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Brazil (A): The Real Plan

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Abstract

This case describes Brazil's political and economic evolution from the end of World War II to October 1998, focusing on the policies and effects of the Real Plan, an economic-stabilization plan implemented between 1994 and 1998. Contagion effects of the Russian crisis in August 1998 led to massive capital outflows from Brazil and put pressure on foreign-exchange reserves. Brazil needs to decide which actions to take with respect to its system of fixed exchange rates. The case affords an analysis of (1) the causes and consequences of inflation in a developing country, (2) the elements of a successful macroeconomic-stabilization plan, and (3) the causes and policy responses to a balance-of-payments crisis in a system of fixed exchange rates. The case can be used in classes on international economics, international business, and international financial markets. See also the B (UVA-BP-0430) and C (UVA-BP-0431) cases.
UVA-BP-0429
This case was prepared by Heitor Carrera (MBA 2000) under supervision of Assistant Professor of Business
Administration Petra Christmann. This case was written as a basis for class discussion rather than to illustrate
effective or ineffective handling of an administrative situation. Copyright © 2001 by the University of Virginia
Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to
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otherwise—without the permission of the Darden School Foundation.
BRAZIL: THE REAL PLAN (A)
In May 1993, Brazil’s President Itamar Franco appointed sociologist Fernando Henrique
Cardoso to the position of Finance Minister of Brazil. Cardoso, who was the Minister of Foreign
Affairs at that time, was about to face a great challenge. He would be the fourth finance minister
for Brazil in less than eight months.
In early 1995, Cardoso took office as the President of Brazil, after defeating the Labor
Party candidate, metalworker Lula (Luis Ignacio da Silva) in the elections. That was a clear
signal that the Brazilian people trusted Cardoso to finally put the country on the right track to
success.
Cardoso was reelected in 1998, defeating Lula again, mainly because of the objectives
that he achieved. Brazil was finally able to control inflation, the currency was stable, the country
proved that its economy was manageable by surviving the Mexican crisis in 1995 and the Asian
crisis in 1997, and above all, the country was back on the radar of international investors (see
Exhibit 4). In more than 30 years, Cardoso was the first democratically elected president to
complete his term since Juscelino Kubsticheck (1956–61). In five years the country experienced
growth and stability, and it seemed that Brazil would take its place among the developed
capitalist countries.
However, Cardoso was still struggling to complete the reforms. If Brazil were not able to
approve and implement significant fiscal reforms, all the positive things that had been
accomplished would be jeopardized (see Exhibit 6 for budget deficit data and Exhibit 7 for
foreign debt). In terms of foreign indebtedness, while Brazil was able to reduce short-term debt,
net foreign debt expanded by 32.6% in 1998 (growth of net foreign debt was almost double that
of total foreign debt due to the decline in the international reserve position).
1
To make matters
worse, the Russian crisis exploded in August of 1998, and investors decided to be more
conservative regarding developing countries and to take a deeper look into the economies in
which they were investing. What would they see in Brazil? What challenges would Cardoso face
in his second term?
1
Banco Central do Brasil (Central Bank): Annual Report 1998.
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The Development Cycle of Brazil
From its discovery by the Portuguese in 1500 through its independence in 1822, and even
through the beginning of the 20th century, the Brazilian economy was based on agriculture and
mineral extraction. Sugar, coffee, rubber, gold, and gems were the main export products. When
other Latin American and African countries emerged as strong competitors in these industries
and World War I created a decrease in exports, Brazil struggled economically because of its
great dependence on commodity prices. The attempts to defend the coffee price (one effort
included trying to burn the product to decrease the excessive supply in 1931)
2
were unsuccessful.
