Brazil Economic and Financial Policy Between 1991 and 1998

In the period 1991-98, Brazilian GDP grew on average by 2.7 % per year, a growth rate significantly higher than that recorded in the decade 1981-90 (1.3 %). This has also allowed an average annual increase in income per capita of ‘ 1, 6 % compared to a decrease of 0, 4 % per year in the previous decade. The rate of inflation, on the other hand, increased considerably in the period 1990 – 93, and then dropped to physiological levels also as a result of the application of the Plan real. Also, for the first time in the1995 imports exceeded exports, as a consequence of the real appreciation of the exchange rate and the reduction of import tariffs, especially towards the countries of MERCOSUL (Mercado Comun do Sul). Between 1997 and 1998, Brazil was hit by serious financial and currency crises which at least partially jeopardized the results achieved in previous years.

In recent years, as in many other countries, also in Brazil the economy has had to face an experience of growing regional integration through the agreement with Argentina, Paraguay and Uruguay, which led to the formation of MERCOSUL. In November of 1991the rulers of the four countries of the region met in Asunción to formalize the creation of this agreement, undertaking to gradually reduce the obstacles, of a tariff and non-tariff nature, to trade between Brazil, Argentina, Paraguay and Uruguay, and to establish a common tariff to be applied to imports from third countries. This agreement has been strengthened rapidly, trade between the four countries has grown at very high rates, and MERCOSUL appears today as the most successful regional integration experience in Latin America, as it offers member countries new opportunities for developing countries. exchanges and commercial and productive collaboration.

Brazilian economic policy was conditioned by the need to curb the rate of inflation by means of numerous structural adjustment plans. The logic that inspired these economic policy programs has been different from time to time, and has materialized in various measures. President F. Collor de Mello, elected in 1990, found himself having to face, from the beginning of his mandate, an inflation rate that had rapidly risen to the level of 90.Monthly% in the month preceding its investiture, due to the attempt by operators to anticipate and transfer future anti-inflationary policy to prices. Collor de Mello’s plan was initially tougher than the previous ones: all bank deposits, except for those of very small amounts, were frozen, as were wages and prices, and the level of economic activity suffered immediately. However, in a short time some of the restrictions introduced on prices and wages were circumvented, the promised structural reforms did not materialize and inflation did not slow down, supported by the expansion of the money supply. Within a few months the Ministry of Finance passed from the hands of Z. Cardoso to those of M. Marques Moreira, which introduced measures aimed at restoring the values ​​of fundamental macroeconomic variables to levels more in line with balanced development. L’Collor de Mello’s impeachment in September 1992, for abusing private funding during the presidential campaign, put an end to his experiments in anti-inflationary economic policy.

At the end of 1992, Vice-President I. Franco took over the presidency and announced structural changes to economic policy, which would no longer focus essentially on monetary restraint, but would aim at a substantial tax reform and modification of the wage indexation mechanisms, which were very widespread. throughout the country, and which still made the inertial component of the rate of inflation very high. After four different finance ministers and with still extraordinarily high inflation rates (1149 % in 1992 and 2489 % in 1993), a radical change in economic policy was undertaken following the appointment of FH Cardoso as finance minister in June of1993, and what was to become Plan real began.

An interesting and specific aspect of Brazilian economic policy since the launch of the Plan Real has been represented by the remarkable homogeneity of the group of economists in power, as well as by the stability of the overall plan of economic policy pursued. The economists P. Arida, E. Bacha, A. Lara Resende, W. Fritsh, P. Malan, G. Franco, and numerous others who have held important positions in recent years, come in fact from the same school of economics of the Pontifical Catholic University (PUC) of Rio de Janeiro and shared a common basic approach in addressing the problems of the country’s economic policy. Some of these same economists had previously been the theorists of the 1986 Plan cruzado, then terminated quickly and without success. The Plan real, inaugurated on December 7, 1993, was made up of three essential components, which would materialize in three successive phases.

