The
Plano Real (
RealThe real is the present-day currency of Brazil and was also the currency during the period 1690 to 1942. When the first real circulated, the plural used was réis. The currently used plural form is reais, with the symbol R$ and ISO 4217 code BRL. The modern real is subdivided into 100 centavos...
Plan, in
PortuguesePortuguese is a Romance language that originated in what is now Galicia and northern Portugal. It is derived from the Latin spoken by the romanized Pre-Roman peoples of the Iberian Peninsula around 2000 years ago...
) was a set of measures taken to stabilize the
Brazilian economyBrazil has a moderate free market and export-oriented economy. Measured nominally, its gross domestic product surpasses a trillion dollars, the tenth in the world and the second in the Americas; measured by purchasing power parity, $1.9 trillion, making it the ninth largest economy in the world and...
in early 1994, under the direction of
Fernando Henrique CardosoFernando Henrique Cardoso, PC - also known by his initials FHC - was the 34
th President of the Federative Republic of Brazil for two terms from January 1, 1995 to January 1, 2003. He is an accomplished sociologist, professor and politician...
as the Minister of Finance, during the presidency of
Itamar FrancoItamar Augusto Cautiero Franco, usually known as Itamar Franco is a Brazilian politician who was President of Brazil from December 29, 1992 to January 1, 1995.-Life and career:...
.
Its architects include, among many others,
Pérsio AridaPérsio Arida is a Brazilian economist.In the 1970s, he was a part of the student activist movement in Brazil, being arrested and tortured....
, André Lara Resende, Edmar Bacha,
Gustavo FrancoGustavo Franco is a Brazilian economist, born April 10, 1956 in Rio de Janeiro.- Career :Son of Maria Isabel Barbosa de Barroso Franco and Guilherme Arinos Lima Verde de Barroso Franco, who was a friend and assistant of President Getúlio Vargas, and also a member of the first board of Directors of...
,
Pedro MalanPedro Sampaio Malan is a Brazilian economist and former Minister of Finance for Brazil.-Early life:Pedro Sampaio Malan was born in 1943 in Petropolis, a town in honor of Dom Pedro II to the north of Rio de Janeiro...
, Winston Fritsch and Francisco Pinto.
According to economic academics, one of the causes of inflation in Brazil was the inertial inflation phenomenon.
The
Plano Real (
RealThe real is the present-day currency of Brazil and was also the currency during the period 1690 to 1942. When the first real circulated, the plural used was réis. The currently used plural form is reais, with the symbol R$ and ISO 4217 code BRL. The modern real is subdivided into 100 centavos...
Plan, in
PortuguesePortuguese is a Romance language that originated in what is now Galicia and northern Portugal. It is derived from the Latin spoken by the romanized Pre-Roman peoples of the Iberian Peninsula around 2000 years ago...
) was a set of measures taken to stabilize the
Brazilian economyBrazil has a moderate free market and export-oriented economy. Measured nominally, its gross domestic product surpasses a trillion dollars, the tenth in the world and the second in the Americas; measured by purchasing power parity, $1.9 trillion, making it the ninth largest economy in the world and...
in early 1994, under the direction of
Fernando Henrique CardosoFernando Henrique Cardoso, PC - also known by his initials FHC - was the 34
th President of the Federative Republic of Brazil for two terms from January 1, 1995 to January 1, 2003. He is an accomplished sociologist, professor and politician...
as the Minister of Finance, during the presidency of
Itamar FrancoItamar Augusto Cautiero Franco, usually known as Itamar Franco is a Brazilian politician who was President of Brazil from December 29, 1992 to January 1, 1995.-Life and career:...
.
Its architects include, among many others,
Pérsio AridaPérsio Arida is a Brazilian economist.In the 1970s, he was a part of the student activist movement in Brazil, being arrested and tortured....
, André Lara Resende, Edmar Bacha,
Gustavo FrancoGustavo Franco is a Brazilian economist, born April 10, 1956 in Rio de Janeiro.- Career :Son of Maria Isabel Barbosa de Barroso Franco and Guilherme Arinos Lima Verde de Barroso Franco, who was a friend and assistant of President Getúlio Vargas, and also a member of the first board of Directors of...
,
Pedro MalanPedro Sampaio Malan is a Brazilian economist and former Minister of Finance for Brazil.-Early life:Pedro Sampaio Malan was born in 1943 in Petropolis, a town in honor of Dom Pedro II to the north of Rio de Janeiro...
, Winston Fritsch and Francisco Pinto.
According to economic academics, 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 ValorThe Unidade Real de Valor, or URV , was a non-monetary reference currency created in March 1994, as part of the Plano Real in Brazil...
