One of the most innovative plans in the world economy turned 30 last month. Exactly three decades ago, the cruzeiro real, a currency eroded by hyperinflation, gave way to the real, which stabilized the Brazilian economy. A risky bet that involved a kind of social engineering to deindex inflation after successive failed economic plans.
Amidst so many indexers created to adjust prices and wages, the economic team of the then Itamar Franco government created a super-indexer: the Real Value Unit (URV). For three months, all prices and wages were broken down into real cruzeiros and URV, whose exchange rate varied daily and was more or less tied to the dollar. Until the day the real was created, R$1 was worth 1 URV, which in turn was worth 2,750 real cruzeiros.
By indexing the entire economy, the URV was able to realign what economists call relative prices, which measure the quantity of different goods and services that the same quantity can buy. Combined with a fixed exchange rate, at first, and high interest rates to attract foreign capital, the plan worked. In June 1994, the Broad National Consumer Price Index (IPCA) reached 47.43%. The indicator fell to 6.84% the following month and only 1.71% in December 1994.
‘Larida’ Plan
Named the ‘Larida’ Plan after economists André Lara Resende and Pérsio Arida, the idea of a pegged currency tied to the official currency was first put forward in 1984. Rather than simply cutting public spending to curb inflation, as orthodox economic theory advocates, the Larida Plan was partly inspired by an unorthodox experiment in Israel in the early 1980s.
In the Middle Eastern country, prices and wages were temporarily frozen to eliminate inflationary inertia, whereby past inflation fuels future inflation. Later, a social pact was made to raise prices as little as possible, and the freeze was lifted, reducing Israeli inflation.
A similar idea was implemented in the Cruzado Plan in 1986. However, the stabilization failed because the freeze lasted longer than expected and, fearing repercussions in the parliamentary elections that year, the first after the dictatorship, the José Sarney government did not implement monetary control measures (high interest rates) or fiscal measures (restructuring public accounts). At the time, there was no National Treasury Secretariat to centralize government accounts, and public spending was partially financed by the Central Bank and the Bank of Brazil.
Political consensus
The success of the Real Plan, however, was not due solely to the URV. In a rare moment of political consensus and fatigue with hyperinflation, the National Congress was important in approving measures that would clean up the public finances. One of them was the creation of the Social Emergency Fund, which unlinked part of the government’s revenues and made the execution of the Budget more flexible in the second half of 1993.
One of the creators of the Plano Real and president of the Central Bank during the Fernando Henrique Cardoso administration, Gustavo Franco says that the Plano Real involved gathering political support before being put into practice.
“The Plano Real is a public policy that involved people who understand the subject, who talk to each other and organized themselves under political leadership to explain concepts and gather political support. Then, there was a whole social engineering process to make such an important collective undertaking happen, which needs to involve an entire country. This is not simple,” the economist highlighted at the launch of the book celebrating the 30th anniversary of the plan.
Recognition
Three decades later, economists from various schools of thought recognize the success of the Real Plan in ending hyperinflation.
“The greatest gain of the Real Plan was to bring inflation to civilized levels, as in any country with a minimally normal economic system. Today, inflation is 4% to 5% per year. The merit of the Real Plan was mainly civilizing. The way it was in Brazil, those who suffered the most from the consequences were the poorest,” says economist Leandro Horie from the Inter-Union Department of Statistics and Socioeconomic Studies (Dieese) to Agência Brasil.
Source: Agência Brasil