Plano Real
Encyclopedia
The Plano Real was a set of measures taken to stabilize the Brazilian economy
in early 1994, under the direction of Fernando Henrique Cardoso
as the Minister of Finance, during the presidency of Itamar Franco
.
Its architects include, among many others, Edmar Bacha, Pérsio Arida
, André Lara Resende, Gustavo Franco
, Pedro Malan
, Winston Fritsch and Francisco Pinto.
("URV"), whose value was set to approximately 1 US dollar. All prices were quoted in these two currencies, cruzeiro real and URV, but payments had to be made exclusively in cruzeiros reais. Prices quoted in URV did not change over time, while their equivalent in cruzeiros reals increased nominally every day.
The Plano Real based its actions on an analysis of the root causes of inflation
in the post-military dictatorship
Brazil
that concluded that there was both an issue of fiscal policy
and severe, widespread inertial inflation
.
in nominal terms after a string of failed plans
to control inflation
. It created the Unidade Real de Valor
(Unit of Real Value), which served as a key step to the implementation of the current currency, the real
. At first, most academics tended not to believe that the Plan could succeed. Stephen Kanitz
was the first public intellectual to predict the future success of the Real Plan.
The Plano Real
The currency’s appreciation was crucial to keep inflation under control. Mainly, it assured the supply of cheap imported products to meet the domestic demand and forced domestic producers to sell at lower prices in order to maintain their market shares. This was especially important in the period immediately following the adoption of the new currency, when the sudden drop in inflation caused a surge in demand. The increased imports, therefore, were essential to avoid demand-side inflationary pressures that would undermine the stabilization plan.
Economy of Brazil
The economy of Brazil is the world's seventh largest by nominal GDP and eighth largest by purchasing power parity. Brazil has moderately free markets and an inward-oriented economy...
in early 1994, under the direction of Fernando Henrique Cardoso
Fernando Henrique Cardoso
Fernando Henrique Cardoso – also known by his initials FHC – was the 34th President of the Federative Republic of Brazil for two terms from January 1, 1995 to December 31, 2002. He is an accomplished sociologist, professor and politician...
as the Minister of Finance, during the presidency of Itamar Franco
Itamar Franco
Itamar Augusto Cautiero Franco was a Brazilian politician and the President of Brazil from December 29, 1992, to January 1, 1995. During his long political career, Franco was also a Senator, Mayor, Ambassador, Governor and Vice President...
.
Its architects include, among many others, Edmar Bacha, Pérsio Arida
Pérsio Arida
Pérsio Arida is a Brazilian economist.In the 1970s, he was a part of the student activist movement in Brazil, being arrested and tortured....
, André Lara Resende, Gustavo Franco
Gustavo Franco
Gustavo Franco is a Brazilian economist, born April 10, 1956 in Rio de Janeiro.-Career:Son of Maria Isabel Barbosa de Barroso Franco and Guilherme Arinos Lima Verde de Barroso Franco, who was a friend and assistant of President Getúlio Vargas, and also a member of the first board of Directors of...
, Pedro Malan
Pedro Malan
Pedro Sampaio Malan , is a Brazilian economist and former Minister of Finance for Brazil.-Early life:Pedro Sampaio Malan was born in 1943 in Petropolis, a town in honor of Dom Pedro II to the north of Rio de Janeiro...
, Winston Fritsch and Francisco Pinto.
The problem
According to economic academics, one of the causes of inflation in Brazil was the inertial inflation phenomenon. Prices were adjusted on a daily basis according to changes in price indices and to the exchange rate of the local currency to the U.S. dollar. Plano Real then created a non-monetary currency, the Unidade Real de ValorUnidade Real de Valor
The Unidade Real de Valor, or URV , was a non-monetary reference currency created in March 1994, as part of the Plano Real in Brazil...
("URV"), whose value was set to approximately 1 US dollar. All prices were quoted in these two currencies, cruzeiro real and URV, but payments had to be made exclusively in cruzeiros reais. Prices quoted in URV did not change over time, while their equivalent in cruzeiros reals increased nominally every day.
The Plano Real based its actions on an analysis of the root causes of inflation
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
in the post-military dictatorship
Military dictatorship
A military dictatorship is a form of government where in the political power resides with the military. It is similar but not identical to a stratocracy, a state ruled directly by the military....
