Hyperinflation in Developing Countries (Essay Sample)

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Hyperinflation in Developing Countries
Hyperinflation is the rapid increase in inflation rates (Calvo, Guillermo and Carlos 1539). High inflation rates result in a rise in nominal prices of goods and devaluation of the domestic currency. Citizens prefer to hold stable foreign currency further leading to depreciation of the local currency. Hyperinflation has occurred in Hungary, Philippines and Zimbabwe in the recent past (Easterly 138). The IMF (International Monetary Fund) has documented 55 previous hyperinflations that took place around the world. Economists’ agree on Cagan’s definition of hyperinflation, as the rapid increase in inflation above 50% in the month of the rapid rise. The description clearly locks out previous rapid inflationary pressures in countries such as Romania, Ecuador and Bolivia. The essay evaluates the causes of hyperinflation in developing nations.
Money Creations
Creation of money to plug persistent state budget deficits and inability to borrow is a primary cause of hyperinflation. The situation compels governments to print more money, to pay debts (Blejer, Mario and Mohsin 380). Higher levels of money supply caused supply shocks resulting in price increments of good. Hyperinflation is common in countries facing political upheavals or the aftermath of war. The war-stricken nations face a lower tax base, resulting in lower revenues to support state expenses. Hungary was left with huge debts after the war and resorted to creating money to pay for the reparations imposed by the Allies. Furthermore, investors’ shy away from government debt instruments further complicating the situation. Consequently, the creation of money to plug state deficits is one of the leading causes of hyperinflation.
Reduced Productivity
Economic contraction and lower productivity are one of the main causes of hyperinflation. The land reforms instituted in Zimbabwe resulted in productivity reduction and economic collapse, resulting in hyperinflation. The redistribution of land to inexperienced farmers led to lower agricultural productivity. Before the reforms, the nation was a net exporter of wheat and tobacco. Moreover, economic reforms undertaken by the state resulted in the contraction of the economy. Before hyperinflation, the natives defaulted on loans advanced leading to the collapse of the banking sector. The USA further imposed economic sanctions on the nation leading to economic collapse. Corruption, civic unrests and government instability significantly undermined the state’s ability to resolve the crisis. The shortages resulted in rapid increase in prices and eventual confidence loss over the domestic currency. Citizens’ transferred capital through the purchase of cross-listed stocks and later resold to get more stable foreign currencies (Végh 20). Consequently, shortages within an economy result in hyperinflation.
Inflation as an Optical Tax
Governments loosen monetary policies massively to achieve devaluation of debts and register a decrease in the tax due. Notably, hyperinflation is used as a form of regressive tax on money due to the projection of money as being less overt than levied taxes. Hyperinflation is used to deform quantitative assessments of the real cost of living prices published view date in retrospect enabling further price hikes. The Governments primarily assume that no difference between inflation taxation and other methods considered conventional (Agénor, Pierre-Richard, John and Eswar 257). The cost of implementing inflation tax is cheaper than the traditional methods and hence more appealing to developing countries. Consequently, inflation taxation is one of the causes of hyperinflation.
Conclusively, hyperinflation is a significant economic cost to the state and the citizenry. The effects of hyperinflation are massive and catastrophic. Money creation to plug state deficits is an important cause of hyperinflation. Moreover, war-stricken nations such as Vietnam and Iraq have suffered hugely from hyperinflation. Fu...