Real(ity) Check

      Real(ity) Check

    After three years of success with inflation brought to its lowest level
    in 40 years there are few skeptics left who doubt the efficiency of Plano
    Real. The plan, however, still has major challenges ahead, namely the reduction
    of the budget deficit and sustained growth.

    Marta Alvim

    On July 1st the Brazilian government’s much lauded Plano Real celebrated
    three years of success in rescuing a chaotic economy once on the brink
    of disaster. Even the skeptical Brazilians, so many times taken for a ride
    by previous failed plans, have accepted the success of the stabilization
    achieved by this plan. Opinion polls conducted all over the country show
    that the population’s approval of Plano Real has increased, and any doubts
    about its efficiency have been gradually dissipating.

    At the government level, President Fernando Henrique Cardoso (FHC)—considered
    Plano Real’s mentor—celebrated while counting on the plan’s achievements
    to take him to a victorious bid to a second-term mandate in next year’s

    Nevertheless, some of the government’s officials, including minister
    of finance Pedro Malan, were reluctant to join in the celebrations of Plano
    Real’s third anniversary, expressing caution as to the future of the plan.
    Despite the general optimism of the population and of FHC’s allies and
    adversaries alike, there is a consensus that Plano Real is about to enter
    a delicate phase, which will be decisive for its consolidation. With inflation
    in decline and at its lowest level in 40 years, the plan still has major
    challenges ahead, namely the reduction of the budget deficit and the continuity
    of stability with sustained growth.

    Just to give an idea, the public sector debt is expected to reach 5%
    of gross domestic product (GDP) at year’s end. Translated into numbers,
    those 5% represent approximately a $40 billion deficit incurred by the
    executive branch; the 27 states and 5.525 municipalities; the Social Security
    system and the public enterprises owned by federal, state and city governments.
    As there are limits to the extent for both borrowing and increasing revenue,
    administrative and fiscal reforms must take place in order to solve these
    problems. According to minister Malan, if only the Social Security reform
    had been approved in 1996 the country would have saved $1 billion this

    The visible result of the debt is the deterioration of infrastructure
    as well as of vital public services, such as health, education and law
    enforcement. Recently, major Brazilian cities witnessed a bloody strike
    led by Polícia Militar (uniformed state-owned police force), whose
    demands for higher salaries could not be met by state governments—themselves
    on the verge of bankruptcy. The population, often overburdened by taxes
    hikes to make up for the public deficit, were left to fend for themselves
    against the resulting upsurge in crime.

    However, the stalemate continues as the proposed constitutional reforms
    introduced to Congress two years ago have yet to be approved. And with
    election season about to begin, it is even more unlikely that they will
    be voted on before 1999 since expenditure reduction proposals are unrealistic
    in election times. No politician in his right frame of mind would risk
    his (or her) political ambitions by getting involved in controversial measures
    that might upset their electoral bases.

    So far the receipts brought in by the ongoing privatization process
    have somehow helped the government compensate for the deficit, but Brazilian
    economists unanimously agree that, without the reforms and the consequent
    reduction of public spending, privatization is only a partial solution
    to the problem. If the government doesn’t create mechanisms to avoid new
    debts , the sell-off of its patrimony will be only enough to pay interests,
    leaving the principal unchangeable.


    Another point of concern is the trade deficit, expected to reach $12
    billion this year according to the latest estimates. The balance of payments—which
    records the trade flows of imports and exports of goods, services and capital—registered
    a $2.1 billion deficit in the first six months of ’97, while during the
    same period of 1996 it registered an $8.2 billion surplus. The latest figures
    reflect the increasing deficit in current transactions (the negative result
    from the sum of the services and trade balances) which reached $15.6 billion
    in the first six months of this year against $7.7 billion during the same
    period in 1996.

