Macroeconomic Principles – The Real Plan

...

Finally, the last stage was the transformation of the URV into “Real”, Brazil's new currency, in July 1, 1994. The prices had already been set in URV, and there was no need for adjustments. This strategy allowed the Real Plan be different from the previous plans because there were no surprises for the population and companies, because the steps were announced months in advance.

The implementation of the "Real" brought benefits to the population, once the inflation corrodes the purchasing power of people. The daily run to the banks and markets ceased to be routine for the Brazilians after the plan. Thus, responding to incentives, consumers, companies and even the government changed their behavior, adapting to the new reality. With the stability and the consequent increase in the purchasing power of society as a whole, consumption exploded. Moreover, with increasing demand for products, there was an increase in employment opportunities.

In addition, the Real Plan also brought benefit to the political party that ruled the country at the time, PSDB, since it enabled the election of the then finance minister, Fernando Henrique Cardoso, as president of the republic the following year.

However, the parity of the "Real" with the dollar caused discontent in some sectors of industry. The trade liberalization and the maintenance of overvalued exchange rate were the two main measures to keep inflation under control. The side effect was that imports were very encouraged and prevented domestic companies to increase their prices, since this would make competition impossible. Consequently, it created a very serious problem with the domestic industry, which grew less and lost competitiveness.

In conclusion, it is important to note that the Real Plan faced several international crises after, such as Mexico in 1995, the Asian Tigers in 1997, Russia in 1998 and finally Brazil in 1999, which forced the government to let the real float. However, the inflation remained within acceptable levels.