Zimbabwe Stock Exchange “Benefits” from Austrian Economic Theory


Zimbabwe is in the middle of an economic disintegration, with GDP half of what it was in 2000, and declining for the seventh consecutive year. Ever since President Mugabe’s disastrous land-reform campaign (an entire article in itself), the country’s farming, tourism, and gold sectors have collapsed. Unemployment is said to be near 80%.

Yet the Zimbabwe Stock Exchange (the ZSE) is the best performing stock exchange in the world, with the key Zimbabwe Industrials Index up some 595% since the beginning of the year and 12,000% over twelve months. This jump in share prices is far in excess of increases in consumer prices. While the country is crumbling, the Zimbabwean share speculator is keeping up much better than the typical Zimbabwean on the street.

Mainstream logic fails to explain the coincidence of a rising ZSE and collapsing GDP because it entirely ignores the monetary side of the economy. At this point Austrian economics makes its contribution to our story. According to Austrian Business Cycle Theory (ABCT), the peak-trough-peak pattern that economies demonstrate is not their natural state, but one created by excess growth in money supply and credit. New money is not simply parachuted to everyone equally and at the same time – it is sluiced into the economy at certain initial “entry points.” From these entry points, a number of initial goods are bought by recipients of new money causing a rise in price for these initial goods relative to other goods.

Because entrepreneurs react to this observed but unjustified change in the structure of prices by investing their capital, misallocation occurs. As money-supply growth continues and prices become more contorted, more and more ventures are undertaken that would not be undertaken in a regime without money-supply growth. When, for whatever the reason, money supply finally contracts, the artificial strength in prices that encouraged unprofitable ventures is removed, prices collapse, and large numbers of ventures go bankrupt. Thus we have the recession part of the business cycle, the simultaneous failure of many firms at the same time.

If, as the Austrian theory states, money enters the economy at certain points, it is likely that a nation’s stock market will become a prime beneficiary of any monetary expansion. Fresh money enters the economy first through banks and other financial entities who may invest it in shares, or lend it to others who buy shares. Thus stock prices rise relative to prices of things like food and clothes and will outperform as long as this monetary process is allowed to continue.

This is what we are seeing in Zimbabwe. With the country suffering from Robert Mugabe’s catastrophic policies, increasingly the only means for the government to fund itself has been money-supply growth. This has only exacerbated the economy’s problems. The flood of new money that authorities have created has caused the existing value of money in circulation to plummet, i.e., the prices of all sorts of goods to explode, some rising more than others.

As prices become more misaligned, basic decision-making abilities of normal Zimbabweans are impaired and the day-to-day functioning of the economy deteriorates. Perversely, all of this has forced the government to issue even more currency to make up for budget shortfalls and to buy support. At last measure, the country’s consumer price index was rising (i.e., the purchasing power of currency declining), at a rate of 1,729% a year.

The ZSE is growing some three times faster than consumer prices. This relative outperformance versus general prices is a result of stocks being a chief entry point for the flood of newly created money. Keep Zimbabwean dollars in your pocket, and they’ve already lost a chunk of their value by the next day. Putting money in the bank, where rates are pithy, is not much better. Investing in government bonds is the equivalent of financial suicide. Converting wealth into foreign currency is difficult; hard currency is scarce, and strict rules limit exchangeability.

As for capital improvements, there is little incentive on the part of companies to invest in their already-losing enterprises since economic prospects look so bleak. Very few havens exist for people to hide their wealth from the evils created by Mugabe’s policies. Like compressed air looking for an exit, money is pouring into shares of ZSE-listed firms like banker Old Mutual, hotel group Meikles Africa, and mobile phone firm Econet Wireless. It is the only place to go. Thus the 12,000% year over year increase in the Zimbabwe Industrials.

Our Zimbabwe example, though extreme, demonstrates how changes in stock prices can be driven by monetary conditions, and not changes in GDP. New money gets spent or invested. In Zimbabwe’s case, because there are no alternatives, it is stocks that are benefiting.