At the beginning of the Great Depression in 1929, coffee alone was responsible for 71% of total
exports, or 10% of the Gross National Product (GNP). The decrease in coffee activity was offset
somewhat by an increase in cotton production. Brazil, especially the São Paulo region, benefited
from the European immigrants who came searching for the rich soil of the region. They brought
their expertise, and soon farmers and international investors started investing in infrastructure,
such as railroad and energy mills, and determined São Paulo as the future economic center of
Brazil (see Exhibit 1 for a map of Brazil).
The First World War and the increase in trade barriers after the Great Depression sharply
reduced international trade, and Brazil turned to its internal market. This contributed to the
industrial development of the country, since it had to provide the goods for its own market. After
World War II, Brazil switched its trade focus from Europe to the United States (see Exhibit 5B).
Brazil also strengthened its ties with the United States by forming a multinational team to study
Brazil’s problems. At the same time, the World Bank and the International Monetary Fund (IMF)
were inaugurated with the mission to promote development all over the world.
In the late 1950s under President Juscelino Kubsticheck, Brazil experienced growth and
development of its industry. Kubsticheck’s motto was to do in five years what would normally
be done in fifty. The state coordinated private investment and printed money to support the
development, a move that was largely criticized by the opposing monetarists. Through Executive
Groups (GE) for several different industries, Kubsticheck tried to develop production facilities in
Brazil. It was the height of the import substitution policy that had been in place throughout the
century, for example, with the creation of the “Registration of Similar Products” of 1911. This
meant that a Brazilian producer willing to produce a product usually imported by the country
would have tax protection and incentives.
In the early 1960s, Jânio Quadros took office and promoted tight monetary and fiscal
policy. He came out of a minority party and did not try to build alliances with the big parties that
ruled the country. Quadros was not able to run the country because he did not have the support of
congress. Thus, he decided to resign, hoping that the people would bring him back to office with
much more power. However, this coup did not work, and his vice president, João Goulart
(Jango), took office. Jango was a former labor minister and, during his term, gave a 100%
2
Werner Baer, The Brazilian Economy: Growth and Development. 4
th
edition (Westport CT: Praeger
Publishers, 1995), 36.
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increase to the minimum wage. The aristocracy and the military feared that Jango and his leftist
ideas would bring the country close to Communism, and, in 1964, a military coup brought
Marshal Castelo Branco to power as the president of Brazil. This movement was supported by
the Brazil’s aristocracy and some even said by the United States, who was in the middle of its
own battle against Communism.
The initial economic goal of the dictatorship was the stabilization of the economy, which
was experiencing an annual inflation rate of 88%. It was the vision of the new regime, which was
established in 1964, that the path to economic recovery lay in Brazil’s ability (1) to control
inflation; (2) to eliminate the price distortion that had accumulated during the past; (3) to
modernize capital markets to lead to an increased accumulation of savings; (4) to create a system
of incentives to direct investment into areas and sectors deemed essential by the government; (5)
to attract foreign capital (both private and official) to finance the expansion of the country’s
productive capacity; and (6) to use public investments for infrastructure projects and in certain
government-owned heavy industries.
In the first years after the 1964 change of government, policymakers emphasized
stabilization and structural reforms in Brazil’s financial markets. The former consisted of classic
stabilization measures—curtailment of government expenditures in a number of sectors,
increased tax revenues as a result of improvements in the tax-collection mechanism, tightening
of credit, and a squeeze on the wage sector. The stabilization program also included measures to
eliminate the price distortions that had worsened during the previous decade of inflation.
3
Initially, Brazil went through a recession caused by the stabilization measures put in
place. However, from 1968 on, the Brazilian economy entered its remarkable seven-year boom,
known as the “Brazilian economic miracle.” Between 1968 and 1974, real annual Gross
Domestic Product (GDP) growth averaged 11.3% per year and new industries such as iron, steel,
car manufacturing, oil, chemicals, aviation, and telecommunications emerged.
