Zimbabwe’s per capita GDP is the third lowest in the world, yet the prices of items in the country—$2 for a Coke, $4 for a jar of peanut butter—is comparable to prices in large cities in the U.S. Why is that? Our pal Michael Hobbes, who was in Zimbabwe working on a human rights research project, answers this question in a new story in The New Republic. Essentially, one of the reasons for this is that Zimbabwe switched from an unstable currency (Zimbabwe dollars) to a stable one (U.S. dollars) without enough stable dollars to go around:
If you woke up tomorrow and found that the U.S. had adopted, say, the yen as its official currency, you would still have a rough idea of what things should cost. If the cafe next door charges 300 yen for a cup of coffee, you know that’s about three bucks. You decide that’s a fair price, you pull the notes out of your pocket and pay.
But switching from a hyperinflated currency to a stable one is not is not like Europe adopting the euro in 2001, or waking up tomorrow and finding all the prices in yen. It is like waking up tomorrow and finding all the prices in pinecones, or hugs. When Zimbabwe adopted the U.S. dollar, prices in the formal economy were doubling every 24 hours, and the actual economy, the one in foreign currencies out back, had been whittled down to just a few extortionate essentials. The relationship between the currency and the economy—that sense of ‘fair’ vs. ‘unfair’ prices—had to be built from scratch.
“People had no sense of the value of a [U.S.] dollar,” Colin says. When the economy dollarized, “stores were just buying up South African products, putting a 100 percent markup on them and putting them on the shelves.”
Also, nearly everything is imported and the country’s politics have driven away investors who could potentially “fuel businesses, the banks, the government, and the population.”