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Three Years of the Real Plan
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Three Years of the Real Plan
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Growth
Income Distribution
Credit
Interest Rates
Consumption
Investments
Automotive Regime
Brazil in Action
The Regional Issue
Employment and Salaries
The Gross Domestic Product (GDP) has grown significantly throughout the period of the Real Plan: since the Plan's beginning in 1994, the accumulated growth has been 13.8%, which represents an average annual growth rate of 4.4%, compared to an average growth rate of 1.5% in the previous thirteen years (1981-93). More important than this growth is the fact that the annual rate of expansion has remained positive. This trend is contrary to the periods of accelerated expansion followed by substantial recessions that occurred in the 1980s and the beginning of the 1990s. The importance of this is not simply that we have been growing in recent years, but also that this constant growth has produced greater confidence in the Brazilian economy. This confidence is a fundamental element in attracting investments, which in turn further stimulate increased growth and employment.
The GDP grew 13.8% in the last three years, more than offsetting the decline in per capita income during the previous 13 years.
As a result of this significant GDP growth in recent years, per capita GDP has also increased during the Real Plan. This increase is yet another indication of the improved quality of Brazilian life since the implementation of the Real Plan.
Per capita income fell by 5% during 1981-93. In only three years (1994-96), it was possible to reverse this decline of almost a decade and a half: per capita income grew by no less than 9%, which corresponds to an annual growth of 2.9% compared to an annual average decline of 0.4% in the previous 13 years.
The 1980s and the beginning of the 1990s demonstrated that inflation reduced the income of the poorest members of society, whether due to their lack of access to the financial market or to the fact that salary readjustments, unlike monetary readjustments, never kept up with inflation. The rich, on the other hand, having access to "indexed" money (financial market assets that guaranteed not only a return to offset inflation, but also enormous gains on top of it), were able to protect themselves from inflation's corrosive effect and, often, to increase their share of national income.
The years 1994-96 registered an unprecedented phenomenon in Brazil's recent history: economic growth with income redistribution.
Inflation, by increasing the inequality between the poor and the rich, became another factor that, along with recession and unemployment, explained the increase in poverty during this period.
The failure of the stabilization programs of the 1980s and early 1990s was the principal cause of the deepening of Brazil's social problems because, in addition to creating chronic economic instability, it increased inequality.
As can be observed in the following graph, the years 1994-96 registered an unprecedented phenomenon in Brazil's recent history: economic growth with income redistribution. All sectors enjoyed gains. However, the greatest gains occurred in the lowest income groups.
Therefore, the Real Plan facilitated significant reductions in poverty.
First of all, per capita income grew as the total wage bill rose 31% in real terms.
Secondly, the distribution of income improved, thanks to the end of the inflation tax that had fallen upon the poorest classes and to the increase in the real value of the minimum salary (21%). Moreover, the fluctuation of individual real incomes was reduced by 40%. This success contributed to greater confidence about future incomes and, therefore, a significant expansion in consumer credit.
Thus, poverty has recently been declining in Brazil. The percentage of poor in the population, which was 33.4% in 1994, fell to 27.8% in 1995 and to 25.1% in 1996. The share of income that goes to the poorest 50% of the population increased from 11.3% to 12.3%. Thus, the degree of inequality fell from 5.73 in 1994 to 5.13 in 1995 and to 5.07 in 19961.
With stabilization, the financial system has begun to return to its principal activity: providing credit for production, trade and consumption. The resumption of credit operations by the financial institutions is another result of economic stabilization. In the period prior to the Real Plan, high inflation rates led the financial system to operate basically on a very short-term basis, creating mechanisms aimed at eliminating or reducing the losses caused by inflation. Access to such mechanisms was, for the most part, limited to the highest income segment of the population.
Since stabilization, the financial system has begun to return to its principal activity: providing credit for production, trade and consumption
At that time, fixed installment payments for financing did not exist. Payments were always being adjusted for inflation and, therefore, their future values were uncertain. Repayment terms were short and installments, consequently, were high.
With inflation under control, repayment terms are being extended; the elimination of monetary correction makes fixed installment payments possible.
With the resumption of credit operations, Brazilians can increase their consumption of more costly durable consumer goods (electric appliances, furniture, automobiles, etc.). The access of individuals to lines of credit increased their participation in the financial system.