Nevertheless, the inflation rate remained high. To avoid the inflation-induced loss of the
purchasing power of money, a complex system of indexation was introduced in 1968. Under
Brazil’s indexation system, domestic currency values of wage rates, rents, debts, government
bonds, savings, and other mid- to long-term contractual agreements were ratcheted upward
continuously in step with increases in the price levels. Indexation protected the real value of a
contract and offset some of the distortions that inflation would bring about, including
discouraging savings due to negative interest rates, impossibility for the government to sell
bonds to cover its deficits, decapitalization of enterprises due to the use of historical costs in
depreciation. Initially, indexation appeared to exhibit positive results and coexisted with a steady
decline of inflation.
4
3
Baer, 75.
4
Baer, 140.
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The government also focused its efforts on investment and industrialization. Between the
early 1960s and the mid-1970s, more than 350 state-owned enterprises were created for the
production of industrial goods and services. The newly founded enterprises were protected by
high tariff barriers. Critics of this import substitution industrialization (ISI) strategy had doubts
about the possibility of high rates of economic growth once the dynamism of ISI vanished.
Orthodox critics of the ISI process felt that the inefficient industrial structure resulting in the
production of high-priced goods (which could not be sold in large quantities domestically or
abroad) would severely limit the prospects of industrial growth. They also believed that the
failure to diversify exports during the period of ISI would lead to stagnation based on import
constraints. Thus, they felt that the post-ISI hopes of high rates of growth would lie primarily in
developing the agricultural export sector and the rationalization of industry (i.e., weeding out
industries with no present or prospective comparative advantage).
Non-orthodox or structural critics felt that since ISI had not solved some of the
underlying socioeconomic problems that were present even before the process had started (for
example, the backwardness of the agricultural sector or the unequal distribution of income),
economic stagnation was bound to return once the inherent dynamism of ISI had spent itself.
Some structural critics even pointed to evidence showing that ISI aggravated existing
socioeconomic problems. In Brazil and in a number of other developing countries undergoing
ISI, income became more concentrated than before and the new industries did not create
sufficient employment for the rapidly growing urban population.
5
In 1973, the “miracle era”, as it is known in Brazilian history, ended with the first oil
shock. Instead of engaging in an austere adjustment program to cope with the dramatic decline in
the country’s terms of trade, the government opted for a growth policy that resulted in substantial
structural changes in the economy, a resurgence of inflation, and a rapid expansion of the
country’s international debt. The oil shock of November 1973 quadrupled the price of petroleum.
Since at the time Brazil was relying on imports for over 80% of its oil consumption, the
country’s total import bill rose from US$ 6.2 billion in 1973 to US$ 12.6 billion in 1974, the
trade balance changed from a slight surplus in 1973 to a deficit of US$ 4.7 billion in 1974, and
the current account from a deficit of US$ 1.7 billion to one of US$ 7.1 billion (see Exhibit 4A
for a detailed balance of payments for the 1970s).
6
Indexation, once the antidote, turned out instead to be the poison. It increased inflationary
pressures. In response to the external oil price shocks, indexation pushed prices up throughout
the economy as indexed prices and wages increased. In terms of the government, the presence of
indexation on its accounts produced rising deficits in the public sector’s budget. Since indexation
benefited mainly the upper class, who had wages and savings that were subject to indexation,
income distribution worsened during the miracle era. (See Exhibit 3 for social data on Brazil).
5
Baer, 75.
6
Baer, 89.
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After the miracle, Brazil went through an era between 1974 and 1978 of misguided
economic policies. The country continued to invest in state-owned enterprises (SOE) and
increased its oil imports, while the entire world was slowing the pace of development due to the
oil crisis. The government borrowed money abroad at floating rates to finance its investments,
not all of which were profitable. When the second oil shock happened, interest rates in
international markets skyrocketed. As Brazil borrowed money at floating rates, this increased the
amount of foreign debt service to 5% of the GDP.
