Fernando Henrique Cardoso (L) (Photo credit: Antonio Scorza/AFP via Getty Images)

The Brazilian solution

How Plano Real defeated inflation

Artillery Row

The presidents of Brazil and Argentina, Lula da Silva and Alberto Fernández, have taken a step toward a common currency. That is their intention, although for now what they are proposing is a new tender, a common “regional unit of account”. The Argentinian peso and the Brazilian real will continue to be used for transactions within the countries, but with the new unit of trade, they plan to reduce their dependence on the dollar in trade with each other. 

The drive to reduce reliance on the dollar is a part of a broader trend. Some, like Barry Eichengreen, argue that in the face of greenback hegemony there is no alternative, dismissing theories about its demise as “dollar sensationalism”. Others, like Zoltan Pozsar of Crédit Suisse, point to signs suggesting that a parallel BRICS financial system — built on petroyuan and CBDCs — is emerging, alongside the Western, dollar-centred paradigm. Brazil and Argentina’s announcement could be understood in the light of the progressing repolarization of the world. 

Crisis hit with full force, marking the beginning of a lost decade

The modern history of Brazil featured a different and bolder plan involving the adoption of a new tender. Called “Plano Real” and implemented in the early 1990s, it introduced a new currency in an original and unprecedented way, to pull the country back from the brink of an economic disaster. 

In the second half of the 20th century, there was talk of a Brazilian economic miracle. At one point — between 1964 and 1974 — its growth rate placed it among the top developing countries. The technocrats who came to power after the military coup d’état in 1964 opened the country to foreign capital and brought stability to the economy. As late as 1982, according to Eul-Soo Pang’s The International Political Economy of Transformation in Argentina, Brazil and Chile since 1960, Brazilian GDP was 55 per cent larger than the combined GDP of the Asian Tigers, whilst being equal to 86 per cent of Canadian GDP. Soon, however, crisis hit with full force, marking the beginning of a lost decade.

Brazil is said to be the country of the future. Some mischievously add: “and will always be”, meaning that the bright future will always remain distant. In the early 1990s, however, it seemed that Brazil had no prospects. Not only had the growth rate slowed, but the entire development model had crumbled. Between 1990 and 1995 inflation averaged 764 per cent a year, and short-term interest rates reached an unimaginable 11,900 per cent. Soaring inflation seemed unstoppable. There’s probably not much exaggeration in the stories from those years that when you paid for products at the checkout counter, their price was higher than when you put them in the shopping cart. 

Over the years, successive Brazilian governments tried to curb inflation, but to no avail. Between 1986 and 1993, six stabilisation plans were implemented, and the currency was changed four times. Among the most radical, the first plan Collor (named after the then president) froze 75 per cent of all private financial assets. It was thought that by cutting off the flow of money, inflation would be suppressed. This radical measure did not bring the desired outcome. 

President Itamar Franco, heading a government plagued by scandals after three finance ministers resigned from their posts, nominated an outsider: Fernando Cardoso. He came up with a plan to quell inflation and repair the fiscal situation under extremely difficult conditions — in the last year of a weak and divided government, and in defiance of IMF experts. Faced with a desperate situation and uncertainty about whether his ideas would even have a chance to take effect, he relied on a group of economists from the Catholic University of Rio de Janeiro, who had been meticulously studying Brazilian inflation. 

The Plano Real envisioned a mending of Brazil’s entire political economy, but the most spectacular part of it involved a two-phase process of introducing a new currency. In the first stage, it was to function as a unit of value — it was called the URV, or Unit of Real Value — and then as a full-fledged, stable currency replacing the inflated one. 

Inflation was so rampant that people had to constantly renegotiate their salaries, whilst prices of basic products changed every week. The stabilising effect of the URV was that — although the ratio between the cruzeiro real (the currency at the time) and the URV was fluctuating — salaries, services and prices of goods were now denominated in URV. So, eggs would still cost 2 URVs, for example, although 1 URV could change its value from 10 to 20 cruzeiros in a short period of time. People started to think in terms of URV. When the process of transferring all contracts and obligations to URVs was completed, a new currency, the real, began to be introduced. 

Most economists did not believe inflation could be loosened without freezing prices

It was an idea that had never been tested anywhere before, and it seemed like folly to many. Most economists and politicians did not believe that the inflation could be loosened without freezing prices and wages. The IMF was reluctant to endorse the plan, as the reputation of its experts was already badly damaged by its support for previous stabilisation plans that had borne no fruit. The government that had appointed Cardoso lacked stability and support from the bickering Congress. Tensions within the team drafting the plan were reaching a boiling point, and several members had quit. To make matters worse, presidential elections were approaching, and with them came the risk that the plan would be scrapped just as it was about to get off the ground. Cardoso decided to run for office. The markets might have calmed down if the chances of his victory were high. However, this was not the case. In May, five months before the election, Lula could expect 40 per cent of the vote, whilst the finance minister could only count for 15 per cent. Introducing a new currency before the elections thus seemed like an imperative. 

Plano Real took off. The introduction of real was successful, and Cardoso won 54 per cent of the vote, triumphing in the first round. It was the second-best result in Brazil’s post-war history. Cardoso and his team brought inflation from 45 per cent per month to 1-2 per cent per month. The change in the lives of ordinary Brazilians was palpable and they wanted it to continue. 

Edmar L. Bacha, one of the economic architects of the Plano Real, stated years later that the plan succeeded in suppressing inflationnot just in the short term, but in the long run. “The Real plan however failed to generate an economic path,” he explained in Brazil”s Plano Real: a View from the Inside, “along which such inflation control was made compatible with sustained economic growth.”

Some see the Plano Real and Cardoso’s subsequent reforms as the zenith of neoliberalism in Brazil. However, as Matthew M. Taylor notes in Decadent Developmentalism: The Political Economy of Democratic Brazil, the ideas of the Washington Consensus had limited impact on Brazil when compared to other Latin American or Eastern European countries. Cardoso imposed fiscal responsibility and succeeded in stabilising prices, but the broader transformation of the economic model did not take place. The tradition of state activism remained intact, for better or worse. 

It seems irrelevant whether Cardoso and his team of reformers led a neoliberal revolution or consolidated the “decadent developmentalism” of Brazilian political economy. Rather, their experience is an example of the need for non-ideological problem-solving in times of crisis. Colombian thinker Nicolás Gómez Dávila once remarked that “politics is not the art of imposing the best solutions, but of blocking the worst”. Sometimes it takes optimism of intellect and a high tolerance for risk to contain the worst solutions. Fortunately for Brazil, people endowed with these qualities appeared at its moment of trial. 

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