THE REAL PLAN AND THE BRAZILIAN ECONOMY:
PRESENT SITUATION AND PROSPECTS

Pedro Sampaio Malan
Brazilian Finance Minister
September 1995

The Real Plan, introduced on July 1st, 1994, is completing its fifteenth month of existence. There is no doubt that it is the most successful stabilization plan in Brazil's history. Previous attempts were overtaken by events within a few months of their implementation and failed to reach even a first anniversary.

At the end of June last year — just prior to the launching of the Real Plan —, inflation was running at the astonishing rate of 7000% per year. In the first half of 1994, it reached a monthly average of 43%. Now, inflation is around only 1 to 2% a month. Its level was of 31.3% in the first twelve months of the Real Plan and about 15% in the first eight months of 1995. These are the lowest figures in almost a quarter of a century. In fact, in the last 35 years (1961-1995), only in four of them (1969, 1970, 1972 and 1973), Brazil experienced lower rates of inflation.

Price stability fosters social development and improves income distribution. It removes the burden of the inflationary tax from those who are least able to protect themselves from it, namely the poor. It must be also recalled that the nominal price of the basic consumption basket now costs less than it did at the time of the launching of the Real Plan, and that, on the other hand, in nominal terms salaries and specially the minimum wage have risen significantly. This means that there has been a boost in the purchasing power of workers over the basic consumption basket.

It is important to stress that this sharp and continuous drop in inflation was attained without price or wage freezes, confiscations, breach of contracts or recession. It has been a direct consequence of a gradual process that began back in June 1993, when the so-called PAI (Program of Immediate Action), which paved the way for the introduction of the Real Plan, was announced. President Fernando Henrique was then Minister of Finance.

Behind this program is the idea that any serious effort in stabilizing the Brazilian economy must start by addressing the relative state of disarray of our public sector. And we have made substancial progress in this direction:

a) the debt of State Governments with the Federal Government was successfully refinanced;

b) State banks were forbidden to extend loans to their controlling shareholders, namely State Governments;

c) Congress aproved an ammendment to the Constitution, creating the Emergency Social Fund, which reduced the degree of earmarked tax revenues, allowing some tranquility in the fiscal front; and,

d) Government, in all levels, is promoting a fight against tax evasion and avoidance.

In this context, I would like to draw your attention to a point made by President Fernando Henrique in his speech, on July 1st, 1995, during the formal ceremony of celebration of the Real Plan's first anniversary. In reality, the Real Plan did not change the Brazilian society. The truth is that we, as a Nation, had already changed before the launching of the Real Plan making possible its success. Brazilian society was obviously tired of inflation and became eager for stabilization. And President Fernando Henrique, who received from the polls a clear mandate to carry on with the Real Plan, will not spare any effort to ensure price stability.

Tight policies in the field of money supply and credit are being followed, since the very inception of the Real Plan, to render the rate of growth in domestic consumption compatible with price stability and a satisfactory balance of payments situation. The growth rate increased sharply in the first quarter of 1995, when, in relation to the same period of 1994, GDP grew by 10.4% (14% in industry and 7.2% in agriculture); and sales increased by 28% in real terms.

This represented a threat to macro-economic stability. Hence, the need for additional restrictive measures adopted in the course of the first semester of 1995, which are becoming gradually more flexible in the light of a cooling off in domestic economic activity.

In the first half of 1995, the Brazilian economy experienced an 8% rate of growth. For the whole year, it will show a growth figure close to the one reached in 1994, when, in real terms, GDP increased by 5.7%. Growth of this order is even more satisfactory when it is realized that, according to recent estimates, the world economy should grow by 3% or less this year.

On the external front, Brazil put forward a major step by establishing a policy of exchange rate bands. The fact that Brazilian exports have continued to grow significantly, combined with the present low rate of inflation, is clear a proof that this exchange rate policy is well fitted for our stabilization program.

Brazil has, for some time, pursued a conservative policy with regard to its balance of payments. Current account showed a deficit of only 0.2% of GDP in 1994, 0.1% in 1993, 0.3% in 1991 and even a small surplus in 1992. The events of last December proved the correctness of our position.

It is in this constructive light that international observers should look at the temporary emergency provisions introduced earlier this year to reduce excessive imports of certain durable goods, such as automobiles. We are confident that our trade figures will continue to improve. Our balance of trade showed, last July, equilibrium after eight months of deficits and, in August, a US$ 328 million surplus.

The world has changed since the end of 1994, and Brazil will not hesitate to take the adequate measures to face the new realities in the fields of trade and finance.

The greatest challenge now facing Brazil, in the economic area, is to achieve stability on a permanent basis and to reach a one digit anual inflation rate in a gradual but firm manner. No other country in the world experienced a longer period of high and chronic inflation and went further than Brazil in promoting the indexation of its economy in a sort of vicious circle in which inflation and indexation feeded each other. The gradual de-indexation of our economy is essencial. Last June, important measures in this direction, for instance, were announced in the fields of salaries and interest rates.

It is also essencial, in order to consolidate stabilization and to attain self-sustained growth, a successful reform of our 1988 Constitution, which will enable, among others, the modernization of our public sector and the attainment of permanent fiscal equilibrium: the true anchor of any successful stabilization program.

Congress is giving majority vote in favor of the proposals of the Executive branch for the amendment of our Constitution and, indeed, has already approved most of those which were brought to its consideration in the first half of 1995, such as the ones that lifted previous restrictions against foreign capital and opened up for private investment, both Brazilian and foreign, several areas of economic activity.

The Executive branch has just sent to Congress two proposals: one for the reform of the fiscal and tax systems, with a view to simplification, clarity and the removal of burdens on invest-ments and exports; and the other for the reform of public administration, aiming at streamlinig and cutting and controlling expenditure.

Government gives also high priority to the implementation of the privatization program, which will create the proper conditions for the lowering of the internal public debt, and to the reform of the social security system, in order, among others, to increase the domestic savings rate. There remains much to be done in regard to bureaucracy, red tape, deregulation and more efficient public management.

The achievement of the objectives on the present Administration's economic agenda will bring about the reduction of production costs in Brazil in relation to its international partners. By lowering the so-called "Brazil Cost", it will be possible to increase the inflow of direct investment and new technologies into the Brazilian economy, as well as to promote our exports of goods and services. This is what, in the final analisys, will bring about the continuing integration of Brazil into the Mercosul and into the world economy as a whole.

At present, we are witnessing in Brazil, within a full democratic system, the begining of an era of sustained economic growth and social justice. And our international partners may play an important role in this process.