30 years of the Real Plan: Unoriginal Lessons from Latin American Stabilizations

Original thoughts

 

There was a huge coverage in the media and several new books and papers written about it, including by several of the actual participants of the stabilization plan. If I have to leave one impression beyond the problems of all the mythology making, and the self-congratulatory mood of the whole thing, is that most of the analysts, including the economists that designed the plan, unlearned what they knew back then. People start defending some ideas because they are convenient, and next thing they end up believing their own half-baked justifications. The book shown above by three central figures in the conception and management of the Real -- Gustavo Franco, who wrote a dissertation under Jeff Sachs, with Lance Taylor in the committee that is worth reading, Pedro Malan, who was a very reasonable macroeconomist concerned with balance of payments problems in the 1970s, with a thesis supervised by Albert Fishlow, and Edmar Bacha, perhaps mostly known for his Belindia paper with Lance Taylor -- is a disappointment, but not a surprise. It suggests stabilization was possible because of the fiscal adjustment, and (this is somewhat interesting given the current debates in Argentina, where everybody wants a Plan) because the Plan wasn't really a plan, in the sense that it had no surprise measures. They mean, there was no price freeze.

The book is composed of short newspaper pieces, some previously unpublished but similar in size and style, over the last 30 years. The more recent are more illuminating for obvious reasons. The diagnostic is essentially that stabilization followed a serous fiscal commitment, an independent central bank concerned with inflation, and a flexible exchange rate to solve the external problem. There is almost nothing about the URV (Unidade Real de Valor), based on the Larida proposal, which was the center piece of the plans way of dealing with the realignment of relative prices during the transition to the new currency (one of the main problems with price freezes). Prices kept changing in cruzeiros, the actual currency, but remained fixed in URVs, that had a daily exchange rate with the cruzeiro. Then the cruzeiro was eliminated and the URV became the real, with a stable exchange rate with the dollar, one might add. Perhaps the lack of discussion can be blamed on the fact that neither Pérsio Arida nor André Lara-Resende participate in the book.

However, in a recent piece on Piauí, Lara-Resende, the more controversial and less conventional, at least these days, of the Real Plan forefathers, although he does say that the URV is the Columbus' egg that allowed to eliminate the problem of inertia, but then goes on to say that:

"Inflation is the result of a long process of fiscal disorder, that mirrors social demands and political conflicts, that cannot be resolved by the established institutional channels" (my translation).

In other words, inflation is caused by too much social spending and fiscal imbalances. The conflict is not, apparently one about income distribution, in the face of an external problem (foreign debt back in the 1980s). There is no mention of the exchange rate, the external obligations or the amount of reserves held by the central bank necessary to service the foreign debt.

Of course what allowed for the stabilization was the change in capital flows in the 1990s, in part the result of the lower rates in the United States after the financial crash of 1987, and more so after the 1991 recession, together with the Brady renegotiation of the external debt, that Brazil signed in 1992. By 1994 the reserves were reasonably large as can be seen below.

Reserves were very low in the 1980s, and that was the main reason for the failure of the heterodox plans, not just in Brazil, but in many other countries like Argentina. In May 1993, when Fernando Henrique Cardoso became Finance Minister, reserves were at about US$ 23 billion, and by the time the real became the currency, and the exchange rate between the real and the dollar was stabilized, reserves had more or less doubled (one can see the erosion of them after the 1999 crisis, and all of that is dwarfed by the accumulation of reserves that started in the second Lula government). There is a brief comment on the round-table at the Catholic University in which someone said that Gustavo Franco was instrumental in trying to keep the exchange rate stable, but it is almost an after thought.

This is lack of understanding of what allowed for stabilization in the 1990s, and not in the 1980s (in the case of Israel the US provided a large transfer of reserves to their central bank; stabilization by invitation, one might call it), is generalized. Many papers trying to find some specific element of the stabilization plans miss the fact that everybody stabilized in the 1990s, once dollars started flowing to the periphery.

At any rate, many other problems with these papers, books, round-tables, on Lula, and his views, on what would allow for higher growth now, on why price stability has been maintained, and so on. But the ideas are mostly conventional, unoriginal, and for the most part incorrect. They provide less knowledge now than what they knew back then.