Hyperinflation in Developing Countries (Essay Sample)

Hyperinflation in Developing Countries
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Hyperinflation in Developing Countries
Hyperinflation is the excessive, rapid, and out of control increases in the prices of goods and services in an economy. Hyperinflation rarely occurs in developed countries, but there are several instances throughout history where economic policies and bad governance have led to hyperinflation in developing countries. While it is normal for developed countries to have inflation rates of about 2% per year if inflation rises rapidly, it may lead to hyperinflation. Several factors can cause hyperinflation, but the most common are excessive money supply, loss of confidence in the monetary system, and extreme price controls.
Developing countries have experienced hyperinflation during periods of depression and severe economic turmoil. A depression, which may last for several years, is characterized by high unemployment rates, lower production, less available credit, and personal and business bankruptcies. To increase the flow of money in the economy, Central Banks usually print more money to encourage local financial institutions to lend to businesses and individuals. However, the increase in the money supply should be supported by economic growth; otherwise, the excessive supply of money will cause hyperinflation. For example, Zimbabwe experienced hyperinflation between 2004 and 2009, mainly due to the excessive printing of money by the central bank coupled with a contracting economy (Amadeo, 2020). At the time, Zimbabwe was engaged in a war in Congo, and the government decided to print more money to fund the war. However, during the same period, exports and economic output were meagre, causing the prices of goods and services to spiral out of control. Therefore, excessive printing of money by central banks can lead to hyperinflation.
Hyperinflation is also caused by a lack of confidence in the monetary system. During times of war, companies selling goods outside and within the country usually include a risk premium in their pricing, leading to exponential price increases. Additionally, poor governance may also cause citizens to lose faith in the monetary system and start hoarding valuable goods and commodities. This causes an increase in prices due to the nature of supply and demand. The lack of confidence in a government can also be reflected in investment outflows as international companies exit the country. This causes the value of the local currency to depreciate as the international companies sell their investments in the