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Volume 51 / Social Sciences


DONALD V. COES, Associate Professor of Economics, University of Illinois at Urbana-Champaign
JOHN H. WELCH, Economist, Federal Reserve Bank of Dallas

ONE CLEARLY CANNOT WRITE about the Brazilian economy without discussing the Plano Cruzado, if the economic literature of the last few years is any guide. Although most Brazilians probably wish to hear no more about it, the topic should remain of interest to economists for several more years. Despite the fact that much of the literature annotated below was written in the first flush of euphoria in 1986 before the plan began to go astray, there is much of value to be learned both from contemporary observers of the plan and from the post-mortems, which are still coming in.

What impresses the outside observer with the advantage of hindsight is the rapidity with which opinions about the plan changed. In early 1986, there were few if any voices among professional economists which were critical of the program; in fact, most contemporary comment on the plan (such as Modiano, item bi 88003231, and Nassif, item bi 88003238) was frankly triumphal in tone. Since journalists usually publish faster than academics, it is not surprising that one of the first critical evaluations of the plan and its aftermath came from that direction (Sardenberg, item bi 88003225).

The evolution of the theory of "inertial inflation" appeared as a central theme in volume 49 of the Handbook. Since the implementation of the Plano Cruzado, anthologies of these theoretical works have appeared concurrently with the journalistic efforts mentioned above. Examples include Pereira (item bi 89000112), Modiano (item bi 88003231), Rego (item bi 88003234), and Carneiro (item bi 88003237). Journalistic and academic evaluations came next. Journalistic efforts of note include Sardenberg, mentioned above, and Assis (item bi 89000935). Sardenberg concentrates on the actual policy-making, while Assis concentrates (as always) on the effects on the financial sector. The academic evaluations concentrated on answering the question "what went wrong?" A few (the more "monetarist" observers) cited inconsistent theoretical underpinnings to the plan (Pelaéz, item bi 88003229, and Maksoud, item bi 89000096), while most concentrated on the problems of implementation (Dornbusch and Simonsen, item bi 88002530, Baer and Beckerman, item bi 89003268, and World Bank, item bi 89000075).

The attributes of the plan which loom as the main culprits are: 1) the over-ambitious increase in real wages at the beginning of the program due to the "bonus;" 2) a consumption bubble caused by lowered inflation expectations and fueled by all the other problems in implementation; 3) an exceedingly long period (nine months) over which prices and wages were frozen; 4) the lack of attention to reducing the public sector deficit; and 5) an overly expansionary monetary policy. Clearly, these "problems" are neither independent of each other nor mutually exclusive. Typically, authors concentrate on a subset of problems according to their theoretical predilections. For example, the staunch inertialist-structuralist school would find the wage bonus the main culprit, as fiscal deficits in their view have nothing to do with inflation, while more (moderate) orthodox economists concentrate on the fact that the fiscal deficit did not improve substantially during the Cruzado Plan and worsened dramatically afterwards.

The discussion over the relevance of the Brazilian public sector deficit and its relationship to inflation generated a few works of note. General analyses include Barbosa (item bi 88002375), Biasi (item bi 90013906), Lozardo (item bi 89000977), and Martone (item bi 89000078). More specific analyses appear in Pereira (item bi 88000079) and Werneck (item bi 88003228), the former concentrating on the Brazilian public sector's ability to channel investment resources, the latter on the relationship between State enterprise and macroeconomic performance.

The role of the financial sector has become an especially important subject, as its main activity starting around 1982 was to channel resources to the public sector to meet foreign debt (and now internal debt) service. The financial sector has also profited greatly in this intermediation role, becoming the most dynamic sector in the Brazilian economy. This is a testimony to the success of the financial reforms of 1964. Several recent works (such as Tavares and Carvalheiro, item bi 89000937, Goldsmith, item bi 88003220, and Teixeira da Costa, item bi 88003232) deal with these developments. Of note in terms of current events is the idea that the financial system in its role of transferring resources to the public sector, principally through intermediation in the "overnight market," became the main source of pressure which would lead ultimately to hyperinflation. Such a view precipitated the so-called "Collor Plan" of March 15, 1990, under which 80 percent of the financial system's liabilities were "frozen" for 18 months. An analysis of this novel stabilization plan, however, will be left for volume 53 of the Handbook, although a brief description appears at the end of this introduction.

A final note should be given to economic liberalization, or more specifically trade liberalization. The structural adjustment loans extended by the World Bank as part of the now-dated "Baker Initiative" were meant to give financial support to countries undertaking "necessary" structural changes, usually encompassing financial and trade liberalization. A large literature has surfaced concerning the role of international trade in the Brazilian economy, especially in light of the post-debt crisis adjustment process. Good examples are Baumann (item bi 88003233), Baumann and Braga (item bi 89000932), Baumann and Lerda (item bi 89000936) and Oliveira Filho (item bi 89001660). The conclusions of these authors is that Brazil should move to liberalizing trade as quickly as possible. Further discussion of the implications of such liberalization will be left to the next social sciences volume, HLAS 53.

Just prior to the preparation of this essay, Brazil instituted an "experimental" inflation stabilization plan under a new president, Fernando Collor de Melo, and Minister of Finance, Zélia Cardoso de Melo. The prognosis was that the continuously increasing cost of financing the internal debt and its consequent feedback into the operational fiscal deficit created a situation where Brazil was on an inescapable march to hyperinflation. Further, the high liquidity of public debt rendered it interest-earning money and hence the continuous refinancing (on a 24-hour basis) put such pressure on the Central Bank that any reasonable fiscal reform was impossible. The "Collor Plan" consists of removing 80 percent of the liquidity from the financial system by freezing it in an account at the Central Bank for 18 months, promoting a profound fiscal reform which includes institution of a wealth tax, widespread privatization of public enterprise, and trade liberalization. The medium-term risk is that there will be a complete loss of confidence in the financial system, the implications of which are substantial capital flight and a complete reliance on the inflation tax for public finance (i.e., hyperinflation). Avoiding these problems depends upon the government's ability to reform its finances during the 18-month freeze period. The short-term risk is that there will be a huge downturn in economic activity, as aggregate demand will be suppressed. How well the Brazilian government manages this intriguing set of macroeconomic policies and an evaluation of the plan's theoretical foundation will most likely prove to be the major thrust in research over the coming years. We are sure to see a proliferation of material on the "Collor Plan" which will rival in quantity that of the "Cruzado Plan."

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