{"id":20549,"date":"2024-06-24T14:39:06","date_gmt":"2024-06-24T17:39:06","guid":{"rendered":"https:\/\/fundacaofhc.org.br\/?post_type=debate&p=20549"},"modified":"2024-11-12T14:48:36","modified_gmt":"2024-11-12T17:48:36","slug":"thirty-years-of-the-real-plan-memories-lessons-learned-and-challenges","status":"publish","type":"debate","link":"https:\/\/fundacaofhc.org.br\/en\/debate\/thirty-years-of-the-real-plan-memories-lessons-learned-and-challenges\/","title":{"rendered":"Thirty Years of the Real Plan: Memories, lessons learned, and challenges"},"content":{"rendered":"\n

With a 30th anniversary on July 1, 2024, the Real Plan was a groundbreaking intellectual, economic, and political achievement. Its success was largely due to the unique dual expertise of then-Finance Minister Fernando Henrique Cardoso (1993\u201394, fondly remembered as FHC), who seamlessly combined intellectual insight with political acumen. By vanquishing the rampant inflation that had gripped Brazil since the early 1980s, FHC won the 1994 presidential election. During his two terms (1995\u20132002), he spearheaded reforms and policies that strengthened the real and modernized Brazil\u2019s economy. However, new momentum is needed for the country to fully realize its potential.<\/p>\n\n\n\n

\u201cThese two qualities rarely converge in one individual. As an intellectual, FHC assembled a team of economists, many of whom had collaborated for years at the Pontifical Catholic University of Rio de Janeiro (PUC-Rio), to devise an entirely original plan\u2014something unprecedented worldwide. He grasped the plan\u2019s intricate details and chose to fully endorse it,\u201d explained P\u00e9rsio Arida, one of the architects of the Real Plan.<\/p>\n\n\n\n

\u201cAs a politician, he successfully persuaded President Itamar Franco, negotiated with the Brazilian Congress, and communicated the plan to the public, securing the crucial support needed for its implementation. Having a good idea is one thing, but finding someone to make it a reality is just as important,\u201d noted the former president of the Brazilian Bank of Economic and Social Development (BNDES; 1993\u201395), who assumed leadership of the Central Bank when FHC took office. <\/strong><\/p>\n\n\n\n

On June 24, the Funda\u00e7\u00e3o FHC hosted a debate to mark the 30th anniversary of the Real Plan, bringing together five economists instrumental in its creation and implementation alongside Ambassador Rubens Ricupero. Mr. Ricupero faced the challenging task of leading the Ministry of Finance in March 1994 when FHC stepped down to run for the presidency. Economist Andr\u00e9 Lara Resende, one of the key architects of the plan, was invited but could not attend as the date coincided with his mother\u2019s seventh-day memorial mass.<\/p>\n\n\n\n

At the event, the speakers reflected on some of the major challenges they encountered in Bras\u00edlia after being called by FHC, shared behind-the-scenes insights into the plan\u2019s implementation, and offered a \u201cglass half full, half empty\u201d assessment of the current state of the Brazilian economy.<\/p>\n\n\n\n

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Economists Gustavo Franco, Pedro Malan, and P\u00e9rsio Arida debate the 30th anniversary of the Real Plan at the Funda\u00e7\u00e3o FHC – Photo: Vinicius Doti<\/strong><\/figcaption><\/figure>\n\n\n\n

The \u2018half-full, half-empty glass\u2019 of the Brazilian economy<\/h3>\n\n\n\n

\u201cWhat worked, and what didn\u2019t? Hyperinflation is a thing of the past, and after 1999, with the adoption of the so-called economic tripod, the balance of payments crisis also became history. But why didn\u2019t the success of stabilization lead to accelerated growth in the Brazilian economy?\u201d questioned Edmar Bacha, who chaired the Brazilian Institute of Geography and Statistics (IBGE) in 1995.<\/p>\n\n\n\n

