Biasoto and Cano
evaluate 10 years of Real Plan

CLAYTON LEVY

NThere were no packages, freezes or confiscations. The Real Plan, launched ten years ago by the government of then president Itamar Franco, was different from anything that had ever been attempted to end inflation. So different that, at the time, it seemed more like a miracle. It wasn't an exaggeration. For those who were used to experiencing inflation of around 2.500% per year in 1993, arriving in June 2004 with the IPCA for the last twelve months at just 6,31% was quite a change. In a historical context of hyperinflation there is no way to dispute the merit of the plan. But other challenges remain, such as getting the economy off the ground, generating jobs and income. In an interview with Jornal da Unicamp, professors Geraldo Biasoto and Wilson Cano, from the Institute of Economics (IE), take stock of the first post-Real decade.

In your opinion, did Brazil improve or worsen after the Real Plan? Why?

Geraldo Biasoto – That Brazil after the Real Plan is better than the entire period that spanned from 1980 to 1994, there is no doubt. But we need to be very clear about what it means to be better or worse and what impact a stabilization plan should have on our judgment about the economy. Firstly, it is necessary to bear in mind that the monetary stabilization that the Plan provided was fantastically successful. In all historical experiences, the transition from very high inflation to stability had enormous costs in terms of employment and even hunger among the population. This was not the case with the Real Plan, the URV served its objectives very well as a gateway currency between the old monetary standard, full of inflationary expectations, and the new one, free from the disbelief of the past. It is logical that this transition would not have been possible without the context of Brazilian external accounts gaining a stability that had long been lost: the availability of international capital once again supported our Balance of Payments. With this, the pressure that, since 1980, had been placed on the economy by generating exportable surpluses, was eliminated, breaking the enormous tension that was always present over the exchange rate parity of our currency. Therefore, two elements explain stabilization: a) effective engineering of passing from the old currency to the new; and b) the return of access to the international capital market, which allowed the exchange rate to go from being an element of tension to the true anchor of the internal price system. Secondly, it is essential to keep in mind that thinking that a stabilization plan can fulfill the role of a development project is enormously short-sighted. It is very typical of those who believe that you just need to let the free play of market forces work to provide growth. The formulation of sectoral policies, the redesign of the credit system, industrial policy, infrastructure financing are aspects that go far beyond a stabilization plan. For all these reasons, the Real Plan provided the basis on which the economy and people were able to evaluate costs and remuneration, which is essential for the lives of people and companies. But it is necessary to evaluate it for what it was: a monetary stabilization plan.

Wilson Cano – First of all, it is necessary to understand that this Plan was not, like the previous ones, just “a stabilization plan”. It is an integral and essential part of a broader program - the Washington Consensus - which constitutes the set of neoliberal reforms introduced in the country since 1990. From the point of view of stability, the answer would be positive, although we cannot ignore that in July From 94 to today, inflation has already increased by 250%! Under the other problems, no, as I will try to show. The Plan was supported by several columns or “anchors”: the new exchange rate policy, where the Real was artificially valued, making spending with foreign currency much cheaper; in trade opening, with a strong reduction or elimination of import tariffs, which made imports even cheaper and in practice prevented national producers from marking up their prices, as a result of which many went bankrupt, eliminated some production lines or became importing traders; in the colossal expansion of the internal public debt, as the enormous influx of dollars to cover the gap in the balance of payments, when converted into national currency, needed to be sterilized, for which government debt securities were issued; in the absurd interest rates in force at the time, with the aim of attracting external and internal capital (public debt).

The Real stabilized inflation, but did not accelerate growth. Why, in his opinion, did the country grow so little during this period?

 

Biasoto – The Real Plan ended up a prisoner of its success. Access to external resources and the enormous fear of promoting development policies that could cast doubt on stabilization ended up making monetary stability an end in itself. Development policies only began to gain some dimension late, in 2000, and ended up being aborted by the change of government.

Cano – Accelerate is not the right word. The Plan simply repeated the weak average growth of the 1980s, for a very simple reason: for it to achieve high and persistent growth, it would be necessary for the flow of external financing to be the same - which, as we know, does not occur in the financial system. international level, whose volatility, uncertainty and risk have only increased since the 1970s. On the other hand, bankers – here and abroad – are not idiots and clearly understand when the financial imbalance – internal and external – of a country increases greatly : simply “get lost”. On the other hand, the high interest rate and the uncertainty about the future direction of the economy inhibited – and still inhibit – private entrepreneurs, who, in addition, no longer counted on public investments, which were drastically cut, as is the case. IMF-BIRD. Therefore, with the shrinking of the State and the limitations of external financing, there is no way to grow high and persistently in this model. Let us not get excited about possible growth of 3% or 4% – this year as in previous years – because the economy, on average, grows much less than that, simply because, when external financing retracts, the exchange rate crisis emerges, and economic policy finds itself a prisoner, creating a new recession.