The first phase of the plan reflected a particular attention to the correction of the fiscal deficit, through the reduction of public spending and the increase of tax revenues. A balanced state budget was prepared for 1994, which was approved by Congress. The government explicitly stated that such a measure would be essential and preliminary to any other reform. This happened through a series of provisions that increased the control over the expenditure of the provincial states and municipalities, through the creation of an Emergency Social Fund (ESF) at the federal state, to which the provincial states and municipalities contributed 15 % of the own budget.

In the second phase of the plan, launched in March 1994, a new monetary unit was created, the Unidade Real de Valor (URV), while keeping the old cruzeiro in circulation A dual price system then prevailed: price changes were allowed in cruzeiros, while contracts were determined and gradually corrected on the basis of the URV, thus allowing for the necessary realignment of prices before the introduction of the new currency, and making so evident in the eyes of citizens what was the loss of purchasing power linked to inflation.

The third phase of the plan was realized with the introduction of a new monetary unit, the real, on 1 July 1994. The authorities had expected a one-to-one parity with the dollar, but in fact the real appreciated rapidly in real terms, following the rise in domestic prices with a fixed nominal exchange rate, supported by large foreign exchange reserves. This situation was exacerbated by the crisis in the Mexican peso in December of the same year, which forced the Brazilian authorities to maintain a fixed exchange rate longer than expected, in order to maintain the credibility of their policies. For Brazil business, please check

Taken together, these policies proved effective in containing the inflation rate, as revealed by the data on an annual basis, fell to 22 % in 1995 and at 2, 6 % in 1998. The plan’s effects on inflation were then key to determining the outcome of the October 1994 presidential election. FH Cardoso and his Plan Real got a plebiscite support, achieving the 54, 5 % of the votes, maximum result in a presidential election in Brazil by 1945. Price stability then appeared for the first time as a real public good, capable of determining the electoral results. As demonstrated by the experience of other Latin American countries in recent years, economic populism no longer appeared capable of determining the electoral results, and support for policies that are realistically able to control inflation prevailed.

Despite the successes achieved by the Plan Real, serious problems faced the country. First, there was the problem of maintaining the credibility of the government’s fiscal policy. Indeed, the fiscal deficit had increased in recent years and inflation had remained under control thanks to the restrictive monetary policy and the substantially fixed exchange rate; but high real interest rates had severely curtailed investment. Secondly, there was the problem of the unusual worsening of the external accounts. This evolution is attributable to at least three new factors for the Brazilian economy: the nominal and real revaluation of the real ; the further reduction of the tariff and non-tariff barriers envisaged by the MERCOSUL agreement; finally, the strong growth in domestic demand which, moreover, has helped to moderate the effect on the exchange rate of the growing inflow of capital from abroad, since 1994.

Finally, the structural reforms promised by the Cardoso government had not yet been implemented, and it was necessary to tackle the issue of income distribution, still extremely inequitable, and of the role of the state in the economy which, although small, was still very much extended.

The good results produced by the Plan real are also reflected in the annual data for 1996 and 1997. Although slowing down compared to the previous two years, GDP continued to grow and inflation slowed further. But, in October 1997, the country was hit by a financial and currency crisis resulting from the Asian crisis. The authorities responded to the crisis and pressure on the real with high interest rates, fiscal maneuvers and a commitment to accelerate the process of structural reforms. In August 1998, this time in the wake of the Russian crisis, the real was again subjected to severe pressure, forcing the authorities to raise interest rates to 50 % to curb capital outflows. Finally, in early 1999, a third currency crisis hit the country. On the occasion of this crisis, generated by internal factors and in particular by the announcement of a debt moratorium by the state of Minas Gerais, the government decided to abandon the policy of defense of the exchange rate of the real, which was left free to fluctuate on the market, recording a sharp depreciation. In December 1998, the IMF approved a stand-by loan with Brazil. On that occasion, the Brazil reaffirmed his commitment to continue the fiscal maneuver, even if he had to register a setback due to the refusal to approve the proposal to increase the social contributions of public employees by the Parliament and the occurrence of delays in the implementation of other tax measures.

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