Ep. 08 da série 'ECONOMIA BRASILEIRA' : 1994 – 2002 – O Plano Real (with English subtitles)

"The Oil Crisis" "Tomorrow Is Another Day! " "Recession" BRAZILIAN ECONOMY "A history told by those who built it" Colonial Brazil went through Brazilwood, Sugar and Gold Cycles. During the empire, the Coffee Cycle began.

Export-oriented too and also produced by slaves. One year after the abolition, the Republic emerged. The Coffee Cycle ended in 1929 when the financial world cracked.

Brazil recovered and experienced decades of growth until the two oil crises, which led to the debt crisis and high inflation. With democracy, the problems persisted. Then, the Cruzado Plan, the Bresser Plan, the Verão Plan and the Collor Plan were launched.

But inflation continued to climb, increasing by 2,800 percent at an annual rate. An innovative plan was needed. THE REAL PLAN 1994- 2002 Obviously, the inflation level was the greatest challenge.

A 2,500% increase in 93 and a 5,000%, 12 months before the plan was launched. That's hyperinflation anywhere in the world. High inflation is a an indication of dysfunctionality.

When something wrong is happening. Fifteen consecutive years of high inflation. That wasn't just a common cold.

It was a very serious condition, a terminal disease. Hyperinflation happens for a number of things. In Brazil, inflation had a few structural causes.

Let's say you don't engage in halting those conditions that lead to hyperinflation. Any stabilization plan will last a while and then fail. Mr Pedro Malan used to say that for each difficult problem there's always a simple and a wrong solution.

So we've successively implemented the wrong solutions. Everyone was trying to fix the problem by applying a quick solution. Between 1986 and 1991, Brazil launched 5 stabilization plans.

And all of them failed. The Cruzado Plan, the Bresser Plan, the Verão Plan, the first Collor Plan and the second Collor Plan. Until we recognized we had a problem that needed to be treated.

So let's start spotting the correct diagnosis. I spoke with André Lara Rezende. Then I was able to appoint a new chairman for the Brazilian Central Bank.

I sent for Malan. . .

Shortly after that, the BNDES' chairman was replaced too. And I was able to appoint another one. And that one was Mr Pérsio Arida.

As the economic advisor, we had Mr Gustavo Franco, a very capable man. So I had the key people to think of an economic project. When Itamar took office, he said, "Let's make a plan.

" Fernando Henrique, who was the Finance Minister, gathered his staff and said, "We want to make a plan. Actually, we don't have to make it. It is ready.

" And it was ready. So we released the idea created in 1984 by two Brazilian economists. André Lara Rezende had written an important piece with Pérsio Arida, known as Larida.

So that was our idea of synchronization. We would create an indexed, virtual currency. And we'd tell the people, "The currency we use now, the Cruzado Novo, depreciates every day.

But prices will remain the same in URVs. Increasingly, prices would be referred to the URV. Let the market convert wages to this currency.

Let the market do this. And once all wages would have been converted to the virtual currency, we just had to say, "Let's end up with the former currency. and the virtual currency is now the country's official one.

" It was necessary to create conditions to make that work. And the most important was the government budget balance. Because one of the reasons for inflation was budget decontrol.

To quote Minister Simonsen, "Inflation is the government surplus. " Overindulgence in terms of public spending mixed with excessive money printing were the typical reasons for all hyperinflationary processes that the world has ever seen. Edmar and I said, "Here's the thing.

"We have to ensure balance deficit before we start. " If the new currency generates inflation, no matter the small it is, it will fall into disrepute. And if you don't have reliability.

. . It would be like hitting with a hammer a small plant that's growing.

"There's only one way to ensure that the deficit will reach zero after we replace the currency. " And Simonsen was saying, "The greatest power an economic team can have is the one of not launching stabilization. You need to politically negotiate a solution to cut the deficit.

" André Lara wrote the critical essay that we sent to the National Congress. We can say that Fernando Henrique managed to captivate support from the important segments of the Congress. There was another challenge.

To normalize the country's ties to the international financial community. As you know, in 1987 Brazil declared moratorium on its foreign debt service. Malan put an end to our moratorium.

