FIVE YEARS OF THE REAL PLAN STABILITY AND DEVELOPMEN

INTRODUCTION

Five years have elapsed since the introduction of the Real Plan. Brazil started to change. There have been significant economic and social accomplishments in this short period.

The Real Plan has been a great watershed for our economy. Before its introduction, the country suffered from recession, inflation and income concentration. Since the beginning of the Real Plan we have had economic stabilization, growth and income distribution.

We have achieved stabilization, which has resulted in greater income distribution, where as previously income was more concentrated due to rampant inflation. In the 12 months prior to the Real Plan’s implementation, inflation reached 5,200%. In contrast, in the 12 months ending in May 1999, inflation was close to 3.2%, if we take into consideration the national index for consumer prices. There was even a deflation of 0.24% during this same period in São Paulo. The persistent drop in inflation over the last five years was briefly interrupted, in the first quarter of 1999, due to the shift in exchange policies. Nevertheless, introduction of a free exchange rate system did not cause a continuous and generalized increase in prices.

The Real Plan has fostered stabilization with growth. We have had six consecutive years of real growth in GDP, a growth rate that has not been seen since the end of the seventies. Between 1994 and 1998, Brasil's GDP grew at an average annual rate of 3.3%. In contrast, the rate was close to zero (0.3%) during the four years preceding the Real Plan.

We have managed to demonstrate that good macroeconomic management is not incompatible with social improvement. More than ten million Brazilians have been brought into the consumer marketplace as a result of the price stabilization process.

Contrary to what many believed, an important reason for the economic growth was the increase in workers’ real average income. Their earnings grew 26% with the implementation of the Real Plan, taking into consideration the income averages during the periods before and after the plan was introduced.

Furthermore, there has been a very significant increase in the purchasing power of the minimum wage. In 1994, the minimum wage bought little more than half of the basic market basket, while in May 1999 it could buy slightly more than the basic market basket. Since the beginning of the Real Plan, the minimum wage has increased approximately 110%, while the basic market basket has increased in price by only 14%. That has been reflected in an improvement in wage earners’ standards of living.

Despite these economic and social successes, we continue to face major challenges. Greater efforts are still necessary in order to attain fiscal balance, so as to guarantee sustained economic growth, significant reductions in the unemployment rate and also increase the efficiency of public spending, mainly in the social area, thus producing greater benefits for the population. The path we have followed over the last five years, as well as some of our more recent accomplishments, demonstrate that we are heading in the right direction.

The unemployment rate, after having risen from 5.6% in 1997 to 7.6% in 1998, barely increased from early 1998 to May 1999, when the rate was 7.7%.

The agricultural sector is expected to produce record grain crops during 1999, in the range of 81.4 million tons. The privatization program, which already has generated revenues of approximately US$ 70 billion, continues to move forward successfully, producing concrete benefits for the population. The price of a telephone line, for example, dropped from around R$1,100.00 in August 1994 to R$ 55.00 in June 1999. Brazilian petroleum production, which already has surpassed the rate of 1 million barrels a day, is expected to increase even more with the end of the petroleum monopoly in June 1999.

In the past five years, we have had to face an adverse international situation, with the emergence of three major external economic crises (Mexican, Asian and Russian). The most evident consequences of these crises were the increases in unemployment rates and a rise in the fiscal deficit.

In January 1999 Brazil experienced a period of serious economic difficulties, with a significant reduction in foreign currency reserves, a sudden and strong increase in the price of the dollar and steep increases in wholesale prices. This situation of serious difficulties was overcome more rapidly and strongly than had been expected by either international investors or ourselves, regaining the confidence and trust of our principal economic partners.

Compared to other countries, our economy has shown a greater capacity to recover when faced with external shocks. This has been due to a variety of factors. Our financial system has undergone an important restructuring program. We have recently had a good performance in the fiscal area, with significant primary surpluses. Inflation remained low after the end of the phase of excessive devaluation that occurred during the shift in exchange policies. Thus we were able to promote a gradual and consistent fall in interest rates. Our firm and transparent decisions, which have demonstrated respect for contracts and institutions, have led the private sector to follow through on the ongoing restructuring of productive capacity. This process of change—stimulated by stabilization, trade liberalization and a renewal of long-term planning—has generated significant productivity gains.

Throughout the year 2000 new currency safeguard mechanisms will be implemented. The structure of economic policies will be based on the inflation targets system, to be monitored by the Brazilian Central Bank. Such policy guidance will provide a new institutional configuration for the preparation of monetary policies, consolidating its primary goal of safeguarding the stability of the Real—a value that Brazilian society has learned to appreciate and wishes to preserve.

The maintenance of a cautious economic policy aimed at economic growth consistent with inflation targets, as well as steady fiscal policies to keep the public debt under control and guarantee responsible fiscal management, will pave the way for the reduction of interest rates, with the goal of creating a favorable environment for productive investments.

It is also essential not to overlook the challenge involved in the implementation of a new management model for the public sector. This new model will simultaneously make it possible to reduce spending and to allocate more productively the funds spent by public entities. Thus we have facilitated the financing of strategic investments and a rise in social spending. It is necessary to continue establishing comprehensive social programs that are more capable of directly meeting the needs of the population as a whole and, above all, the poorest.

Moving toward this new model, the federal government is preparing to present to the congress and society its Multi-Year Plan (Plano Plurianual - PPA) for the 2000-2003 period. The structure of the new PPA is based on the successful experience of the "Brazil in Action Program." This program introduced an innovative management model for the Brazilian public sector, focused on achieving concrete results, with programs entirely dedicated to society and subject to continuous assessment, characterized by a greater transparency and efficiency by means of making the managers accountable for costs and results.

Implicit in the new public sector management model are greater incentives for the formation of partnerships among government, private enterprise and the organizations of civil society. Such partnerships perform roles of increasing importance in overcoming the challenges in various areas: economic infrastructure, social development, regional imbalances, the environment, and science and technology.

The consolidation of both the new management model and the structural changes brought about over the last couple of years, as well as the advances in the financing of social security and in the establishment of a tax structure that is fairer and more favorable to competitiveness, will clearly demonstrate that Brazil benefits from an increasingly mature institutional environment.

Five Years of the Real Plan have produced a series of concrete successes, including the consolidation of economic stabilization with a renewal of development and promotion of better income distribution. We have already done a great deal, but there is still much more to accomplish. We have prepared the ground; we have planted the seeds; the tree is already producing fruit. From now on, our task will be twofold: to safeguard our achievements and to move forward to new triumphs.

FERNANDO HENRIQUE CARDOSO