In the following period from 1980 to 1984, Brazil focused on managing its international
relations. The Mexican debt moratorium in 1982 started a debt crisis in Latin America. Brazil
reached an agreement with the IMF, went through a maxidevaluation of its currency and,
because foreign investors were not confident about investing in Latin America, Brazil’s
government financed its expenditures by increasing its domestic debt. The economic unrest led
to questions regarding the dictatorship’s ability to handle the crisis, the society started pressuring
for the end of dictatorship. General Figueiredo was the last military president in Brazil. In 1984,
Brazil went through an indirect election, and congress elected Tancredo Neves to take office in
1985 as the first civilian president after 20 years of dictatorship.
Neves died before taking office. His vice president, José Sarney, who took office in his
place, inherited a terrible economic situation: an economic recession, inflation rates of almost
200% annually, and high foreign debt. In order to address the problems of foreign debt and
inflation, Brazil implemented a series of heterodox fiscal and monetary plans. The first of these
plans, the Cruzado Plan, was implemented in February 1986. Prices and wages were frozen, all
indexes were banished from the economy, and a new currency called the cruzado was
introduced. Initially, the population was very motivated by the end of inflation, and even went
out on the streets claiming themselves as “Sarney’s supervisors.” They monitored price increases
in stores and, if they noticed any price increase, would call the police to close the store down.
However, the price freeze resulted in a misalignment of relative prices that when combined with
barriers to imports resulted in a shortage of products. For producers it was a matter of luck, if the
suppliers of a company had increased their prices before the freeze, and if the company did not
have time to translate this increase into its prices, the company’s products would not be
profitable at their frozen price. As a result, producers kept their products from the official
market, and a black market for products such as milk and meat developed. By August of 1986,
the lack of products in the supermarkets was constant as demand for goods exploded and the
supply stayed rigid. As item after item disappeared, shop owners began charging above official
prices. Facing the shortage of many goods and the reappearance of inflation, the government
scrapped the Cruzado Plan. The new measure, dubbed Cruzado Plan II, attempted to reassert
control over the economy by increasing sales taxes by 50 to 100% and lifting most price
controls. However, Cruzado Plan II only succeeded in re-igniting an annual 500% inflation rate.
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After the failure of the Cruzado Plan, a series of other economic stabilization plans were
implemented under Sarney’s presidency. Exhibit 10 summarizes these plans. All of these plans
failed and were abandoned after a few months. Many of these plans included wage and price
freezes, introduced new currencies, and promised to kill inflation with no pain. When the miracle
could not be realized, more traditional monetary and fiscal tools were used to fix the damage
caused by each of these plans. At the end of the 1980s, Brazil’s economic situation was worse
than at the beginning of the decade. Between 1980 and 1990 income per capita fell by almost 4%
and cumulative inflation during the 1980s reached 39,043,765%, compared to 85% in the United
States during the same period.
7
In Sarney’s last year, the entire country was just waiting for the
first direct elections in 29 years.
Back to Democracy
On March 15, 1990, Fernando Collor de Melo, former governor of the small state of
Alagoas, took office as president of Brazil, after winning the race in a second round ballot
against Labor Party candidate Lula. Although relatively unknown, Collor capitalized on the
nation’s discontent with the traditional parties and organized the National Reconstruction Party
(PRN), who had no say in congress. The PRN held only 20 out of 531 seats in the chamber of
deputies, and two out of 81 of the senate seats)
8
. History was repeating itself, since Collor was
taking office under the same conditions as Jânio had in the 1960s. Worse, Collor was inheriting a
devastated country now that the economy was stagnant, hyperinflation was about 81% a month
(March 1990), and there was huge domestic and foreign debt. As Brazil declared a moratorium
on foreign debt in 1987, the relationship with the international community worsened. Moreover,
Brazil amended its constitution in 1988, transferring tax collection, but not responsibilities, to
states, which hurt the federal budget.