Brazil
Brazil
Brazil , officially the Federative Republic of Brazil , is the largest country in South America. It is the world's fifth largest country, both by geographical area and by population with over 192 million people...
that concluded that there was both an issue of fiscal policy
Fiscal policy
In economics and political science, fiscal policy is the use of government expenditure and revenue collection to influence the economy....
and severe, widespread inertial inflation
Inertial inflation
Inertial inflation is a concept coined by structuralist inflation theorists. It refers to a situation where all prices in an economy are continuously adjusted with relation to a price index by force of contracts....
.
The solution
The Plano Real or Real Plan intended to stabilize the domestic currencyCurrency
In economics, currency refers to a generally accepted medium of exchange. These are usually the coins and banknotes of a particular government, which comprise the physical aspects of a nation's money supply...
in nominal terms after a string of failed plans
Timeline of Brazilian economic stabilization plans
The following is a timeline of the Brazilian economic stabilization plans in the "new Republic" era, a period characterized by intense inflation of the local currency, exceeding 2,700% in the period of 1989 to 1990....
to control inflation
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
. It created the Unidade Real de Valor
Unidade Real de Valor
The Unidade Real de Valor, or URV , was a non-monetary reference currency created in March 1994, as part of the Plano Real in Brazil...
(Unit of Real Value), which served as a key step to the implementation of the current currency, the real
Brazilian real
The real is the present-day currency of Brazil. Its sign is R$ and its ISO code is BRL. It is subdivided into 100 centavos ....
. At first, most academics tended not to believe that the Plan could succeed. Stephen Kanitz
Stephen Kanitz
Stephen Charles Kanitz is a Brazilian economist, business consultant, lecturer, professor and writer.-Academic life:He holds a D.Sc...
was the first public intellectual to predict the future success of the Real Plan.
The Plano Real
- introduced a new currency called the real (plural reais) on 1 July 1994, as part of a broader plan to stabilize the Brazilian economy, the short-lived cruzeiro real was substituted in the process.
- enacted a series of contractionary fiscal and monetary policies, restricting its expenses and raising interest rates. By doing so, the country was able to keep inflation under control for several years. In addition, the high interest rates attracted enough foreign capital to finance the current account deficit and increased the country’s international reserves.
- put a strong focus on the management of the balance of paymentsBalance of paymentsBalance of payments accounts are an accounting record of all monetary transactions between a country and the rest of the world.These transactions include payments for the country's exports and imports of goods, services, financial capital, and financial transfers...
,- at first by setting the realBrazilian realThe real is the present-day currency of Brazil. Its sign is R$ and its ISO code is BRL. It is subdivided into 100 centavos ....
at a very high valueExchange rateIn finance, an exchange rate between two currencies is the rate at which one currency will be exchanged for another. It is also regarded as the value of one country’s currency in terms of another currency...
relative to the U.S. dollarUnited States dollarThe United States dollar , also referred to as the American dollar, is the official currency of the United States of America. It is divided into 100 smaller units called cents or pennies.... - later (late 1998) by a sharp increase on domestic interest rates to maintain a positive influx of foreign capitals to local currency bond marketBond marketThe bond market is a financial market where participants can issue new debt, known as the primary market, or buy and sell debt securities, known as the Secondary market, usually in the form of bonds. The primary goal of the bond market is to provide a mechanism for long term funding of public and...
s, financing Brazilian expenditures.
- at first by setting the real
The result
The real initially appreciated (gained value) against the U.S. dollar as a result of the large amount of capital inflows in late 1994 and 1995. It then began a gradual depreciation process, culminating in the 1999 January Brazilian currency crisis, when the Real suffered a maxi-devaluation, and fluctuated wildly. Following this period (1994–1999) of a quasi-fixed exchange rate, an inflation-targeting policy was instituted by new central bank president Arminio Fraga, which effectively meant that the fixed-exchange period was over. However, the currency was never truly "free", being more accurately described as a managed or "dirty" float, with frequent central bank interventions to manipulate its dollar price.The currency’s appreciation was crucial to keep inflation under control. Mainly, it assured the supply of cheap imported products to meet the domestic demand and forced domestic producers to sell at lower prices in order to maintain their market shares. This was especially important in the period immediately following the adoption of the new currency, when the sudden drop in inflation caused a surge in demand. The increased imports, therefore, were essential to avoid demand-side inflationary pressures that would undermine the stabilization plan.