This sort of thinking can be applied to the stock markets in the Western world too. Though western central banks have not been printing nearly as fast as their Zimbabwe counterpart, they do have a long history of increasing the money supply. It forces one to ask how much of the growth in Western stock markets over the preceding twenty-five years has been created by a vastly increasing money supply, and how much is due to actual wealth creation. Perhaps stock prices have increased faster than goods prices for the last twenty-five years because, as in Zimbabwe, Western stock markets have become one of the principal entry points for newly printed currency.


John Paul Koning
for The Daily Reckoning Australia



  1. In New Zealand we have had a similar, although less dramatic experience. With vast increases in the money supply over the last few years our housing market and share market have boomed, yet many people believe it has been wealth being created when it is merely the result of inflation of the money supply!

  2. What is likely to be the long term results of such a boom? What posture does an invester operating in such an environment adopt?

    Milton Kamwendo
    October 4, 2008
  3. the performance is largely due to asset bubbles, investors wanting to hedge themselves against inflation, and the fact that the money market is underperforming.
    what could be the economic benefits of a growing stock exchange like the ZSE?

    prechard mhako
    October 21, 2008
  4. John Paul Koning’s article hits the button as far as the pre-dollarisation era.

    Having been a nervous small investor and, thus, very keen observer of the ZSE, I observed that the share prices seemed to be indexed to the street value of the Zim dollar against the US dollar or, more euphemistically and legally correct, the “impled rate” for multi-currency listed ZSE stocks (being in the public domain rather than the charcoal grey street rate). That index sometimes led the money supply growth and probably coincided with it once the RBZ also extended its Open Market Operations to where all the action seemed to be in its fight against financial speculation.
    This is all conjecture, of course, as the street does not keep records!

    However, it is the post-dollarisation era, where new phenomena are emerging, that cannot still be entirely explained by the Austrian Theory, which is more interesting going forward.
    This new era is characterised so far by stagnant economic activity, deflating prices of goods (a steady negative 1+% per month)and a soaring bull market on the ZSE, with year-to-date growth in excess of 300% by end of July 2009.

    The apparent deflation might be explained by the fact that the dollarisation was a big-bang affair in which there was a deliberately set official opening rate for USD that was higher than the street rate. This had the effect of mopping up ZWD in circulation and hence the effective demand in one fell swoop.

    Street prices in the prior period were already inflated with a risk premium and would have come down anyway as brave giant South African retail chains, with a long term regional expansion vision, started moving consumables into Zimbabwe at “purchasing power parity” prices.

    This, by itself, does not explain the continued deflation. Only the “big bang” seems to do this and this is probably consistent with the Austrian Theory.

    However, it also explains why the prodctive stagnation in Zimbabwe is irrelevant, supply having been semi-formally regionalised to South Africa to supplement the informal cross-border trade that was predominant in the pre-dollarisation era (and may still be).

    South Africa needs to solve its own economic recession problems by widenning its regional markets and also has a political interest in ensuring that some modicum of economic turn-around in Zimbabwe is sufficiently visible to stem the tide of cross-border migration which compounds already existing problems in the abscence of a stable basis for the resolution of the Zimbabwean political discourse.

    In short, supply (growth) has been established, albeit with a few jitters, while demand has been choked through big-bang dollarisarion (is there any other?).

    Now for the enigma of the ZSE. With big-bang re-rating, you would expect a similar apparent deflation of prices, at least one-off, since it was already previously indexed to “implied rates”. The question is why is this bourse going completely against the global and local recession perceptions when founded in a stagnant economy? Where are the sources of money suggested by the Austrian Theory coming from, since the Central Bank can no longer print USDs?
    Even if it is argued that the bourse is a leading indicator, 300+% year to date growth is a bit much on the back-drop of an apprent 5% growth in GDP and continued indigestion in the political stabilisation process.

    Comments please!


    Joe Martin Harvey, DPhil.


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