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

2. 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

3. First sociologist to be President of his country

4. 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

5. Initial Impact of the Real YearAnnual Rate of Inflation 19902739 1991415 1992991 19932104 19942407 199567 199611,10 19977,91 19983,89 199911,32

7. 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

8. 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

9. Initial Impact of the Real YearAnnual Rate of Inflation 1990 -4,3 1991 1,0 1992 -0,5 1993 4,9 1994 5,9 1995 4,2 1996 2,2 1997 3,4 1998 0,0 1999 0,3 Source: Banco Central do Brasil, Relatório 2011

10. 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 199319941998 R$ 30 billionsR$ 40 billionsR$ 50 billions

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

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

13. New Crisis Banks ▫Difficulties in paying debts; ▫Rising in nonperforming loans; ▫Incentive for merger and acquisitions; 1998-1999 ▫Asian and Russian crisis ▫Real was attacked  IMF, World Bank and US Government: US$ 41.5 Billion