RESULTS REAL PLAN

With the sharp reduction in the inflation tax, demand in the economy increased markedly after implementation of the Real Plan. This heightened demand strengthened significantly the economic recovery that had been occurring at a moderate pace since the last quarter of 1992. In fact, Brazil's GDP grew 7.4% in the second half of 1994, with manufacturing output rising 11%.

This growth stemmed mostly from increased consumption generated by: a) the drop in the inflation tax, b) the increase in total wages, and c) the strong expansion of consumer credit. Table 2 shows that sales in the São Paulo area during the first six months of the Real Plan were 15.3% above the same period of 1993. If July is not considered, this average rises to 22%.

The strong rise in demand led to a major expansion of industrial production and sales. According to the Industrial Federation of São Paulo (FIESP), industrial sales grew 25% in real terms during the second half of 1994 and 30% for the first year of the Real Plan compared to June 1994 (Graph 3).

Labor market statistics also show that the economy grew substantially after the Real Plan's introduction. According to IBGE data, the unemployment rate in the six major metropolitan areas fell from 5.4% in June to 4.4% in March, and then to 3.4% in December. This unemployment level was the lowest registered since February 1990.

The rise in employment and in industrial production was accompanied by the growth of real wages and of the total wage bill. According to FIESP data, real wages in the industrial area of São Paulo grew 8.9% in the first six months and 8% in the first year of the Real Plan (Graph 4).

Graph 4 - Index of Real Industrial Salaries - São PauloDeflator: Consumer Price Index (IPC-FIPE - Jan. 1994)

The increase in employment and in real wages caused the industrial wage bill to grow 10.5% during the first year of the Plan, according to FIESP data. This trend, combined with the renewal of consumer credits, led to a sharp growth in economic activity. The Indicator of Economic Activity (INA), calculated by FIESP, is composed of three elements: the utilization of installed capacity, the average number of hours worked per employee, and the value of sales. The INA was 25.7% greater in the second semester of 1994 than in the first semester of that year (Graph 5). Throughout the first year of the Plan, the INA grew 16.4%. Thus, economic activity and income levels rose greatly in the first year of the Plan despite the restrictive credit measures that were adopted beginning in October 1994.

The growth in industrial production and in employment was accompanied by a greater utilization of installed capacity and by a resumption of investments. As a percentage of GDP, invest-ments in 1992 were the lowest since the 1970s, about 13.7%. As shown in Table 3, investment as a percent of GDP has since grown steadily, reaching 19% in 1995, according to data from the Institute of Economic and Applied Research (IPEA).

1989	16.6
1990	15.4
1991	15.0
1992	13.7
1993	14.4
1994	16.3
1995*	19.0

It is evident that the growth in investment is qualitatively different from that of the 1970s. Public sector investments are becoming less important at the same time that imports of capital goods are rising. These imports generate two distinct benefits: they update the industrial park by incorporating new technology and they permit increased industrial production without generating upward pressure on prices.

Graphs 6 and 7 show that the increase in investment was reflected in both domestic production of capital goods and in imports. It is obvious also that capital goods imports grew at a rate well above that of domestic production. In April 1995, such imports were double the level of April 1994 and almost 2.5 times those of April 1993.

Agricultural activity also has expanded during the Real Plan. The output of grains was 9.1% greater than that of 1993, significantly depressing prices. Another record harvest is estimated for 1994/95, with production at 80 million tons according to IBGE.

Despite the positive factors mentioned above, the excessive overheating of the economy towards the end of 1994 and during the first quarter of 1995 jeopardized the stabilization program. It threatened inflationary trends, promoted the trade deficits, and put pressure on the nation's productive capacity. In October 1994, some sectors were already working at 100% capacity. Graph 8 shows the growth in the rate of installed capacity utilization in the São Paulo industrial area since the Real Plan was introduced.

Graph 8 - Installed Capacity Utilization in the São Paulo Industrial Sector

July 1994	7.1%
August	27.0%
September	26.0%
October	22.9%
November	13.6%
December	20.6%
Average	15.3%