We suspended the moratorium. But it took Brazil 10 years to negotiate its debt. The debt crisis had been solved by the Brady Plan from 1990 on, and in 1993 in Brazil.

And what did the Brady Plan offer? The Brady plan came from the acceptance of the impossibility of paying the debt. The countries would negotiate with their creditors a discount of 35 percent of the debt.

That was the negotiation suggested by the Brady Plan, which about 15 countries made between 1989, 93 and 94. That opened a huge range of possibilities for Brazil's external relations. Direct investment, trade financing, financing flows.

. . Perception, in fact.

The country's picture. With debt negotiation and deficit under control, it was time to launch the URV. The conditions for the stability plan were there yet.

For a successful stabilization plan. I think that the key step was the decision we made to do everything crystal clear. You wouldn't wake up in the morning and hear the breaking news, informing about a new currency or about a certain depreciation.

We explained what would happen beforehand. All fellow Brazilians must unite to endorse the real. You need to convince society.

We had a distrustful nation, hostile to authoritarianism before us. So we had to invite the country to dance. It was time to bring citizens together and tell them to fight for the currency stabilization.

We asked, "Which currency do you want to use to sign contracts? The one which is rotting or the Real Value Unit? " The people supported the idea.

An implicit social pact took place, to support the stabilization. People were so desperate, that when they heard the name URV, they thought, "You, know? We should trust this thing.

" The media helped a lot. Television, radio. .

. People learned and embraced that. They were tired of inflation.

Within 3 months everything was indexed to the URV. We've minted the new currency, so everybody would understand. "Now things changed.

And this currency is stable. " During the 70s and 80s we had the Cruzado Plan, then we had the Cruzado Novo, then Cruzeiro again, then Cruzeiro Real. .

. For each one of them we cut three zeros. And every time we changed the currency, we had to change the banknotes too.

And then we noticed that we were running out of national heroes. We had Dom Pedro II, Dom Pedro I, Deodoro da Fonseca. .

. Then we used writers, intellectuals, politicians. .

. Until someone said, "It won't take us long to use animals too. " And that's exactly what happened.

BRAZILIAN ECONOMY "A history told by those who built it" BRAZILIAN ECONOMY "A history told by those who built it" Finally, it was the time to launch the real. So, by the first of July. .

. We switched currencies, and started to use the real. After the old currency was replaced, the new one had four figures.

It was 2,732 or something like that. Many people thought that would complicate things. Like no one would be able to divide the small figures.

So, we went to a fair in the neighborhood. Every product was charged in reals. Tomatoes, savories, sugarcane juice.

. . Everything was charged in reals.

Brazilian people helped a lot. They converted prices correctly. Extraordinary.

And we managed to fix the currency stability issues. In fact, we managed to standardize things. To everyone's and to my surprise, that thing worked.

Brazil's economy became fairly open and our foreign debt had been negotiated. The country could one more time request external financing so we could finance exports. When the Real Plan provoked a sudden boom in demand, supply shortage didn't occurred.

And the shelves remained full. A wild inflation turned into a civilized inflation, so to speak. I was a minister no more because I was qualifying to run for Presidency.

FHC wins in the first round with 54 percent of the votes. When we fixed our economy and the inflation rate. .

. The first consequence was that the Brazilian poverty threshold dropped some 10, 12, 15 percent. And millions of people joined the consumer society.

The middle-class forming phenomenon began when the inflation rates dropped. With the Real Plan we saw an increase by 32, 37% of the population with an average household income above R$ 2,004. A support policy for a real minimum wage increase began in 1993.

We made a lifting minimum wage, from 70 to R$ 100 a month, which caused a reduction of poverty and inequality. I believe that the main effect of the stabilization was precisely, as the name goes, the stability itself. People started being capable of planning their future.

Inequality rates dropped. However, many banks went bankrupt. With inflation, it was hard to measure what you possessed.

Only natural because inflation conceals the issues. Once you migrate to a stable economy, you see the true form of things. A bad comparison, but if someone is swimming naked and the tide lows you can see that the person was naked.

