One of the most innovative plans in the world economy completed 30 years last month. Exactly three decades ago, the cruzeiro real, a currency ravaged by hyperinflation, was replaced by the real, which stabilized the Brazilian economy. A risky bet that involved a kind of social engineering to de-index inflation after successive failed economic plans.
Amid so many indexers created to readjust prices and wages, the economic team of then-President Itamar Franco created a super-indexer: the Unidade Real de Valor (URV). For three months, all prices and wages were broken down into cruzeiros reais and URV, whose exchange rate varied daily and was more or less pegged to the dollar. Until the day the real was created, R$1 was worth 1 URV, which in turn was worth 2,750 cruzeiros reais.
By indexing the entire economy, the URV managed to realign what economists call relative prices, which measure the amount of different goods and services that the same amount can buy. Combined with a fixed exchange rate, initially, and high interest rates to attract foreign capital, the plan worked. In June 1994, the Índice Nacional de Preços ao Consumidor Amplo (IPCA) reached 47.43%. The indicator fell to 6.84% the following month and only 1.71% in December 1994.
‘Larida’ Plan
Called the ‘Larida’ Plan, in honor of economists André Lara Resende and Pérsio Arida, the idea of a pegged currency tied to the official currency was proposed for the first time in 1984. Instead of simply cutting public spending to curb inflation, as orthodox economic theory advocates, the Larida Plan was partially 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, where past inflation feeds future inflation. Then, 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 that year’s parliamentary elections, the first after the dictatorship, the government of José Sarney did not implement monetary control measures (high interest rates) or fiscal measures (restructuring public accounts). At that time, there was no National Treasury Secretariat to centralize government accounts, and public spending was partially financed by the Central Bank and Banco do Brasil.
Political Consensus
The success of the Real Plan, however, was not solely due 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 public finances. One of them was the creation of the Emergency Social Fund, which uncoupled part of the government’s revenues and made budget execution more flexible in the second half of 1993.
One of the creators of the Real Plan and president of the Central Bank during Fernando Henrique Cardoso’s government, Gustavo Franco says that the Real Plan involved gathering political support before being put into practice.
“The Real Plan is a public policy that involved people who understand the subject, who talk to each other and organize under political leadership to explain concepts and gather political support. Then, there was a whole process of social engineering to make such an important collective undertaking happen, which needs to involve an entire country. This is not simple,” the economist emphasized 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 civilizational. The way it was in Brazil, those who suffered the most were the poorest,” says economist Leandro Horie from the Intersyndical Department of Statistics and Socioeconomic Studies (Dieese) to Agência Brasil.
Source: Agência Brasil