The entry of foreign banks into Brazil, as well as the extensive restructuring of the domestic financial system, augments competition in the market, increases the security of those who use bank services, and contributes to reduce interest rates and bank fees. These are positive changes for the consumer.
Despite remaining high in comparison to international standards, interest rates have been reduced concurrently with the fall of inflation. In July 1994, interest rates (Overnight/Discount) were 6.87% per month, the equivalent of 122% in annual terms. By May 1997, using the same measure, the rate had fallen to 1.58% per month, or 23.79% during 12 months.
Although not yet comparable to world levels, the decline in interest rates speaks for itself.
Ever lower interest rates will mean more consumption, more investment and, therefore, more employment. This is why Brazil needs structural reforms, and principally those that will enable the public sector to reduce its unproductive expenditures and, thus, to spend no more than it takes in. A government that spends more than it takes in competes with the private sector for resources, removing money from the economy to satisfy its own consumption needs instead of investing. The government's need for financing results in higher interest rates, which is nothing more than the price of money. And if the government decides to finance itself by printing money, it will spark inflation. Thus, the reforms are inextricably linked to the reestablishment of favorable investment and employment conditions in Brazil.
Although not yet comparable to world levels, the decline in interest rates speaks for itself.
The notable increase in consumption after the implementation of the Real Plan resulted from the combined influence of growth, income redistribution and the resumption of credit availability. This consumption increase is the most expressive indication of the change that has taken place in the post-Real period.
In July 1994, one minimum salary could purchase approximately 12 bags of cement; today, it can purchase 22.
The immediate effect of the Real Plan was a strong increase in demand. Initially, it was for basic necessities like food, hygiene products and cleaning materials; and soon thereafter for goods of a higher value, such as appliances and automobiles. In the first phase, what stood out was the significant growth in the purchase of various consumer goods, such as eggs, milk, chicken and meat. However, one cannot ignore that there was a notable diversification of consumption as Brazilians bought more processed foods -- like yogurt, canned goods, and various frozen foods -- that were formerly inaccessible to the majority of the population.
Brazilians were able to consume more than food products. Included in this expanded list of consumer goods are the principal electric appliances, like refrigerators, freezers and color televisions. Additionally, a very strong demand developed for more sophisticated products like microwave ovens, VCRs and video cameras.
The Real Plan sparked a substantial increase in the sale of low-priced cars. In three years, sales of these cars more than doubled. Income and credit availability combined to give more people the means to purchase automobiles, especially less expensive autos. For this very reason, economy car sales as a percentage of total automobile sales grew from 45.5% in June 1994 to 61% in May 1997. Moreover, the opening of the economy increased competition in the sector, forcing it to produce better cars at competitive prices. The consumer benefited.
Gradually, the Real Plan is making room for new products in the Brazilian population's consumption basket. Home construction materials are another important example. In July 1994, one could purchase approximately 12 bags of cement with a minimum salary; today, one can purchase 22 bags with one minimum wage. As a result, the increase in consumption was significant. Sales of portland cement in 1996 were 38% greater than in 1994. Of all the concrete produced last year, almost 80% was marketed as resales of construction material, and 53% was resold to individuals for building their own homes.
The production and sale of inputs for civil construction rose notably.
The federal government is taking other steps also to spur the development of the construction sector. The recent proposal sent to Congress to create new rules for the Real Estate Financing System (Sistema de Financiamento Imobiliário - SFI) seeks to reduce the country's housing shortage and to expand employment. The government hopes that the bill's implementation will stimulate the flow of long-term private capital into the sector, and especially from institutional investors such as the pension funds.
Investment levels have also increased as a percentage of GDP. This was the result of the improved ability to foresee developments because of stabilization, of the emergence of an enormous consumer market, and of the government's tireless efforts to reduce the Brazil Cost. Investment as a percent of GDP rose from 14% in the pre-Real period to nearly 16% in the first half of 1997. But this level is still insufficient for Brazil's needs. That is why it is necessary, through fiscal adjustment, for the government to become a net saver and for the country to create new jobs by investing more.
Annual foreign direct investment jumped from US$1.3 billion during 1991-94, to no less than US$9.9 billion in 1996. It will probably reach US$15 billion in 1997.
Regarding foreign direct investment, much has changed since the implementation of the Real Plan. The flow of these investments into Brazil has expanded significantly. While the average net inflow was US$1.3 billion between 1991 and 1994, it reached US$4.3 billion in 1995, US$9.9 billion in 1996, and the forecast is US$15.0 billion for 1997. By May 1997, US$6.3 billion had entered the country, surpassing by 69.3% the inflows for the same period in 1996.
