Economics - General

Want a 912% return in one year?

Sound too good to be true? Well, according to the Motley Fool website (“Best market“), Zimbabwe’s stock exchange returned 912% in 2006. The Mises Institute states that between January and the beginning of April 2007, the Zimbabwe stock exchange returned 595%, and looks to continue to be the top stock index in 2007 as well.

You of course have to invest in this market, right?

Not so fast. Zimbabwe’s economy is actually collapsing. According to the Mises Institute:

“Zimbabwe is in the middle of an economic disintegration, with GDP declining for the seventh consecutive year, half what it was in 2000. Ever since President Mugabe’s disastrous land-reform campaign (an entire article in itself), the country’s farming, tourism, and gold sectors have collapsed. Unemployment is said to be near 80%.”

So why is the stock market rising so fast? The answer is hyperinflation. The CIA World Factbook states:

“The official annual inflation rate rose from 32% in 1998, to 133% in 2004, 585% in 2005, and approached 1000% in 2006, although private sector estimates put the figure much higher.”

Thus, if the rate of return in a stock market is 912%, but the rate of inflation is 1000%, when you convert the investment made in Zimbabwean dollars (ZWD) into U.S. Dollars, you will actually be losing 8.8 cents on every dollar invested (assuming currency rates adjust perfectly for inflation and no other factors).

Economic Policy

Economist have often given countries advise as to how to manage their economy. Cut spending. Invest in infrastructure. Balance the budget. Borrow from the IMF. Borrow from the World Bank. Raise taxes. Lower taxes. Increase user fees. Privatize state-run companies. And so on. Some policy recommendations work in some situations and some work in others.

One of the few policy recommendations which always works is the following: don’t print money to finance government projects! Printing large amounts of money devalues a country’s currency, leads to hyperinflation, and greatly distorts investment and saving decisions. Yet Zimbabwe’s president Robert Mugabe is not heeding these warnings. In a recent Washington Post article (“…Print more Cash“), however, Mr. Mugabe vowed to print more money to finance his projects, despite the hyperinflation it is creating.

If I were you, investing in Zimbabwe is not my idea of a good bet.