08S7B trailblazers

Zimbabwe's Economic Freefall

- Cartoon from The Economist KAL's cartoon 19/3/08 http://www.economist.com/research/articlesBySubject/displaystory.cfm?subjectid=8717275&story_id=10881977
Although the cartoon may have exaggerated figures, the economic situation in Zimbabwe is indeed dire. Inflation is at a record high, and even with wage rises of 300 percent or more, it still cannot keep up with the rate of inflation. Fuel prices have soared so much that some complain that a day's transport to work already consumes their day's wages.

Economic indicators
Unemployment: 50%
Inflation: 60%
Poverty: 75%
Budget overspend: 25%
GDP: projected to shrink between 2 - 5%
Real income: dropped 75% in 10 years

- as provided by BBC (http://news.bbc.co.uk/1/hi/world/africa/978768.stm)

Since bread, sugar and cornmeal are necessities, they have an extremely inelastic demand curve. With the breakdown in domestic production with the seizure of farmland by Mugabe's government, supply is at a all-time low. Furthermore, Zimbabwe does not have the financial muscle to import enough to address the shortage.

To address the shortage and skyrocketing prices caused by the supply curve at the extreme left and a demand curve that is almost vertical, the government imposed a price ceiling that causes the price of goods to become approximately 50% of what the equilibrium price would otherwise be. Since prices for the raw materials are so high, the producers will encounter very high variable cost that is spread over a very small quantity produced. with the price ceiling, they cannot even earn enough to cover their fixed costs, causing them to have huge difficulties in maintaining their "businesses". When the government forces the suppliers to sell the resources at suppressed prices, the supply of raw materials dry up as well.

The extreme shortage in necessities has caused the black market to thrive, where the goods are sold at the black market prices and people profit. In fact, people profit not only from the necessities alone; hyperinflation has resulted in a situation where "those with good connections who can buy hard currency at the official rate and sell it to those who need it at a far higher price". - quoted from http://news.bbc.co.uk/1/hi/business/6922441.stm

Businesses that refuse to sell the goods would be taken over by the Zimbabwe government, and the government is trying to print more money to counteract inflation. But the Zimbabwean dollar is turning out to be the modern day banana notes. 25 million Zimbabwean dollars are now worth 1 pound. Without the proper value in gold in the Federal Reserve, printing extra money just devalues the existing currency in the market.

The only way to solve this problem would be to slowly stabilise the Zimbabwe currency by injecting cash, as well as solve the underlying problem of the corrupt Mugabe government that cares more about itself than the citizens, and of course, the actual situation on the ground has to be addressed as well, with food aid and rationing, and healthcare and sanitation help.

With other humanitarian issues like the Darfur situation, it remains to be seen how much aid the international community is willing to provide to save lives.

References:
http://www.iht.com/articles/2007/02/06/news/zim.php?page=1
http://www.iht.com/articles/2007/08/01/africa/zim.php?page=1

as well as the links in the main text.

posted by R @ 5:28 AM