Actually, we could see the true figures. Among the naked bodies, so to speak, there were private banks. Of course the banks went bankrupt.

Because they depended on inflation. Actually, much of those bankers' revenue came from float, inflation, and so on. It was basically what we call inflationary revenues.

And those revenues disappeared overnight. Those banks faced hard times and went into insolvency. And at the dawn of the new currency, Brazil saw the most violent and dramatic banking crisis of its history.

One hundred banks went bankrupt. Six out of ten greatest banks went bankrupt. Bamerindus, Econômico, Nacional.

. . But we also had problems with public banks.

Banco do Brasil went bankrupt as well. And so did Caixa and Banespa. We had to follow unpopular measures to protect the financial system.

Had we not done anything at that moment the bankrupt banks would no longer be the only ones affected. We could generate a severe economic crisis. Which could lead to unemployment and recession.

Then we came to the PROER program, which was very misunderstood, but it offered a brilliant financial engineering. Brazilian Central Bank ordered intervention to those organizations. Shareholders lost everything and had their patrimony made unavailable.

The bankers lost their banks. But account holders didn't lose their money. Banco do Brasil became an S.

A. corporation, and so did Caixa Econômica. Rather than being a direct link for political favors.

So we started to build a solid financial system that came to be made sufficient, strong. . .

And resilient to the crises we faced afterwards. Even with those issues that arose, the real was successful. And in fact, 1998.

. . was the fiscal year with the lowest inflation rate in our history.

1. 6 percent a year. But of course, that stabilization plan didn't solve all issues we had on the first of July, 1994.

It was the beginning of a stage. Many years were necessary after the URV and the real, so we could keep creating conditions to maintain the currency within a certain degree of stability, as it is to this day. I can say that the main problem, and biggest challenge, is a modernization of the public sector.

The state reform, re-structuring of public finances issues. . .

That is, federal government, social security, states, municipalities and state-owned enterprises. The major leak we had were the state banks. No one knew the price for the debts of each state.

Every state had their own state banks. Those state banks lent their controlling shareholders money, I mean those states, and they never paid back. The Brazilian state banks were actually controlled by the state government.

Theoretically, they had a license to kill. Part of those funds was used extensively. The loan given to the state government went to those groups, close to the state government.

Political groups and everything else. A private bank could go bankrupt. But not state banks.

Payments were postponed. In case of default, debts would increase. At one point, the Central Bank had to take it all.

It was a spurious correlation for state governments with federal resources. It was impossible to keep a solid monetary policy because there was no way to control the state banks. And a fiscal policy could not be controlled either.

We had to conceive and put into operation the state banks privatization program. But at the same time, there was a state debt crisis. So, we started to organize the states debt.

We gathered all those debts at our Central Bank. And we said, "You can't go into debt anymore. " So that we could prevent it from becoming a bottomless pit, a black hol to swallow the people's money.

That's why the Fiscal Responsibility Law. So, Fernando Henrique has the credit for doing what he had to do and show the results. He showed society that without a fiscal balance, inflation would return.

Then the society said, "We do not want inflation! So we rather get fiscal balance. " The Fiscal Responsibility Law was some breakthrough.

And all Brazilian states had surpluses from 1998 and on. After that, fiscal policy was feasible. Feasible to have a monetary policy that would work out.

Brazil could have a minimum condition to think of any policy. Because with those inflation rates we had. .

. One could ask, "What's Brazil strategic plan? " How?

There wasn't even monetary stabilization. In order to remedy public accounts, privatization continued. Privatizing the largest mining company in Brazil, and one of the world's largest, was a big mistake.

All of that should be public. It should not be a private speculation object. There was a feeling that Brazil was leaving its public patrimony to private companies, to the underground.

If you can get royalties from extracting assets, that company doesn't have to be from the state. My opinion is quite ambiguous. We should see things with less dogmatism.

We have to be pragmatic. There's no such cleavage: public sector is bad, private sector is good or public sector is good and private sector is bad. Both have problems.