\u201cIt\u2019s tough. Few countries have managed to overcome the middle-income trap since the Second World War. Those that did had much better income distribution, more efficient states, and were more open to the world. To reach a higher level of development, we face these three challenges,\u201d Mr. Bacha explained.<\/p>\n\n\n\n

\u201cIn addition to 30 years of the real, we\u2019ve had over 25 years of the floating exchange rate regime, 25 years of the inflation-targeting system, and 24 years of the Fiscal Responsibility Act. There\u2019s much to celebrate, but we still have a lot to tackle, such as low economic growth and high income inequality. Why is it so difficult to push through reforms in Brazil?\u201d asked Pedro Malan, finance minister from the beginning to the end of the FHC administration.<\/p>\n\n\n\n

\u201cI\u2019m struck by the interest the country is showing on the 30th anniversary of the Real Plan. This wasn\u2019t the case on the 25th, 20th, or even the 10th anniversary. Perhaps it\u2019s the unease about the present or the future that\u2019s driving Brazilians to understand what was so unique about the Real Plan\u2014that it achieved the near-impossible: the defeat of hyperinflation,\u201d said Gustavo Franco, president of Brazil\u2019s Central Bank from 1997 to 1999. <\/p>\n\n\n\n

According to Mr. Franco, Brazil\u2019s inflationary process during the 1980s and 90s was staggering: \u201cWe experienced 15 years of inflation, with a monthly average of 16%. It\u2019s impossible to maintain a rational economic life in that kind of environment.\u201d <\/strong><\/p>\n\n\n\n

\u201cWhen I was invited to lead the Central Bank in March 1999, the government already sensed that the managed exchange rate\u2014or exchange rate anchor\u2014had run its course. At that time, interest rates managed the balance of payments while the exchange rate controlled inflation. We decided to reverse those roles: allowing the exchange rate to float to improve the balance of payments while implementing inflation targets,\u201d recalled Arm\u00ednio Fraga, who helmed the Central Bank for nearly all of FHC\u2019s second term.<\/p>\n\n\n\n

\u201cThe so-called \u2018economic tripod\u2019 emerged, consisting of a floating exchange rate, inflation targets, and fiscal responsibility. The structural reforms passed during the first term, including the reorganization of state finances and the privatization of state banks, provided a solid foundation for the tripod,\u201d said Mr. Fraga.  <\/p>\n\n\n\n

\u201cAt the end of 2002, during the transition from the FHC administration to the Lula administration, there was a moment of stress, but fortunately, President Lula upheld the tripod. It proved resilient and, despite some challenges, remains in place today,\u201d Mr. Fraga continued.<\/p>\n\n\n\n

\u201cThe Real Plan altered Brazil\u2019s trajectory by convincing the Brazilian people of the dangers of inflation. I\u2019m less sure about the politicians. Thirty years later, many still deny the link between inflation and excessive public spending. They fail to see the connection between cause and effect. In recent years, fiscal responsibility has been abandoned, jeopardizing the economic tripod,\u201d warned Rubens Ricupero, finance minister from March to September 1994.<\/p>\n\n\n\n

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Ambassador Rubens Ricupero and Real Plan economists in a debate at the Funda\u00e7\u00e3o FHC – Photo: Vinicius Doti<\/strong><\/figcaption><\/figure>\n\n\n\n

How the ideas behind the Real Plan took shape<\/h3>\n\n\n\n

The most successful stabilization plan in Brazil\u2019s history originated in the Economics Department of PUC-RJ in the 1980s, where a group of economists sought to understand the unique characteristics of Brazil\u2019s inflationary process. \u201cThe idea that someone had a stroke of genius in isolation is completely false. It was a collective effort,\u201d recalled P\u00e9rsio Arida, a professor at PUC-RJ during that time.<\/p>\n\n\n\n

