Economy & Energy
  Year  I  - No 4
Sep/Out 1997

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Editoração Eletrônic
Sunday, 13 December 1998.


 Carlos Feu Alvim
English Version:
Frida Eidelman

Fighting inflation in Brazil has as an anchor a compromise with the exchange rate stability. In this sense, the Plano Real is an adaptation of the Argentinean and Mexican plans for fighting inflation or of those from other developing countries which have been supported or suggested by the international financing organizations.

Fixing exchange represents a distortion of the market laws and could be interpreted as a certain doubt about the wisdom of these laws from the creators of this plan.

Nevertheless, it should be recognized that the exchange stability is not an inopportune measure since its maintenance implies forcing the satisfaction of two essential conditions:


balance of the government’s accounts and

competitivity of the local economy at the international level.


It would then be an instrument to induce the accomplishment of these two conditions which do not automatically exist by adopting the stabilization plan to which the exchange policy is linked. For the success of the Plan it is necessary to bring about a series of measures aiming at reaching public accounts balance and economic competitivity in production.

These two objectives are difficult to get and demand determination of goals and a clear strategic vision from those conducting the economic policy and great political skill from the authorities since very often it is necessary to adopt unpopular measures.

The exchange rate anchor, if it acts as such, does not allow the transfer to the exchange rate of residual inflation provoked by the inertia of the previous habits. Since this inflation is not null, the existing experience shows that one gets the valorization of the internal currency, which is more or less serious according to the exchange rate chosen at the time the Plan was started. In the Brazilian case, President Cardoso himself has already recognized that the exchange rate chosen at first (which tried to avoid loss of external reserves) overvalued the Real.

In order not to be unpopular, a stabilization plan fixes the transition rules for the salaries so that there are no losses for the medium class, which shapes public opinion, and this provokes, by the elimination of inflation losses, a rise of the consumption power of the poorer classes.

Stabilization eliminates as well the illusion of monthly gains of financial applications associated with the high nominal interest rates. The reduction in the nominal rates and the perspective of stability stimulate purchase on credit.

All these phenomena induce the consumption growth whose explosion would impair the stabilization plan.

In the new harvest of plans of neo-liberal inspiration, artificial price control fixed factors (tabelamento) was naturally eliminated. In order to contain inflation, on one hand a high interest rate is used to contain the internal demand of products and services, and on the other hand there is the liberalization of imports to raise the internal offer of goods.

The raise of interest is not caused in this case by lack of financial capital but rather by the determination of the monetary authorities to contain demand. On the opposite, the currency convertibility and the high internal interests provoke the influx of capital which is simply retained in the form of external reserves causing financial losses that would have reached in Brazil US$ 10 billion.

The intervention of central banks aiming at decreasing the money supply is a practice known in central countries and in general it occurs with exchange rate variations that limit the influx of external capital. In order not to renounce the exchange rate anchor, these market adjustments are avoided.

As a result of this double and drastic intervention in interests and exchange, the state absorbs the excess of external financial capital paying real interest rates much higher than those of the international market and, since it is impossible to absorb (enxugar) all the world financial capital, the public debt is unnecessarily raised up to the threshold point where the external investor accepts the risk.

The difference between the internal and external interests paid on the amount of international reserves and the actual interests paid on government bonds emitted, in order to absorb the monetary surplus, (enxugar) the market impairs the first objective of the plan which is to(?) balance of the internal accounts already charged with debt of internal interests from other sources. This increases the need of reducing the public expenditure and liquidating assets via privatization which are no easy tasks since only the annual interests associated with the reserve amounted to three times of what was earned through Vale do Rio Doce, which was the largest state-owned company.

The second condition for the success of exchange stability is the increase of competitivity of the national economy so that the deficit in the commercial balance do not impair the external accounts. But competitivity is not reached without investment in the productive sector. The high internal interest rates hinder the search for investment resources in the financial market.

On the other hand, the artificially valued exchange reduces the competitivity relative to the external product. This reduces profits and consequently investment capacity in order to increase competitivity with own resources.

It is clear that it is possible to make new interventions by offering special credit conditions

and granting fiscal advantages to the exporting sectors or to productive investments. However, these are measures that impair the internal account balance and introduce new distortions in the sacred market. In the case of taxes exemptions , for example, there will always be some loss in the public accounts with or without compensation for the states from the federal government.

The high interest rate causes the insolvency of the indebted sectors , including some banks and in order not to unstabilize the financial system, the government intervenes by injecting in these sectors money from the Treasure, raising the debt and rendering more difficult the public account balance.

In the past the government was criticized for its undue participation in some productive segments. The generalization of this intervention deformed the market and led to inefficiency. We are now viewing a harsh intervention in the economy which, by acting on financial variables that pertain to its whole and not a specific sector, render the consequences more ample and unpredictable.

It would not be to much to ask our neo-liberals - who with much reason would deny the label - a little less financial intervention in the economy and a little more confidence in the market.