The Plano Real ("
Real Plan",
[The word ''real'' in Portuguese could be translated either to ''real'' or ''royal'' in English. The name of the plan comes from the name of the currency which was chosen to give the idea of a stable and credible purchasing power.] in
English
English usually refers to:
* English language
* English people
English may also refer to:
Peoples, culture, and language
* ''English'', an adjective for something of, from, or related to England
** English national ...
) was a set of measures taken to stabilize the
Brazilian economy
The economy of Brazil is historically the largest in Latin America and the Southern Hemisphere in nominal terms. The Brazilian economy is the third largest in the Americas. The economy is a middle income developing mixed economy. In 2022, ...
in 1994, during the presidency of
Itamar Franco
Itamar Augusto Cautiero Franco (; 28 June 19302 July 2011) was a Brazilian politician who served as the 33rd president of Brazil from 29 December 1992 to 31 December 1994. Previously, he was the 21st vice president of Brazil from 1990 until th ...
. Its architects were led by the
Minister of Finance
A finance minister is an executive or cabinet position in charge of one or more of government finances, economic policy and financial regulation.
A finance minister's portfolio has a large variety of names around the world, such as "treasury", ...
and succeeding president
Fernando Henrique Cardoso
Fernando Henrique Cardoso (; born 18 June 1931), also known by his initials FHC (), is a Brazilian sociologist, professor and politician who served as the 34th president of Brazil from 1 January 1995 to 31 December 2002. He was the first Brazi ...
. The Plano Real was based on an analysis of the root causes of
hyperinflation
In economics, hyperinflation is a very high and typically accelerating inflation. It quickly erodes the real value of the local currency, as the prices of all goods increase. This causes people to minimize their holdings in that currency as t ...
in the ''
New Republic'' of Brazil, that concluded that there was both an issue of
fiscal policy
In economics and political science, fiscal policy is the use of government revenue collection ( taxes or tax cuts) and expenditure to influence a country's economy. The use of government revenue expenditures to influence macroeconomic variabl ...
and severe, widespread
inertial inflation. The Plano Real intended to stabilize the domestic
currency
A currency, "in circulation", from la, currens, -entis, literally meaning "running" or "traversing" is a standardization of money in any form, in use or circulation as a medium of exchange, for example banknotes and coins.
A more general ...
in
nominal terms after a
string of failed plans to control
inflation
In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduct ...
.
Background
According to economists, one of the causes of inflation in Brazil was the
inertial inflation phenomenon. Prices were adjusted on a daily basis according to changes in price indexes and to the exchange rate of the local currency to the U.S. dollar. ''Plano Real'' then created a non-monetary currency, the
Unidade Real de Valor
The Daily Unidade Real de Valor, or URV (Portuguese, ''Real Value Unit''), was a non-monetary reference currency (i.e., non-fiat) created in March 1994, as part of the Plano Real in Brazil. It was the most theoretically sophisticated piece of the ...
("URV"), whose value was set to approximately 1 US dollar. All prices were quoted in these two currencies, cruzeiro real and URV, but payments had to be made exclusively in cruzeiros reais. Prices quoted in URV did not change over time, while their equivalent in cruzeiros reals increased nominally every day.
Solution
The Plano Real intended to stabilize the domestic
currency
A currency, "in circulation", from la, currens, -entis, literally meaning "running" or "traversing" is a standardization of money in any form, in use or circulation as a medium of exchange, for example banknotes and coins.
A more general ...
in
nominal terms after a
string of failed plans to control
inflation
In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduct ...
. It created the
Unidade Real de Valor
The Daily Unidade Real de Valor, or URV (Portuguese, ''Real Value Unit''), was a non-monetary reference currency (i.e., non-fiat) created in March 1994, as part of the Plano Real in Brazil. It was the most theoretically sophisticated piece of the ...
(''Real Unit of Value''), which served as a key step to the implementation of the new (and still current) currency, the ''
real''. At first, most academics tended not to believe that the Plan could succeed.