    That means the inflow of foreign capital, albeit strong, was not enough
    to cover the deficit, forcing the government to use $2.147 billion from
    the country’s reserves to finance its overseas transactions in the period.
    Analysts estimate that the current account deficit will reach $36 billion
    by the end of the year compared to $17 and $24 billion in 1995 and 1996

    On the other hand, Banco Central’s (Central Bank) recent announcement
    that foreign reserves had reached $60.3 billion in July—an increase of
    $2.8 billion from June—shows that investors are confident that the trade
    balance will not cause a currency crisis in the short-term.

    Looser monetary policies and a devaluation of the real (which some believe
    is 20% overvalued) have been suggested as a way to stop the balance of
    payments’ increasing deficit. Proponents of such measures contend that,
    by modifying the current exchange rate policy, an increase in exports would
    follow as the price of Brazilian goods would again become attractive to
    overseas markets. Unfazed by the pressures, government officials have refused
    to adopt such alternatives, betting that Brazilian companies themselves
    will find solutions to become competitive by ways of modernization, productivity
    and cost reduction.


    The deindexation of the economy, together with the exchange rate policy
    adopted by Plano Real’s management team, are considered by far the most
    important measures that led to inflation reduction. Before the plan, the
    perverse indexation mechanism tied salaries and price indexes readjustments
    in such a vicious circle that inflation kept feeding itself until it reached
    a record high of 7000% in June of 1994. On top of the deindexation process
    and the adoption of a strong currency, the government also put in place
    high interest rates that slowed consumption, while removing tariff barriers
    to imports.

    Although not heterodox like previous plans which imposed price freezes
    and confiscation of bank deposits, the measures adopted by Plano Real have
    also had a significant impact on Brazilian society: On the up side, it
    increased the low-income population buying power and reduced poverty. Statistics
    show that in 1996 25.1% of the population had been classified as poor compared
    to 33.4% in 1994, and 27.8% in 1995. On the down side, it put a strain
    on the middle class budget due to the combination of high prices of goods
    and services and lack of salary adjustments in the past three years.

    However, price indexes have been showing a downward pattern. The Finance
    Ministry predicts an annual inflation of 5% in 1998, while economists are
    even more optimistic, predicting a 4% rate for next year.

    With inflation under control, the question now is whether it’s possible
    to maintain a long-term sustainable growth in investment, employment and
    productivity of the economy. According to studies conducted by the Applied
    Economics Research Institute (IPEA), an entity linked to the Ministry of
    Planning,, the answer is yes.

    The Institute, usually very conservative in its estimates, has recently
    published a 424 page book titled O Brazil na Virada do Milênio
    (Brazil at the turn of the Millennium) in which it shows that in the year
    2006 Brazil will have approximately 178.5 million inhabitants and a gross
    national product at $1.3 trillion. GDP growth should be 7% annually, unemployment
    rates will be very low and inflation should be at a rate of 4%. Furthermore,
    the expected increase in productivity and resulting growth of the economy
    should make for a 52% gain in wages in real terms.

    IPEA stresses that economic projections are always subject to mistakes.
    However, if the necessary fine-tuning of Plano Real is done, and if the
    Brazilian economy is not affected by unexpected international crises, then
    the plan will have achieved its consolidation goal.


    Despite the plunge of Brazilian stocks last July, the stock market has
    been by far the country’s best investment in the past six years or so.
    In 1991 the Ibovespa (index used by financial specialists to measure the
    average yield of shares) was around 1200 points. In mid-August it reached
    12500 points. During this 6-year period, the Ibovespa had gains of 930%
    in real terms compared to the 420% yielded by CDB’s and the 123% profitability
    of savings accounts.

    The upsurge in foreign investments, the privatization of state-owned
    companies and controlled inflation are credited for the spectacular stock
    market profits. In 1991, for instance, Telebrás (state-owned telecommunications
    giant) shares were valued at $6.6 per block of a thousand shares. Today
    they are trading at $116.

    Marta Alvim is a Brazilian journalist, freelance translator
    and interpreter. You can reach her at

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