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The Real Stabilization Plan Of Brazil

1752 words - 7 pages

Brazil faced many struggles with its currency throughout the last half century, eventually changing its currency five times before reaching what most would argue was their best stabilization plan. The stabilization plan that Brazil concluded with and is currently practicing is known as the Real. Each of the five currencies mentioned lasted at most three years, however since the creation of the Real Plan, the Real has been used for over twenty years. Compared to each of its predecessors, the Real Plan can easily be considered the most successful strategy followed by the Brasilian government. The Real was mainly able to achieve its fame by being able to keep inflation rates stabilized and lower over the past twenty years.
What exactly was the Real Plan? The Real Plan was essentially a framework created and implented by Itamar Franco and Fernando Henrique Cardoso. According to Filho, Franco and Cardoso determined that Brazil’s economic issues lied with its inflation rate. Therefore, they set forth to create a policy where they could stabilize and control the inflation rate, the aftermath was known as the Real Plan. As Filho puts it, this was possible by following three steps: first off they had to adjust the short-term fiscal deficit, then monetary authorities had to introduce a price index to stabilize the economy, and finally the real would be introduced as legal tender. Unlike the other stabilization plans, what made the Real different, were the steps used in introducing this new plan. Cardoso and Franco saw the issues of bringing about a new currency into the Brasilian economy, and therefore they preemptively created these three steps in order to make the plan successful. The results of the steps linked to eachother and allowed the next step to become successful. The first step which involved adjusting short-term fiscal deficit eventually led to a primary fiscal surplus of 2.6% of GDP. The second step involved the announcement of the Unit of Real Value, URV, as a reference point while the cruzeiro real was still being used in the public. The URV was amazing because it did not require a set price for the currency, or a wage freeze in order to lower inflation.
According to Franco, the URV was able to be placed in effect through a law which established that all contracts must be written in URV’s. The URV was then based on a basket of goods, and 1 URV would be approximately worth 1 USD (United States Dollar). Eventually, the people would accept and have confidence in the URV, and because of this would allow the final step to occur. The final step was for the URV to become actual legal paper tender in July of 1994. The currency at which the people traded with as a non physical unit of account, was now a piece of paper in front of them. The real then replaced the cruzeiro novo as a unit of account. At this time as well, the government introduced two anchors. The monetary anchor and the exchange rate anchor. The point of these two anchors was to...

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