Plano Real 1994 – 2002 Real Plan and the end of inflation

Redemocratization and economy Began in 1985; Unsuccessful Attempts to control inflation: ▫Strong fiscal adjustment; ▫Deficit financed by the Central Bank. Senator Fernando Cardoso became Finance Minister; ▫Immediate action plan:  Cut in government spendind;  Effective tax collection (evasion U$ 40 – 60 Billions)  Resolve financial relations with state governments

First sociologist to be President of his country

The new indexing system - URV 1 URV = 1 US$ Official prices denominated in URV; New currency – Real; ▫Price increases; ▫Restrictive monetary policy; ▫Capital inflows > Real Aprreciated

Initial Impact of the Real YearAnnual Rate of Inflation , , , ,32

Initial Impact of the Real Poor people get more purchase of power; Rising sales; Rate of investment increased; Positive impact on the balance sheet of enterprises Exchange rate – Key policy instrument

Use of Exchange rate to maintain price stability; ▫Exchange rate anchor Open the economy – declining the tariffs on imported tariffs; Trade balance deterioration; Mexican crisis emerge: ▫Devaluation of Real; ▫Interest rates and tariffs rise again

Initial Impact of the Real YearAnnual Rate of Inflation , , , , , , , , , ,3 Source: Banco Central do Brasil, Relatório 2011

Unresolved Fiscal Dilemma Personnel expenditures Pension expenditures represented 43% Other related problems: ▫Confidence of financial system – PROER; ▫Congress as a problem – political system; ▫Temporary decress (Medidas provisorias) role; ▫IMF – 1998 – Fiscal reforms aprroved R$ 30 billionsR$ 40 billionsR$ 50 billions

The vicious circle Maintain Exchange rate and finance deficit Borrow at a rising interest rate Worsened fiscal situation – undermined investor confidence

Capital flows Multinational investements; ▫Buying Brazilian companies; ▫Building new factories; ▫Investing in modernization; ▫Growth of labor productivity;

New Crisis Banks ▫Difficulties in paying debts; ▫Rising in nonperforming loans; ▫Incentive for merger and acquisitions; ▫Asian and Russian crisis ▫Real was attacked  IMF, World Bank and US Government: US$ 41.5 Billion