Brazil - The 1990-94 Period
The 1990-94 Period
The first post-military-regime president elected by popular suffrage,
Collor de Mello (1990-92), was sworn into office in March 1990.
Facing imminent hyperinflation and a virtually bankrupt public sector,
the new administration introduced a stabilization plan, together
with a set of reforms, aimed at removing restrictions on free enterprise,
increasing competition, privatizing public enterprises, and boosting
Heralded as a definitive blow to inflation, the stabilization plan
was drastic. It imposed an eighteen-month freeze on all but a small
portion of the private sector's financial assets, froze prices,
and again abolished indexation. The new administration also introduced
provisional taxes to deal with the fiscal crisis, and took steps
to reform the public sector by closing several public agencies and
dismissing public servants. These measures were expected not only
to swiftly reduce inflation but also to lower inflationary expectations.
However, few of the new administration's programs succeeded. Major
difficulties with the stabilization and reform programs were caused
in part by the superficial nature of many of the administration's
actions and by its inability to secure political support. Moreover,
the stabilization plan failed because of management errors coupled
with defensive actions by segments of society that would be most
directly hurt by the plan.
After falling more than 80 percent in March 1990, the GPI's monthly
rate of growth began increasing again. The best that could be achieved
was to stabilize the GPI at a high and slowly rising level. In January
1991, it rose by 19.9 percent, reaching 32 percent a month by July
1993. Simultaneously, political instability increased sharply, with
negative impacts on the economy. The real GDP declined 4.0 percent
in 1990, increased only 1.1 percent in 1991, and again declined
0.9 percent in 1992 (see table 7, Appendix).
President Collor de Mello was impeached in September 1992 on charges
of corruption. Vice
President Itamar Franco was sworn in as president (1992-94),
but he had to grapple to form a stable cabinet and to gather political
support. The weakness of the interim administration prevented it
from tackling inflation effectively. In 1993 the economy grew again,
but with inflation rates higher than 30 percent a month, the chances
of a durable recovery appeared to be very slim. At the end of the
year, it was widely acknowledged that without serious fiscal reform,
inflation would remain high and the economy would not sustain growth.
This acknowledgment and the pressure of rapidly accelerating inflation
finally jolted the government into action. The president appointed
a determined minister of finance, Fernando
Henrique Cardoso, and a high-level team was put in place to
develop a new stabilization plan. Implemented early in 1994, the
plan met little public resistance because it was discussed widely
and it avoided price freezes.
The stabilization program had three stages: the introduction of
an equilibrium budget mandated by the National Congress (Congresso
Nacional; hereafter, Congress); a process of general indexation
(prices, wages, taxes, contracts, and financial assets); and the
introduction of a new
currency, the real (for value of the real (R$)--click here),
pegged to the dollar. The legally enforced balanced budget would
remove expectations regarding inflationary behavior by the public
sector. By allowing a realignment of relative prices, general indexation
would pave the way for monetary reform. Once this realignment was
achieved, the new currency would be introduced, accompanied by appropriate
policies (especially the control of expenditures through high interest
rates and the liberalization of trade to increase competition and
thus prevent speculative behavior).
By the end of the first quarter of 1994, the second stage of the
stabilization plan was being implemented. Economists of different
schools of thought considered the plan sound and technically consistent.
Data as of April 1997