Brazil got it all right, then lost the plan
NO country has risen and fallen as dramatically as Brazil in the past 20 years. Maybe I feel this way because I was a big supporter of Plano Real, the economic plan drafted by the then finance minister, Fernando Henrique Cardoso, and economists from PUC-Rio University in 1992.
Plano Real was a plan that was responsible for stabilising Brazil’s economy.
The main elements included the introduction of a new currency (the real); the de-indexation of the economy; an initial freeze of public sector prices; the tightening of monetary policy; and the floating of the currency, with a floor specified for its value vis-à-vis the dollar.
These policies enabled Brazil to get monthly inflation rates down from 45% during the second quarter of 1994 to an average of less than 1% in 1996. The economy grew by 6% in 1994, 4.2% in 1995 and 2.9% in 1996.
Despite the recession in 2009, Brazil’s economy expanded quite strongly, helped by high commodity prices, which contributed both to it achieving significant current-account surpluses and accumulating international reserves.
This also enabled the country to pursue countercyclical policies to mitigate the effects of the international financial crisis.
In fiscal policy terms, tax rates were reduced, public investments were expanded and a more flexible target for a fiscal surplus was introduced. In monetary policy terms, the central bank injected liquidity into the economy and reactivated the credit market.
In 2010, Brazil’s economy expanded by 7.5%. With India and China, it helped support global growth at a time when the big, developed countries such as the US, UK and Germany were struggling to post two quarters of positive GDP growth.
But five years later, Brazil’s economy is fragile, so much so that GDP fell by 4.5% year on year in the third quarter, confirming that the country is on track for its worst recession since the Great Depression.
Brazil’s GDP was negative in the first three quarters of the year and analysts expect a contraction of about 3.5% in 2015 as a whole.
Once the fastest-growing economy, it is now faced with fiscal contraction, hammered by lower commodity prices, and the consumer credit boom that helped expenditure growth is tanking.
In addition, the latest consumer price index increased by 9.9% compared with a year ago, the highest level in 12 years, and the unemployment rate is the highest since 2009.
The unravelling of the good policies of Plano Real is happening alongside the arrest of senior people in the private sector and in politics, including the government’s leader in the senate.
Which makes me wonder about the extent to which deep political divisions undermine a
On track for worst recession since Great Depression
policymaker’s ability to respond to the current economic crisis.
For instance, after the corruption probe that led to the recent arrest of André Esteves, CEO of BTG Pactual, investors withdrew $1.8-billion (about R26-billion) from the firm, leaving the already burdened central bank to deal with the potential effect on the broader financial system.
There are lessons to be learnt here.
Of the Brics countries, Brazil and Russia are in recession and South Africa has just narrowly escaped this.
Given the political and economic pressures prevalent in both Russia and South Africa, it is quite easy for these two countries to end up in the rut that Brazil is in.
Leoka is an economist