Inter-temporal Changes in Well-being During Conditions of Hyperinflation: Evidence from Zimbabwe

Abstract

In the last decade, the economy of Zimbabwe underwent unprecedented stress and change. Starting in 2000, land reform began with farm invasions. This process eventually evolved into a government-guided fast-track reform. During this process, the international community imposed sanctions, and these factors, together with a severe drought, let to a reduction in availability of the main food staple. Inflationary pressures built and were exacerbated by foreign exchange shortages. The economy slowed due to debt overhang and dwindling investment caused in part by increased uncertainty. Several factors contributed to deterioration of the value of the Zimbabwean Dollar and by mid-2007, hyperinflation became rampant. The economic crisis began to abate in 2008 and political agreements signed in 2008 and implemented in 2009 led to further stabilisation. As Zimbabwe moves forward, it is important to understand the conditions faced by the poor, and how they have changed during the period of hyperinflation. To do so, this paper uses 2001 and 2007/8 nationally representative household data and an asset index to avoid reliance on money-metric measures during the period of hyperinflation. An asset index is constructed using polychoric principal component analysis for both periods. A profile of well-being in 2001 is obtained using consumption expenditures, which helps calibrate asset index poverty lines. The 2001 data are used to generate small-area poverty estimates for both survey years and to validate the robustness of the findings from the asset index. The asset index holds its own when compared with standard consumption expenditure methods and small-area estimation-based predictions, providing confidence in our findings. Urban asset poverty declined during 2001/7, but extreme poverty increased. Rural asset poverty and extreme poverty worsened between 2001 and 2007. For the best-educated households, poverty increased significantly. Conditions of communal and resettlement workers deteriorated, reflecting worsening economic conditions in rural areas.