, you wrote a report that the source of Zimbabwe’s hyperinflation is the Reserve Bank of Zimbabwe. From recent assertions in the news that may still be the case. The question everyone would like an answer to is how do we stop the hyperinflation?
SH: There are various ways, but one of the most reliable ways is the currency board system, in which a local currency becomes a clone of an anchor currency. I stopped a big hyperinflation in Bulgaria in 1997, when I was the President’s adviser, by designing and introducing a currency board. The hyperinflation peaked at 242% per month. The currency board law was introduced, and with that the lev began to trade freely at a fixed exchange rate with the German mark. Each lev was backed 100% by German mark reserves. So, the lev was as good as a mark. The hyperinflation stopped within hours.
The other sure-fire way to stop a hyperinflation is by dollarising. I have done this in Montenegro in 1999, when I was the President’s adviser and in Ecuador in 2001, when I was the Finance minister’s adviser. By eliminating the local currency, a hard budget constraint and discipline are put into the fiscal system, because the government can no longer go to the central bank and force it to print money to finance government expenditure. So, hyperinflation stops immediately. The problem in Zimbabwe is that the government abandoned dollarisation whenever it started using bond notes and RTGS. The result has been a disaster. Indeed, high inflation has resulted. I measure it today at 152% per year.
ND: As a leading world expert on measuring and stopping hyperinflation do you think the 2% tax is the right first step and is it likely to work?
SH: The 2% tax was a terrible policy blunder. It was a spark that started the most recent economic wildfire in Zimbabwe.
ND: It’s not the only measure, is it? We’re hearing of more austerity measures to come.
SH: No one knows what will come. The government has no economic plan. Indeed, I don’t think the authorities know what the word ”plan” means.
ND: How does the new Finance minister, Prof. Mthuli Ncube dig the country out of this hole and who is his best aid? The Reserve Bank, private sector or should it be borrowing more from Afreximbank and GemCorp at this time? Is there not a limit to how much the Zimbabwean government can borrow?
SH: I answered the ”digging out of the hole” question earlier. A big problem in Zimbabwe is the Reserve Bank. This corrupt institution should have been mothballed and put in a museum long ago. As for borrowing more money, given the current state of Zimbabwe’s economic incoherent strategy that would not be wise. Borrowing money is only wise when you have a good strategy that will ensure that your borrowed money will be productively used.
ND: What does Zimbabwe need to do immediately to show “fiscal discipline?” And in the short-medium term?
SH: Mothball the Reserve Bank, and forbid the government from issuing any kind of quasi-monies, like bond notes and RTGSs.
ND: Does the economic turmoil in Zimbabwe threaten the region? If so, in what way?
SH: No. Zimbabwe’s economic turmoil is homegrown and hurts Zimbabweans, and no one else.