History of South America

Real plan

The “Real Plan ” was a neoliberal economic reform held in Brazil between September 1993 (when Cruzeiro Real was launched) and July 1994 (Real launch), during the government of Itamar Franco , to contain the advance of hyperinflation.

In fact, this economic stabilization plan was coordinated by the then Minister of Finance Fernando Henrique Cardoso and was successful, since, since then, inflation has been hovering around 5% a year.

To learn more:Neoliberalism and Itamar Franco.

Main Causes and Characteristics

Hyperinflation eroded the real value of the Brazilian currency, which devalued daily, affecting most of the Brazilian population, which lost its purchasing power.

For this reason, between 1993 and 1994, the government started to have as goals the balance of public accounts, with the reduction of expenses and increase of revenues. Thus, the reduction of public expenditures and the increase of taxes was a form of resolution, accompanied by the increase of the interest rates and the cut of unconstitutional transfers to the States and Municipalities, forcing them to administrative austerity. These initial measures brought fiscal balance, which was maintained by the Fiscal Responsibility Law.

With this juncture, a strong currency was launched, the Real , which increased the purchasing power of Brazilians and stimulated the economy. In turn, to combat inflation, price adjustments became annual.

Economic opening, with the gradual reduction of import tariffs, as well as the simplification in the provision of international services, was also a measure used to stimulate imports and increase competition with national industries.

On the other hand, the government continued the privatization process, especially in the steel and petrochemical sectors. Thus, the public machinery was free from the burden to finance the sector's investments.

Finally, it is worth mentioning the artificial maintenance of the exchange rate, which valued the Real (R$), keeping it on a par with the dollar ($), through the sale of this currency in the international market.

Historical Context

In 1993, the hyperinflation rate was 2708% per year. In the midst of this scenario, Fernando Henrique Cardoso is appointed Minister of Finance and begins to undertake a series of reforms. The first of these in August 1993, when he created the Cruzeiro Real .

On February 27, 1994, this action is complemented by Provisional Measure No. 434, by which the Real Value Unit (URV) is instituted, together with the rules for the conversion and use of monetary values, and the new national currency, the Real, in force until the present day.

On March 1, 1994, the URV came into effect as a virtual currency, avoiding price freezing as a transitory measure. Thus, if in June the inflation was 46.58%, in June, when the new currency was launched, inflation was 6.08%.

With economic stability, the market quickly reheats, leading to consumerist euphoria. Satisfied with the economic recovery after three decades of crisis, Brazilians elect Fernando Henrique Cardoso, President of Brazil, in October 1994.

Finally, we can say that the Real Plan was successful in controlling inflation and expanding the purchasing power of the Brazilian population, increasing consumption and production of goods and services. However, some economic crises, especially external ones, forced the government to increase the basic interest rate to prevent the outflow of foreign capital, which caused an increase in public debt. Despite everything, monetary stability remains.

Read more:

Neoliberalism in Brazil

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