("URV") which 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 reais increased nominally every day.
The Plano Real based its actions on an analysis of the root causes of
inflationIn economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the price level rises, each unit of currency buys fewer goods and services; consequently, inflation is also an erosion in the purchasing power of money – a loss of real...
in the post-
military dictatorshipA military dictatorship is a form of government wherein the political power resides with the military. It is similar but not identical to a stratocracy, a state ruled directly by the military....
BrazilBrazil , officially the Federative Republic of Brazil , is a country in South America. It is the fifth largest country by geographical area, occupying nearly half of South America, the fifth most populous country, and the fourth most populous democracy in the world. Bounded by the Atlantic Ocean...
that concluded that there was both an issue of
fiscal policyIn economics, fiscal policy is the use of government spending and revenue collection to influence the economy.Fiscal policy can be contrasted with the other main type of economic policy, monetary policy, which attempts to stabilize the economy by controlling interest rates and the supply of money....
and severe, widespread
inertial inflationInertial inflation is a concept coined by structuralist inflation theorists. It refers to a situation where all prices in an economy are continuously adjusted with relation to a price index by force of contracts....
.
The Plano Real or
Real Plan intended to stabilize the domestic
currencyIn economics, the term currency can refer either to a particular currency, for example the US dollar, or to the coins and banknotes of a particular currency, which comprise the physical aspects of a nation's money supply...
in nominal terms after a
string of failed plansThe following is a timeline of the Brazilian economic stabilization plans in the "new Republic" era, a period characterized by intense inflation of the local currency, exceeding 2,700% in the period of 1989 to 1990....
to control
inflationIn economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the price level rises, each unit of currency buys fewer goods and services; consequently, inflation is also an erosion in the purchasing power of money – a loss of real...
. It created the
Unidade Real de ValorThe Unidade Real de Valor, or URV , was a non-monetary reference currency created in March 1994, as part of the Plano Real in Brazil...
(
Real Unit of Value), which served as a key step to the implementation of the current currency, the
realThe real is the present-day currency of Brazil and was also the currency during the period 1690 to 1942. When the first real circulated, the plural used was réis. The currently used plural form is reais, with the symbol R$ and ISO 4217 code BRL. The modern real is subdivided into 100 centavos...
. At a first moment, most academics tended not to believe on the Plan's success.
Stephen KanitzStephen Charles Kanitz is a Brazilian economist, business consultant, lecturer, professor and writer.-Academic life:He holds a D.Sc...
was the first public intellectual to predict the future success of the Real Plan.
The
Plano Real introduced a new currency called the real (plural reais) on 1 July 1994, as part of a broader plan to stabilize the Brazilian economy, the short-lived cruzeiro real was substituted in the process.
The real initially appreciated (gained value) against the U.S. dollar as a result of the large amount of capital inflows in late 1994 and 1995. It then began a gradual depreciation process, culminating in the 1999 January Brazilian 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, 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.
Moreover, the government enacted a series of contractionary fiscal and monetary policies, restricting its expenses and raising interest rates. By doing so, the country was able to keep inflation under control for several years. In addition, the high interest rates attracted enough foreign capital to finance the current account deficit and increased the country’s international reserves.
It also was characterized by a strong focus on the management of the
balance of paymentsIn economics, the balance of payments, measures the payments that flow between any individual country and all other countries. It is used to summarize all international economic transactions for that country during a specific time period, usually a year.The BOP is determined by the country's...
, at first by setting the
realThe real is the present-day currency of Brazil and was also the currency during the period 1690 to 1942. When the first real circulated, the plural used was réis. The currently used plural form is reais, with the symbol R$ and ISO 4217 code BRL. The modern real is subdivided into 100 centavos...
at a very high
valueIn finance, the exchange rates between two currencies specifies how much one currency is worth in terms of the other. It is the value of a foreign nation’s currency in terms of the home nation’s currency...
relative to the
U.S. dollarThe United States dollar is the unit of currency of the United States. The U.S. dollar is normally abbreviated as the dollar sign, $, or as USD or US$ to distinguish it from other dollar-denominated currencies and from others that use the $ symbol. It is divided into 100 cents .The U.S...
and later (late 1998) by a sharp increase on domestic interest rates to maintain a positive influx of foreign capitals to local currency
bond marketThe bond market is a financial market where participants buy and sell debt securities, usually in the form of bonds. As of 2008, the size of the international bond market is an estimated $67.0 trillion , of which the size of the outstanding U.S. bond market debt was $33.5 trillion...
s, financing Brazilian expenditures.