We can neither get to one extreme nor to the other. We need the State and we need the private companies. For example, steel companies could perfectly be privatized, as they have been.

Vale do Rio Doce was divided into political feuds among various states. Major changes also occurred in the telecommunications industry. On the monopolies issue, we advanced knocking some of them.

How did Telebrás sell telephone services? They received the client's money, and 2 or 3 years later they would deliver their service. Telephone companies improved with privatization.

The country had no money, and it wasn't capable of providing qualified public services. Private companies on the other hand. .

. When they provide this kind of services there is a risk of them charging more from citizens who can pay higher prices. And how did we fix that issue?

We've created regulatory agencies, which is the modern way for the State to control a situation. In fact, the communication system remains public although it has been privatized. The country won't invest directly, but it keeps control of that.

Mr Cardoso was re-elected in 1998. And the first tests for the Real Plan took place. In 1997, the Asian countries crisis began.

The Asian Crisis in 1997 worsened in late 1997, and in 1998 we saw the Russian crisis, which hit Brazil. And the Brazilian crisis in 1999. Brazil had to go to the IMF.

There was a balance of payments crisis, and I was invited to take office at the Brazilian Central Bank. The exchange rate had been forced to float. And I proposed that we kept the floating exchange rate.

Basically, exchange fluctuation happens when the government can't control its currency against the others. It's not that the government can't interfere with the exchange fluctuation. It can and should, under certain circumstances.

But without a target for the exchange rate. The floating exchange rate was one of the three innovations, which became known as The Macroeconomic Tripod. Armínio, along with Minister Pedro Malan, proposed a new macroeconomic organization for the country, based on that famous tripod.

It was called the economic tripod. The idea was to have significant fiscal surplus. Exchange rate had to float.

Inflation within expectations. Brazil definitely got back on track, we can say, on that moment. The targets for inflation predicate the Central Bank's independence.

Establishing the Central Bank's commitment of independently pursuing a goal, which is the inflation target. I mean independent, but not to do whatever they wanted. Not the Central Bank's goals, but the government's goals.

The Central Bank had to act in a very rational way. It could not act emotionally or attending political, popular or short term outcries. At the turn of the century, inequality began to decrease faster.

From the early 2000s, with school stipend, food stipend. . .

we tried to reach the poorest people and places. Leading people in extreme poverty to a level of comfort, dignity, dreams and projects. But on the other hand, creating the foundation, so poverty wouldn't be a problem for the next generation.

The idea was to pay for the children's time. Pay, so that they wouldn't give up on school. Because those were the rules.

You get the money, but you promise to keep your child at school. And they could change the percentage, from about 20 or 18 percent of children out of school for about 2 or 3 percent. The child who goes to school will offer a 100 times greater productivity than her father.

Then they will come into the labor market, and thus, the whole economy will get stronger. And this is very good for the economy. Obviously, it attracted other companies to Brazil.

More investments and more direct investment capital. In this sense, if the Family Stipend Project works out, it's autophagic. I mean it gradually decreases.

How low did the inequality rate fall from 2001 to 2012? Within a period of 12 years, the poorest 5 percent had a gain of 137 percent, while the richest 5 percent had a gain of 26 percent. With the advent of the 2002 elections, Brazil had to face a new crisis.

There was a great turmoil with Lula's triumph, which happened because people were afraid of him. His party had been totally against the Real Plan. They had caused scandals and all of that.

The party was against opening, against privatization. . .

Against almost everything! During his political rallies he said, "I don't want to be elected to maintain the same economic policy. " Therefore, he lifted a great question about discontinuity.

Many people expected a monetary and fiscal policy, completely different from the one that in fact was trying to balance the finances and make Brazilian economy stronger. When Lula began to see himself as the winning candidate, the Brazilian crisis worsened too. Between the first and second rounds there was a wave of pessimism.

The exchange rate almost reached 4 percent. And the country had to turn to the IMF. One thing is Brazil becoming a member of the IMF.

Another thing is to allow the IMF to come here and say, "You've got to do this and that. " The way they did with Argentina. Was the economic stability that had taken Brazil decades to build about to collapse?