Between 1985 and 1994, Brazil faced a tough period marked by severe inflation. Prices were rising rapidly, causing people to lose their purchasing power and struggle to plan their finances. This inflation was fueled by excessive government spending and the expectation that prices would keep going up, prompting businesses to frequently raise prices to protect their profits. This challenging economic situation, coupled with high debt and slow growth, led to a lost decade. Many attempts were made to stabilize prices before the introduction of the Real Plan in 1994, which now marks its 30th anniversary.
A brief history of the fight against inflation
Before the Real Plan, several attempts were made to combat inflation.
Cruzado plan, I and II
The Economic Stabilization Plan, launched in February 1986 and known as the Cruzado Plan, introduced several measures to control inflation in Brazil. One of the main changes was replacing the old currency, the cruzeiro, with the cruzado, which involved removing three zeros. The plan also froze the exchange rate and prices and implemented a “wage trigger” to adjust salaries according to inflation. Initially, inflation dropped sharply, increasing the purchasing power of the population and gaining popularity.
However, price freezes led to financial problems for producers, and shortages of food and other goods. In response, the Cruzado Plan II was launched in November 1986, but it didn’t solve the economic problems. Inflation quickly rose again, and the country faced a serious financial crisis, including declaring a moratorium on external debt in 1987.
Bresser plan
Launched in 1987, this plan included measures such as freezing prices and changing how wages were adjusted. Initially, it managed to significantly lower inflation within just a few months. However, problems soon arose: Many companies didn’t follow the price freeze and increased prices again. This caused inflation to rise rapidly once more. Thus, despite working temporarily, the Bresser Plan faced challenges that limited its long-term effectiveness.
Summer plan
In 1989, the Brazilian government launched the Summer Plan to try to control the skyrocketing prices, which were spiraling out of control. They changed the currency from cruzado to cruzado novo and also froze prices on various products. Initially, inflation decreased somewhat, but soon after, prices began to rise rapidly again. By the end of the year, inflation was extremely high, indicating that the plan did not succeed, just like its predecessors.
Collor Plan, I and II
The “Brasil Novo” Plan or Collor Plan was implemented in 1990 right after the election of the first directly elected president since the military regime. One of the most controversial measures was freezing cash deposits and savings accounts for 18 months, allowing limited withdrawals up to NCz$ 50,000. The plan also froze prices and salaries and changed the currency to the cruzeiro without removing zeros. Despite easing currency exchange and gradually opening up the economy, the country fell into a severe recession with extremely high inflation, reaching 1,621% per year.
The Collor Plan II, announced in 1991, also froze prices and salaries and introduced the Reference Rate (TR), but it couldn’t control inflation for long. President Collor was impeached in 1992 amid economic and political crisis. His successor, Itamar Franco, again changed the monetary standard in 1993 to the real cruzeiro, cutting three zeros from the currency.
Life before the Real Plan
Shopping for a month’s worth of food and hygiene products in a single visit to the grocery store after payday is a common practice in Brazilian culture. This habit originated in the 1980s and 1990s, before the Real Plan. During this period, inflation reached up to 80% in a single month, making prices unpredictable and extremely high. They were indicated by stickers, as barcodes were not yet in use. Due to the constant rise in prices, there was a specific employee in markets whose only job was to update price stickers. The freezer became the most valued household appliance, as people tried to stockpile as much meat and other perishable foods as possible before their prices changed again.
Moreover, stores often did not have enough products in stock. There were lines to buy food and even cars. It was not uncommon for Brazilians to sleep in these lines to buy packages of rice, beans, and sugar, for example. People sometimes had to resort to the black market, where products were sold at much higher prices. Salaries were adjusted every month but still did not keep up with the inflation rate.
Overnight investments are a type of investment where the investor deposits money overnight and receives the adjusted amount the next business morning, corrected by an interest rate that tracks inflation. They were also a common strategy for some Brazilians to minimize money devaluation and loss of purchasing power.
How the plan was implemented
Part 1: Fiscal adjustments
The plan started at the end of 1993 with a budgetary reform to reduce government spending and increase its revenues. There was a $22 billion cut in the budget, along with a 5% raise in taxes. Additionally, the government established the Emergency Fund, allocating 15% of tax revenues to fund social programs.
Part 2: Implementing the Real Value Unit (URV)
The Real Value Unit (URV) was the critical piece of the puzzle that made the success of the Real Plan possible. It functioned as a conversion unit rather than an actual currency, and it was pegged to the previous day’s commercial dollar rate. In stores and supermarkets, prices were adjusted and displayed in URV, while transactions were conducted in cruzeiros reais, the circulating currency at the time. The value of URV in relation to the cruzeiro real was adjusted daily through official announcements by the Central Bank, widely reported in the media.
One kilogram, or about 2.2 pounds, of chicken, could be bought for 1 URV. The price of chicken would be marked as 1 URV on the supermarket shelf. At the checkout, however, the price would be converted, and payment would be made in cruzeiros reais. While prices in cruzeiros reais continued to rise, prices in URV for the same products remained relatively stable. For instance, on the first day the URV was implemented, chicken would cost CR$ 647.50. Even when the value of the cruzeiro increased to CR$ 657.50 the next day, the price of chicken still remained 1 URV.
Part 3: Introducing the Real
After the complete adaptation of the economy to the URV (Unidade Real de Valor), on July 1st, 1994, the real was introduced, also based on the dollar as a reference. A conversion table was published, allowing the population to exchange their old cruzeiro notes for real notes over a few weeks. Additionally, strict inspections were conducted to prevent unjustified price increases, with penalties for merchants attempting to profit from the currency change.
Conclusion
Brazil’s Real Plan was a significant turning point in the country’s economic history. It transformed a struggling economy plagued by hyperinflation into a more stable and growing one. While challenges remain even now, 30 years later, the lessons learned from the Real Plan continue to guide Brazil’s economic policies today. The commitment to controlling inflation, promoting growth, and maintaining public trust is essential for Brazil’s future prosperity.
