Exchange rate overvaluation and agricultural performance in Zimbabwe: 1965-1985

Abstract

In the 1960s and early 1970s, most African countries followed relatively passive exchange rate policies. This was the period when the Bretton Wood System was still in force, and the relative price (exchange rate) stability prevailed in both developed and developing countries. However, in 1972 the Bretton Wood System broke down and a number of developed countries adopted floating exchange rate systems. Most African countries opted not to float their currencies, but instead preferred to peg their currencies to a single currency (e.g., the US dollar) or to a basket of currencies. With the benefit of hindsight, this appears to have been a mistake, because confronted with the oil crisis, increased inflation, and falling terms of trade, for many countries the exchange rate became overvalued. Prices were slowly getting out of line and export competitiveness was being lost. In the 1970s, no one was alarmed because any disequilibrium in balance of payments was covered by capital inflows from abroad.