Critics of the Real Plan point to exchange rate, fiscal and tax policies as its main Achilles heel. What do you think about it?

 

Biasoto – In fact, the criticism is poorly focused. The Real Plan had several combinations of economic policies. At its beginning, the exchange rate was fixed and valued, with high interest rates and relatively tough monetary and fiscal policies. Between mid-1995 and 1998, the interest rate was very high to ensure the inflow of foreign capital with an extremely valued exchange rate. Fiscal policy was a little looser amid a state reform with transfer of assets to the private sector. From 1999 until now, the exchange rate has become flexible and the inflation target policy (although always not met) leads to a very high interest rate. As an anchor we no longer have the exchange rate, but the fiscal surplus that offsets the high cost of public debt and keeps the debt-GDP ratio under control. Finally, a tax burden that never stops growing. Ultimately, there does not seem to be just one problem with the arrangement of policies, given that several have already been used. The issue is the lack of greater clarity regarding the roles of the State and economic authority in a continental economy with slow and discontinuous economic development. The real problem is that short-term economic policy remains disconnected from a development project.

Cano – They are right, at least in part: in the exchange rate, because the appreciation makes our exports more expensive, at the same time that it creates the illusion of a (permanent) cheap dollar for imports and loan contracts. But, when in a crisis it becomes more expensive, then comes the bankruptcy of debtors, and the eternal crying at the State's teats, as Rede Globo is doing, for example. Fiscally and tax-wise, because the State was forced to increase the tax burden, which, under FHC's terms, rose from 28% to 34% of GDP, as a result of which businesspeople and the media (curiously, workers doesn’t realize that he is the biggest loser!). But what they don't say is that the 8% increase simply served to pay for the colossal increase in the volume of interest paid by the State, which today stands at around 9% of GDP... The dilemma, therefore, for that the load would decrease, is located at one or more vertices of the following triangle: a) drastically lower interest on the debt; b) issue a new default (à la Collor) and proceed with a strong extension of their maturities; c) further cut current spending and public investments (where: education, health, roads, civil servants' salaries...?).

Proponents of the Plano Real believe that Brazil would now be ending a “preparatory decade” and entering a post-plan harvest phase, with the prospect of average annual growth of 3,5% to 4% per year. Do you agree with this assessment? Why?

Biasoto – This is the view that it is enough to stop the public deficit and put inflation under control for this sleeping animal, Brazilian capitalism, to awaken and begin the spectacle of growth. The problem is that, in the history of the world economy, only two countries have experienced this type of spectacle: England during the Industrial Revolution and, in this century, the United States. All other development processes are derived from compositions and articulations between local and international capitalist classes, with the presence and mediation of the State, including the Japanese, German and Korean cases. Today, the fiscal surplus takes between 8% and 10% of GDP from the hands of companies and individuals and transfers it to holders of public debt securities. Not that the State has taken on so much debt, the fact is that the wealth of individuals and legal entities is invested in securities, under penalty of generating speculative processes in the most diverse markets, the State is the only agent that can remunerate this mass of wealth. In other words, we subtract from the economy the demand that would boost growth and the agents who receive interest payments continue in financial investments because they have no horizon to invest. We may even have 3% growth, but it will quickly hit external accounts and the lack of coordination between public and private investment. There is no way to grow sustainably without the State clearly defining, and supporting, through an industrial, credit and foreign trade policy, a space for action for national and international capital.

Cano – These people, honestly, are not defending the country, but rather their interests as rentiers, with speculation and easy gains on financial assets, especially public debts. They know, but they hide – and the media unfortunately either doesn't realize this or pretends not to realize it – that the country has already been in crisis for 25 years, and that the possibility of high and persistent growth does not exist in this model. Now, they are trying to reinvent the wheel, with agricultural exports. Now, it was with them that we entered capitalism and the international market, and we know our history very well. They intend, even if unconsciously, to return to the era before the 1929 Crisis... That is why they want to “end the Vargas era”.

The PT in government oscillates between criticism and continuity of the Real Plan. What is the meaning of this dichotomy?

 

Biasoto - The PT experiences the FHC government's dilemma in an even more dramatic way because it is much less legitimate in the eyes of the market. No one admits the questions, but they circulate in the heads of market agents: will Pallocci have the full support of the President and the PT if the international market effectively restricts capital flows? Is it possible to go through all this time without a populist relapse that changes economic policy? The dilemma is resolved by an even more staunch adherence to the policy implemented in 1999: fiscal surplus, floating exchange rate and high interest rates. In the absence of its own formulation capacity, the PT bought the policy it fought so hard for.

Cano – It is the dichotomy of the absurd: it laments the cursed legacy, while at the same time giving continuity – and in some cases deepening, as in the Pension Reform and union and labor reform projects – to the process that originated it. There can only be one meaning: the creed that guides economic policy is the same: subordination to national and international finance.

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