Hyperinflation – An Introduction
Hyperinflation affects the economic wellbeing of a nation’s citizens and derails economic growth plans. In economics, hyperinflation connotes a situation where the prices of goods and services rise exponentially and uncontrollably over a specific period. Recent incidences of uncontrolled inflation in developing nations such as Zimbabwe and Venezuela depict the causes and effects of hyperinflation. Unregulated inflation encumbers economic production, debilitates access to essential resources such as food and water, and weakens a nation’s socioeconomic position in the international sphere. In developing nations, hyperinflation results from a combination of economic mismanagement and ineffective fiscal strategies, such as uncontrolled printing of money.
Mismanagement of Economic Resources
The misuse and mismanagement of economic resources create and drive hyperinflation in most developing countries. However, one can only consider a nation’s economy as depictive of hyperinflation if the inflation rate exceeds acceptable guidelines and affects the price of goods and commodities. An examination of current developing nations with heightened inflation depicts how economic mismanagement causes hyperinflation. For instance, Zimbabwe experienced heightened inflation due to its relatively high national debt and the associated decline in economic output. While he inherited a strong economy in 1980, Zimbabwe’s former ruler Robert Mugabe sanctioned the repossession of white-owned farms – and subsequent redistribution to African individuals – a practice that affected the nation’s agricultural productivity and, by extension, reduced its economic growth (McIndoe-Calder, 2018). Similarly, Venezuela’s former President Hugo Chavez executed his Bolivarian Missions programs at the expense of economic growth and stability (Pittaluga, Seghezza & Morelli, 2020). Venezuela’s high level of corruption did little to lessen the effects of poor economic planning and, in this way, amplified the rising inflation rate. Therefore, a combination of economic mismanagement, poor leadership, and high corruption levels drives hyperinflation in developing countries.
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Ineffective Fiscal Policies
Another factor – ineffective fiscal policies – worsens inflation in developing countries and causes hyperinflation. In most instances, efforts to regulate inflation and mediate extant socioeconomic problems such as poverty and high illiteracy levels increase government expenditure and necessitate new economic strategies. Sadly, most developing countries embrace ineffective fiscal methodologies, such as printing more money, to resolve existing financial difficulties. In turn, uncontrolled money-minting activities worsen inflation, drive a correlated loss in confidence in associated fiscal systems, and eventually cause hyperinflation (Armstrong, 2019; Beretta, 2020). If one reviews Zimbabwe’s hyperinflation, they would note that unrestricted printing of money caused an increase in the prices of goods and services, drove a reduction in the foreign reserves, and decreased the government’s ability to subsidize goods (Kavila & Le Roux, 2017). Similarly, Venezuela debased its currency when it printed more money to meet its government’s rising expenditure. Therefore, poor fiscal policies intensify inflation and increase the possibility of hyperinflation in developing countries.
Hyperinflation in developing nations occurs due to the formulation and subsequent execution of poor fiscal policies and the mismanagement of available, but limited, economic resources. In itself, hyperinflation entails an increase in a nation’s inflation rate that exceeds normal parameters – in this case, two to five percent inflation rate per month – and causes a massive increase in the prices of goods and services. A developing nation with hyperinflation typically creates sociopolitical structures or policies that reduce economic productivity and lessen access to essential goods. In response, most fiscal regulation systems mint more money and, in this way, create or worsen hyperinflation. Ultimately, developing nations need good leaders to decrease the chances of hyperinflation in their economies.
Armstrong, P. (2019). An MMT perspective on macroeconomic policy space. Real-World Economics Review, 89, 32-45.
Beretta, E. (2020). The fourfold relation between the essence of money, inflation, bubbles, and debt – A theoretical macrofounded analysis. Economic Notes, 49(3), e12166.
Kavila, W., & Le Roux, P. (2017). The role of monetary policy in Zimbabwe’s hyperinflation episode. African Review of Economics and Finance, 9(2), 131-166.
McIndoe-Calder, T. (2018). Hyperinflation in Zimbabwe: Money demand, seigniorage, and aid shocks. Applied Economics, 50(15), 1659-1675.
Pittaluga, G. B., Seghezza, E., & Morelli, P. (2020). The political economy of hyperinflation in Venezuela. Public Choice, 1-14.
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