I. Introduction

This paper evaluates the Real Plan and indicates Brazil's principal outstanding economic challenges. In doing so, it defines the peculiarities of the Brazilian stabilization process in order to discuss realistic targets for reducing inflation and for re-establish-ing the conditions of sustained growth.

Stabilization is a long process. Brazil's past experience illustrates the need for a relatively long time-frame to stabilize the economy. In fact, in the middle of the 1960s, three years were needed to reduce inflation from 100% to 30% per year. It fell from 92% in 1964 to 34% in 1965. It rose to 39% in 1966 and then remained at the rather high annual rate of 25% during the next two years This reduction in the inflation rate occurred when there were far fewer limitations on economic policy formation. The country was under an authoritarian regime, had no generalized indexation, enjoyed reasonable external support, and faced less critical fiscal and financial constraints than it does today. Even so, the stabilization plan faced serious difficulties in the 1960s and had to be adjusted on several occasions.

International experience is full of cases in which relatively long periods were needed to consolidate, and to adjust periodically, stabilization policies. Israel, Mexico, Argentina and Chile are examples. In countries like Brazil, the challenge can be even greater because inflation cannot be reduced simply by using onventional monetary and fiscal policy instruments. The Brazilian situation requires a complex combination of orthodox policies (monetary and fiscal) and structural reforms. These reforms frequently presume profound changes in the constitution and in the very culture of government organs. Further complicating the issue is the need to end the public's inflationary memory and to terminate an indexation system that, after four decades of double-digit inflation, permeates the economy.

Unlike in the 1960s, Brazil's current stabilization program is going forward within a democratic framework of independent power centers, a free press and a multi-party system. Therefore, the present reform agenda requires considerable political negotiation and greater maturity.