Stephen Kanitz
Stephen Charles Kanitz (born in São Paulo) is a Brazilian business consultant, lecturer, professor and writer.
Academic life
He holds a D.Sc. in Accounting from University of São Paulo, Master's degree in Business Administration from Harvar ...
was the first public intellectual to predict the future success of the Real Plan.
A new currency called the ''real'' (plural ''reais'') was introduced on 1 July 1994, as part of a broader plan to stabilize the Brazilian economy, replacing the short-lived
cruzeiro real
The cruzeiro real (\mathrm\!\!\!\Vert, plural: ''cruzeiros reais'') was the short-lived currency of Brazil between August 1, 1993, and June 30, 1994. It was subdivided in 100 centavos; however, this unit was used only for accounting purposes, and ...
in the process. Then, a series of contracting
fiscal and
monetary policies was enacted, restricting the government expenses and raising interest rates. By doing so, the country was able to keep inflation under control for several years. In addition, high interest rates attracted enough foreign capital to finance the current account deficit and increased the country's international reserves. The government put a strong focus on the management of the
balance of payments
In international economics, the balance of payments (also known as balance of international payments and abbreviated BOP or BoP) of a country is the difference between all money flowing into the country in a particular period of time (e.g., ...
, at first by setting the real at a very high
exchange rate
In finance, an exchange rate is the rate at which one currency will be exchanged for another currency. Currencies are most commonly national currencies, but may be sub-national as in the case of Hong Kong or supra-national as in the case of t ...
relative to the
U.S. dollar
The United States dollar ( symbol: $; code: USD; also abbreviated US$ or U.S. Dollar, to distinguish it from other dollar-denominated currencies; referred to as the dollar, U.S. dollar, American dollar, or colloquially buck) is the official ...
, and later (in late 1998) by a sharp increase on domestic
interest rates
An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, th ...
to maintain a positive influx of foreign capitals to local currency
bond market
The bond market (also debt market or credit market) is a financial market where participants can issue new debt, known as the primary market, or buy and sell debt securities, known as the secondary market. This is usually in the form of bonds, bu ...
s, financing Brazilian expenditures.
Result
The real initially appreciated (gained value) against the U.S. dollar as a result of large
capital
Capital may refer to:
Common uses
* Capital city, a municipality of primary status
** List of national capital cities
* Capital letter, an upper-case letter Economics and social sciences
* Capital (economics), the durable produced goods used fo ...
inflows in late 1994 and 1995. It then began a gradual depreciation process, culminating in the 1999 January currency crisis, when the real suffered a maxi-devaluation, and fluctuated wildly. Following this period (1994–1999) of a quasi-fixed exchange rate, an inflation-targeting policy was instituted by new central bank president
Arminio Fraga
Armínio Fraga Neto (born 20 July 1957, in Rio de Janeiro) is a Brazilian economist who was president of the Central Bank of Brazil from 1999 to 2003. From 1993 until his appointment to the Central Bank, he was Managing Director of Soros Fund Ma ...
, which effectively meant that the fixed-exchange period was over. However, the currency was never truly "free", being more accurately described as a managed or "dirty" float, with frequent central bank interventions to manipulate its dollar price.
The currency's appreciation was crucial to keep inflation under control. Mainly, it assured the supply of cheap imported products to meet the domestic demand and forced domestic producers to sell at lower prices in order to maintain their market shares. This was especially important in the period immediately following the adoption of the new currency, when the sudden drop in inflation caused a surge in demand. The increased imports, therefore, were essential to avoid demand-side inflationary pressures that would undermine the stabilization plan.
See also
*
Economic history of Brazil
*
Economy of Brazil
The economy of Brazil is historically the largest in Latin America and the Southern Hemisphere in nominal terms. The Brazilian economy is the third largest in the Americas. The economy is a middle income developing mixed economy. In 2022, a ...
References
{{reflist
External links
The 2010-10-04 episode of NPR's Planet Moneydevoted to the Plano Real, describing it in simple terms
Currencies of Brazil