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07/30/2013

It's green, it's made of paper, and it helps cure inflation.

Zim
Zimbabwe in more inflationary times. (Reuters/Howard Burditt.)

What price national pride?

For a partial answer to the question, consider the case of Zimbabwe.

Beginning in the late 1990s and for much of the following decade, the southern African republic’s economy declined at a rapid rate. “Collapsed” would not be too strong a term.

To cope with a nearly constant series of financial crises, the country’s central bank got in the habit of printing money faster and faster and in ever larger denominations, money whose value kept shrinking as public confidence in the currency eroded or – what was that word again? Collapsed.

By July 2008, the annual inflation rate had reached a truly dizzying level, estimated at 231 million per cent. Prices for consumer goods changed hourly and doubled almost daily.

But the central bank kept churning out Zimbabwe dollars, emblazoned with ever greater quantities of zeroes. In January 2009, the bank released a 100 trillion-dollar note that was briefly worth about $30 U.S. before it, too, became worthless.

In the end, Finance Minister Tendai Biti – an opposition figure in a patched-together coalition government – took what must have been a deeply painful decision. After all, a country’s currency is about as potent a national symbol as exists, even if its value is sinking through the floor.

But Biti did what he felt he had to do. He withdrew Zimbabwe’s own currency from circulation and replaced it with legal tender of a different colour.

You might be familiar with it. It’s called the U.S. dollar.

Now, five years later, almost all financial transactions in Zimbabwe are conducted in American greenbacks, and inflation has practically disappeared. By 2011, the annual inflation rate had fallen to just 3 per cent, and it continues to hover around that level.

This abrupt monetary transformation – from chaos to stability in one simple step – is known to economists as “dollarization.”

Simply put, it’s the replacement of a discredited national currency with banknotes that bear the markings of a foreign land, preferably one that has a better grip on its money supply.

Zimbabwe is by no means the first country to have gone down this road.

It was more than a century ago, in 1904, that the Central American republic of Panama opted to use U.S. dollars as its currency – or just a year after the country conveniently gained political independence from Colombia, so that the United States could dig a certain canal there. Panama also has a “national” tender of its own – the Balboa – but in practice there is no difference between the two currencies. They trade at par.

Nowadays, at least two other Latin American states, Ecuador and El Salvador, also do business in yanquí dollars.

Meanwhile, a welter of Pacific states have also opted to use greenbacks. They include Palau, Micronesia, the Marshall Islands, and East Timor, among others.

At least three other Pacific island-nations – Kiribati, Nauru, and Tuvalu – have followed a similar course but with a different geopolitical slant. They also do business in dollars from a foreign land, but in these cases the dollars are Australian, not American.

Other groups of countries – most notably members of the European Union – have opted to replace their old national monetary units with a common currency, in this case the Euro. Several Caribbean islands also use a shared currency, as do more than a dozen countries in central and west Africa, mostly former French colonies.

In most cases, dollarization seems to work pretty well, although it is no panacea for all of a nation’s ills.

Zimbabwe – where presidential and parliamentary elections are being conducted on July 31 – may have slain the dragon of monetary inflation by opting for the U.S. dollar. But many serious political and economic challenges remain, not to mention one or two tricky logistical problems.

For example, U.S. banknotes circulating in Zimbabwe tend to remain in circulation a long time, becoming both very dirty and extremely limp. Worse, there is no easy way to make small change, a difficulty chronicled not long ago in a New York Times report from Harare. Instead of making change with coins – in Zimbabwe, there are no coins – cashiers in supermarkets tend to divvy out candies or matches or single tablets of Aspirin as a rough means of rounding off each transaction.

It isn’t perfect, but it sure beats an annual inflation rate of 231 million per cent.

Oakland Ross is a foreign affairs reporter for the Toronto Star.

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