Thirty years after the Real Plan

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By CIRO BIDERMAN, LUIS FELIPE COZAC & JOSÉ MARCIO REGO*

Less than 20 years after the Real Plan, the government once again tried to control inflation by holding public energy and fuel tariffs

When we started thinking about this project that became the book Conversations with Brazilian economists (Ed. 34), around 30 years ago, we believed we were at the beginning of a new phase in Brazil. It seemed like we would have a new economic model after decades of an exhausted model. Chronic inflation was in its final act and a new and healthy vision of public policy seemed to take hold. We can say that the 15 years that followed the Plano Real confirmed our perception.

The FHC 1 and 2 governments, as well as the Lula 1 and 2 governments, brought a new perspective to the country. The Real Plan, which actually resolves inertial inflation in the country, started from a theoretical mechanism that proved successful in practice – the anchoring of prices in an indexed and virtual currency. The famous “Larida” proposal, a term coined by Dornbusch in reference to its two creators (André Lara Resende and Pérsio Arida) was based on established theoretical-economic principles applied to the real world.

But there is another original and non-intuitive theoretical contribution, which played a relevant role in understanding the economic context of the inflationary period: the idea that, in Brazil, the increase in inflation would reduce, not increase, the public sector deficit. It would be a “Tanzi effect in reverse”, that is, in Brazil the rise in inflation would reduce the deficit, since expenses were less protected than revenues, indexed by monetary correction since the sixty-year-old military dictatorship.

This effect became known as the “Bacha Effect”, as it was disseminated by one of the fathers of the Real Plan, Edmar Bacha, and was the basis for the Constitutional Amendment that created the Social Emergency Fund, and promoted a decoupling of around 20% of expenses , granting greater budgetary freedom and enabling fiscal management, which was crucial to controlling inflation. Edmar Bacha himself gives credit for the original idea, arguing that the appropriate name would be “Efeito Guardia”, in allusion to the late former Minister of Finance Eduardo Guardia.

It is important to remember that we are back in a position of fiscal tightness, where the decoupling of part of spending is once again necessary. Today, we are on the opposite path: of the meager “discretionary” portion of spending, around a quarter is linked to parliamentary amendments (it was just 7% in 2018).

With youthful optimism, we thought that we would no longer see the use of controlled prices to contain inflation. This strategy, systematically used by governments prior to the Real Plan, only postponed the problem, generating relative price distortions that made the problem even greater in the future. Less than 20 years after the Real Plan, the government once again tried to control inflation by holding public energy and fuel tariffs. Again, the same ghost stalks us today – and the results are known.

A variation of this pseudo-anti-inflationary strategy is to hold back the increase in the minimum wage with the same objective. This expedient was used countless times by governments before 1994. But, from the Real Plan onwards, consistent increases in the minimum wage with its distributive effects were the hallmark of these 15 years of good economic policy that we have seen. To our surprise, the increase in the minimum wage and civil service salaries below inflation (along with the absence of public examinations) was recently used as a strategy to control the primary deficit, in the previous government.

Today we see self-styled left-wing groups once again applauding deficit movements and interest rate reductions without economic foundations, without worrying about the quality of spending and its financing. We see conservative groups applauding deficit control at the expense of the minimum wage and civil service, without worrying about the unsustainability and “short-termism” of this and other strategies.

So we continue, forgetting what we learned, each group with its own irrationality to applaud. The constructive technical debate is stifled and good management of public policy and the budget is lost. The Tax Reform, which should be regulated this year, gives us some hope that rationality can reign again.

Following the tradition of forgetting every 15 years what happened in the previous 15 years, what scares us most is that we don't even remember the value of democracy. Since the “Diretas Já” struggle 40 years ago, we never imagined that democracy would be questioned. We watch with sadness the existence of groups disregarding this basic value. We know that it is easier to carry out economic policy under a dictatorship, just as it is easier to be a veterinarian than a doctor (because in this case the patient complains!).

But there was an apparent consensus that this advantage did not compensate for all the evils of a dictatorship. We still believe that democracy is the worst system out of all the others, as Churchill said. But part of the Brazilian population has forgotten this too.

*Ciro Biderman He is a professor of Public Administration and Economics courses at Fundação Getulio Vargas (FGV-SP).

*Luis Felipe Cozac é PhD in Business Economics from Fundação Getúlio Vargas – SP.

*José Marcio Rego is a professor at Fundação Getulio Vargas – SP and retired professor at the Pontifical Catholic University of São Paulo (PUC-SP).

Originally published in the newspaper Economic value.


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