This change was due to the fact that investors have a more positive perception of the Brazilian economy. Decisive in this was:
- price stabilization and the renewed ability to plan;
- the macroeconomic adjustment;
- the continuing process of trade and financial liberalization;
- the National Privatization Program;
- the liberalization of laws, for instance the reduction of tax rates and the authorization of investments in formerly restricted areas; and
- the presence of an enormous and expanding consumer market.
There was also a diversification of the sectors receiving these investments. Manufacturing, which accounted for 72.3% of total investments in Brazil as of June 1995, attracted around 24% of the flows in 1996. Meanwhile, the service sector, which had previously accounted for 22.0% of total flows, captured 62% of the new inflows in 1996.
The country source of investment in Brazil changed also, with Spain, Portugal, Chile, the Netherlands and South Korea, among others, increasing their relative investment shares.
The number of companies receiving annual investments of less than US$10 million grew continuously, increasing from 1,660 to 2,370 between 1994 and 1996. This trend indicates a more dispersed presence of foreign investors, with the average individual investment rising from US$516,000 to US$808,000 during the period.
Foreign direct investments bring a number of benefits to Brazil, among them:
- the introduction and dissemination of technological advancements;
- an intensification of external competitiveness and, as a result, of exports;
- an increase in employment; and
- the financing of current account deficits, through capital that tends to stay in the country for long periods.
With a view to promoting new investments, the government has undertaken measures in specific sectors, for instance, the proposal to create the Real Estate Financing System, the Automotive Regime ("Regimes Automotivos"), and the "Brazil in Action" Program ("Brasil em Ação"), among others.
Many investments, over varying time periods, are anticipated under the General Automotive Regime (Regime Geral Automotivo). New investment resources planned for the sector during 1996-99 total R$19 billion, distributed among 141 projects. The vehicle assembly sector plans to invest a majority of these resources, i.e., R$14.8 billion, in 14 projects. The farm machinery sector will invest R$0.6 billion in 15 projects. Finally, the autoparts sector will put R$3.6 billion into 112 new projects.
Anticipated investments for 1996-99 will reach R$21.8 billion, distributed throughout Brazil.
Under the Special Automotive Regime for the Northeast/North/Central-West (Regime Automotivo Especial do Nordeste/Norte/Centro-Oeste), the combined anticipated investments of 25 companies total R$2.8 billion.
The "Brazil in Action" Program has been created in order to assure the implementation of a new development model that is compatible with the increasing opportunities afforded by economic stabilization. This program comprises a group of 42 investment projects aimed exclusively at infrastructure and social development. It will invest R$54.3 billion between 1997 and 1998.
The Brazil in Action Program comprises a group of projects with the dual purpose of making Brazil competitive in the world economy and of overcoming social inequalities.
The projects were selected because of their ability to generate many other investments that will maintain the dynamic of economic growth in the coming decades. At the same time, these projects share a close complementary and synergistic relationship for balanced regional development. They have the dual purpose of making Brazil competitive in the world economy and of overcoming social inequalities.
An examination of the infrastructure projects reveals a consistent series of investments in transportation, energy and communications. These projects were chosen for their impact in reducing the Brazil Cost, their capacity to promote private investment, and their contribution to equalizing opportunities among regions competing for productive capital. In deciding where to invest these resources, the government took into consideration what used to be called the Axes of National Integration and Development ("Eixos de Integração e Desenvolvimento Nacional"). These six axes represent a way of rearranging the country with a view toward integrating the sparsely occupied or depressed regions into the areas that are more dynamic, as well as assuring them a link with international markets.
In the transportation sector, the Brazil in Action program has four main thrusts: the inter-modal model, the decentralization of the federal railway network, continental integration and the privatization of port operations. Investments are foreseen on nearly 7,200 km of waterways, of which: 2,250 km on the Araguaia/Tocantins/Rio das Mortes complex; 1,056 km on the Madeira river; 1,371 km on the São Francisco river; and 2,400 km on the Tietê/Paraná/Paranaíba complex. In addition to these projects, the program plans to update the capacity of another 1,000 km of the main axis of integration with Mercosul, located along the Southeastern and Southern regions, and to restore 13,000 km of highways in order to incorporate them into the interstate network. The investments in the ports of Pecém, Suape, Sepetiba and Santos will fill the gaps in the Brazilian port system and, thereby, consolidate the transportation system that the country needs to position all of its regions more advantageously within the international market.