\u201cIn Brazil, inflation behaved very differently from other known inflationary processes due to compulsory indexation by law, which created a certain complacency about long-term inflation. While it was believed that indexation would cushion the effects of inflation, it was actually the serpent\u2019s egg,\u201d Arida explained.<\/p>\n\n\n\n

\u201cThe Real Plan was conceived much earlier, through at least a decade of academic discussions at PUC-RJ on how to address the issues of persistent, high, and growing inflation. In 1984, Andr\u00e9 Lara Resende published the article \u2018The Indexed Currency: A Proposal to Eliminate Inertial Inflation.\u2019 That same year, he and P\u00e9rsio Arida launched the Larida Proposal,\u201d noted Pedro Malan.<\/p>\n\n\n\n

\u201cGradually, in the protected academic environment of PUC-RJ, a consensus emerged that Brazil\u2019s chronic inflation needed to be tackled by addressing over-indexation, culminating in the idea of creating a single index, which would eventually become a currency,\u201d Mr. Arida continued. Ten years later, on March 1, 1994, the Unidade Real de Valor<\/em> (Real Unit of Value \u2013 URV) was introduced, serving as an embryonic currency designed to ensure a smooth and transparent transition from the cruzeiro real<\/em> (CR) to the real.<\/p>\n\n\n\n

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Economists Gustavo Franco, Pedro Malan, and P\u00e9rsio Arida debate the 30th anniversary of the Real Plan at the Funda\u00e7\u00e3o FHC – Photo: Vinicius Doti<\/strong><\/figcaption><\/figure>\n\n\n\n

The URV, the precursor to the real, was adjusted daily. While its value remained stable, the amount of cruzeiros reais<\/em> equivalent to one URV fluctuated. Salaries denominated in URV were recalculated daily based on the prices of goods and services, which were also listed in URV but paid in cruzeiros reais<\/em>. This synchronization of wages and prices around a stable reference\u2014the URV\u2014helped stabilize the economy. On June 30, 1994, as announced over a month prior, the Central Bank set the conversion rate at CR$2,750 per URV. The following day, on July 1, 1994, one URV was converted into one real (R$1), and the URV ceased to exist, having fulfilled its purpose.<\/p>\n\n\n\n

The URV made it possible to end indexation without resorting to price and wage freezes. Previous plans had shown that freezing only temporarily impacted inflation, caused economic disruption, and led to legal disputes that became additional burdens on public finances.  <\/strong><\/p>\n\n\n\n

By promising not to impose sudden shocks on the economy, the government eliminated the fear of an overnight price freeze, which had previously fueled inflationary expectations. In essence, the Real Plan broke inflationary inertia\u2014the tendency for past inflation to carry over into the present\u2014and stopped the preemptive behavior of economic agents who raised prices prematurely, fearing they would be frozen in the future.<\/p>\n\n\n\n

\u201cThe lessons Brazil learned from earlier stabilization plans\u2014such as Cruzado 1 and 2, Bresser, Ver\u00e3o, and Collor 1 and 2\u2014were crucial to the success of the Real Plan. From the day Fernando Henrique was appointed finance minister on April 19, 1993, until the launch of the URV, 280 days passed. Adding the 120 days until the launch of the real, those 400 days changed Brazil,\u201d recalled Mr. Malan, who took over the Central Bank in September 1993 during the Itamar Franco administration and, on January 1, 1995, became the sole finance minister of the FHC administration.<\/p>\n\n\n\n

In June 1994, the final month of the cruzeiro real<\/em>, inflation was 46.6% (which, if annualized, would have reached 9,785%). By July, the first month of the real, inflation had dropped to 6.76%. Over the first twelve months of the new currency, cumulative inflation stood at 33%. By early 1997, annual inflation had fallen below 10%, and by 1998, it was just 1.6%. The real, still in use today, has since allowed inflation to remain within a \u201ccivilized\u201d range of 3% to 6% per year, with only a few brief periods where it surpassed 10%.<\/p>\n\n\n\n

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