The communications sector was included in the program with substantial investments planned to expand and to modernize telecommunications and postal services. Public and private companies will undertake these projects within the new institutional model of service concessions, which anticipates the privatization of the system by the end of 1998. The most important step in this direction, besides the new Telecommunications Law ("Lei Geral das Telecomunicações"), was already taken in the first half of 1997: the initiation of the process granting concessions for the exploitation of Band B of the Mobile Cellular Services. However, these institutional reforms have not prevented the Telebrás System from pouring massive investments into the expansion and improvement of its fixed and mobile telephone services. In 1996 alone, three million new conventional and cellular phones were installed. This number will be increased further this year with the installation of 5.2 million new telephones.
In the energy sector, Brazil in Action has focused on projects that facilitate the modernization of Brazil's energy profile. The projects invest in the energy transmission system which will, initially, remain under government control to facilitate the regulatory function that will be essential after the privatization of the energy sector. They are also projects that progressively change the current energy matrix, introducing the use of natural gas for power generation.
Of the transmission systems being expanded, the most notable are: the system associated with the Xingó hydroelectric plant supplying the Northeast region; the Tucurui transmission line supplying the western region of Pará-Altamira, Itaituba and Santarém; and the interconnection of the North/Northeast and South/Southeast/Central-West systems.
Brazil in Action's principal undertakings in the natural gas sector are the Bolivia-Brazil Gasline and the transportation project for the Urucu Natural Gas in the Amazon region. The Bolivia-Brazil Gasline will begin supplying natural gas by December 1998. Thus, both Bolivian and domestic natural gas will be available to the Southeastern, Southern and Central-West regions, supplying them with clean and highly efficient energy.
Guided by the principles of decentralization, private participation and cooperation among the federal, state and municipal governments, the objective of the sanitation, housing and health projects is to combine universal access with improvement in the quality of services. The federal government's goal for 1998 is to make water supply services available to 100% of the urban population and sewage services to at least 80%. The housing programs focus mainly on assisting families with up to five minimum salaries. These groups would otherwise have no chance of being served under the new market rules that will go into effect with the Real Estate Financing System. The measures in the health area were subdivided into two efforts. The first is directed at restoring existing facilities and strengthening the management capacity of the Unified Health Service ('Sistema Único de Saúde" - SUS). It also seeks to expand the pioneer assistance model, Community Health ("Saúde da Comunidade"), by contracting community health agents and by practicing family healthcare. The second, dedicated to pre-natal care, seeks to reduce infant mortality 50% by 1999.
To confront the crucial problem of unemployment, Brazil's great challenge at the end of this century, Brazil in Action has selected a group of projects with emphasis on job and income generation, as well as on professional training.
Focusing on basic instruction, the education projects seek to increase the stature and qualifications of teachers, as well as to meet the schools' needs, by radically decentralizing the resources for improving administration and learning.
Measures aimed at strengthening family farming and agrarian reform, a priority of this administration from the beginning, are also included in Brazil in Action. So far, 117,000 families have been resettled, i.e., 42% of the 280,000 that will be assisted by 1999.
Water resources, especially irrigation, were selected for their important role in agricultural production and in solving the problems of depressed regions like the semi-arid Northeast. The significant increase in water availability, and its adequate management, along with the expansion of agricultural irrigation, will assist the semi-arid regions to overcome their relative backwardness. By implementing a new irrigation model, with the participation of private investment, the goal is to increase productive investments and to improve the execution and administration of the irrigation projects. The results are already evident. While only 298,000 hectares were under irrigation by 1996, another 118,000 hectares will be added in 1997 alone.
The monetary stability resulting from the Real Plan brought the theme of Brazilian economic development back to the forefront. In this context, the regional issue takes on a new perspective.
The Brazilian legacy is one of profound income inequalities, contrasting social realities among the country's regions, and a heavy concentration of economic activity in the South-Central region. This situation developed within the context of a closed, relatively isolated economy with high levels of import protection and excessive controls on foreign capital.
Investments are now flowing to new areas, spreading employment opportunities.
The opening of the Brazilian economy increased its competitive requirements, stimulated the influx of foreign capital, and accentuated the need to integrate into external markets. There has been a restoration of private productive investments in Brazil, with the country rejoining, as we have seen, the club of nations receiving a growing share of the international flow of direct foreign investments.
Contrary to pessimistic forecasts that economic activity would be increasingly concentrated in Brazil's South-Central region, which would be greatly aggravated by the inclusion of Belo Horizonte and Porto Alegre, a significant part of the new investment is seeking new areas. Investments are going not only to the South-Central region, but also to such so-called periphery states as Bahia and Ceará in the Northeast and to Goiás and Mato Grosso in the Central-West.
A significant "relocation" movement is currently underway. Industrial plants in the consumer goods sector (textiles, clothing, etc.), previously installed in developed regions, are moving to less developed states like Ceará or Maranhão.
In the automotive industry (cars, motorcycles, trucks, autoparts, etc.), which accounts for a significant portion of national industrial production, there has been a vigorous inflow of new manufacturers into areas where this type of activity did not exist previously, for instance, the North, Northeast and Central-West. Some 25 auto sector companies are expected to invest a total of R$2.8 billion in these regions.
New frontiers are being established in farming, agro-industrial and mining activities. Examples are the increased grain production in the Central-West and Northeast, and the irrigated fruit production in the Northeast.
The federal government anticipated some of these changes to a certain extent in its Multi-Year Plan for 1996-99, which was expanded later in the Brazil in Action Program. It reintroduced into its planning an expressed concern about the regional impact of development, adopting the concept of national development and integration axes. The government's approval of a group of large investment projects, with an emphasis on infrastructure, contributed to restoring confidence in the Brazilian economy and to guiding the increasing flow of private investments.
The government has been searching tirelessly for solutions to the new challenges of globalization, especially that of employment. There are four basic aspects of government policy in this area:
- incentives for sectors with great job creating potential;
- job and income generating programs through incentives to micro and small enterprises;
- training and qualification programs for workers; and
- strengthened collective bargaining procedures between workers and employers.
In 1996, the Brazil in Action Program was responsible for training more than 1.1 million workers in job qualifying and requalifying courses. By the end of 1998, the program will assist nearly 4.3 million people. Moreover, in 1996 nearly R$5.5 billion were applied to small productive investments that create jobs. Such investments are anticipated to reach some R$6 billion in 1997. As a result of this effort and its affect on income, it is estimated that in 1996 more than 500,000 direct or indirect jobs were maintained or created. The number anticipated for 1997 is even larger: 800,000 jobs. Other measures are being implemented successfully in this area, such as the Program to Combat Slave, Child and Other Degrading Labor ("Programa de Combate ao Trabalho Escravo, Infantil e Outras Formas Degradantes de Trabalho") and the Program to Improve Work Conditions and Environment ("Programa de Melhoria das Condições e dos Ambientes de Trabalho"). The combined effort of different ministries to fight degrading child labor met with significant success in a short time: 30,000 children were removed from work in the charcoal kilns and sugar fields and returned to school thanks to the Brazil Child-Citizen Program ("Programa Brasil Criança-Cidadã").
Moreover, measures were adopted to de-index salaries gradually, providing a significant increase in negotiating room between workers and employers. In addition, one should highlight the Provisional Measure ("Medida Provisória") that made it possible for the workers to participate in profit-sharing, an innovation that strengthens and facilitates salary negotiations.
Since the beginning of the Real Plan, according to information from the IBGE's Monthly Employment Survey ("Pesquisa Mensal de Emprego" - PME), some 1,151,000 new jobs were created in just six of Brazil's principal metropolitan areas.
The unemployment rate remained low in the third year of the Real Plan, at a level almost equal to that of the year immediately prior to the Plan's implementation. The unemployment rate in Brazil is relatively low compared to that of other industrialized countries and to that of the Latin American economies.
Moreover, both the average income and the total earnings of workers increased, in real terms, significantly more than did GDP during the Real Plan: 21.9% and 31.3%, respectively. The results show how much salaries have grown as a percentage of Brazil's national income.
Salaries are growing as a percentage of national income.
The minimum salary has not been forgotten. Unlike in the past, when unrealistic increases were unsustainable due to an inflation process that rapidly depreciated them, the minimum salary has been steadily recovering. Having been set in May 1997 at R$120.00, the minimum wage is 21.3% more, in real terms, than it was in July 1994.
1 The degree of inequality is calculated as a ratio of the share of income of the richest 20% to the poorest 50%. In other words, the larger the share of income of the poor, the smaller the ratio.