In addition, Collor faced other challenges. Due to the numerous attempts to stabilize the
economy under the Sarney presidency, the population would have little confidence in the
commonly used tools, such as price freezes, as a solution to the inflation problem. Nor would
Collor be able to approve fiscal reform, since congress had no history of doing so and since
Collor’s party was a small minority in congress.
Collor’s stabilization plan’s goals were to control inflation by applying tight policies to
restore the government’s capacity to implement economic policy and to renegotiate the debt.
Although this approach seems orthodox, the way Collor decided to approach the problem had
never been seen before in the international economy.
7
James Brooke, “Bad Times, Bold Plans for Brazil,” New York Times, 7 January 1990.
8
Susan Kaufman Purcell and Riordan Roett ed., Brazil Under Cardoso (Boulder, CO: Lynne Rienner
Publishers, 1997), 26.
-7- UVA-BP-0429
Collor made it clear that the main target of his plan was to “kill the tiger of inflation with
a single bullet.” Prices and wages were frozen in an attempt to control the “inertial inflation.”
9
The government also implemented a tight fiscal policy by trying to reduce the number of federal
employees, implementing new taxes on financial transactions, increasing the efforts to collect
taxes, and starting to implement a privatization plan.
However, it was the monetary policy of the “Collor Plan” that shocked Brazilian society.
The government decided to freeze checking, savings, and investment accounts to reduce the
money supply. Each Brazilian would be allowed to withdraw a certain amount of money (about
$1250) per month, and access to the remaining balance would be blocked for 18 months. The
amount of blocked money amounted to about 80% of money circulating in the economy.
10
The
idea was to control inflation by making money a scarce resource, driving interest rates up, and
slowing down demand. In addition, Collor implemented the fourth currency reform in four years
by replacing Brazil’s currency, the novo cruzado, with the cruzeiro (which had previously been
the name of the national currency).
The immediate impact of the Collor Plan was to reduce dramatically the country’s
liquidity, so that the money supply as a percent of GDP fell from about 30% to 9%. Within a
month, inflation declined to a single-digit monthly rate (5 or 9%, depending on the index used).
The sharp decrease in liquidity led to a pronounced fall in economic activities, as revealed by the
negative growth of the GDP of 7.8% in the second quarter of 1990. The fear of a recession and
the pressure from various socioeconomic groups led the government to release many blocked
financial assets ahead of schedule, which was done in an ad hoc fashion, without well-defined
rules.
11
After 45 days of the plan, the money supply grew again by 62.5%, or 14% of the GDP. In
the first few months of the plan, an estimated one-third to one-half of the frozen assets found
their way back into the market, taking advantage of several loopholes and exceptions to the
confiscation. By July 1990, the inflation rate that had dropped between April and June started to
increase again, reaching a monthly rate of more than 17% in November. In addition, Collor was
not able to fire federal employees, because of the protection given by the constitution and the
lack of support from congress.
At the same time, Collor was putting together a plan to open the Brazilian economy
through a process called “abertura.”
12
The idea was to integrate Brazil into the global economy,
and let foreign competitors come to the national market by reducing trade barriers. In addition,
there was pressure from the international community and agencies such as the IMF, for Brazil to
9
Inertial inflation is the inflation that is already built up in people’s minds. The most different elements of the
supply chain would be so used to inflation that, even in its absence, they would adjust prices for possible inflation.
In an inertial inflation scenario, if all suppliers kept prices constant, there would still be inflation, because the next
member of the supply chain would adjust his prices anyway.
10
WSJ, Brazil’s Congress given Backing to the Collor Plan (April 13, 1990).
11
Baer, 184.
12
Portuguese word for “opening.”
-8- UVA-BP-0429
turn into a more open economy. The timing of this move was not good. Brazil was going through
a recession, and opening the economy under these conditions made the Brazilian business
community displeased with Collor’s decision.
By the end of the first year of his term, Collor had not achieved his main campaign
pledge to control inflation. The annual inflation rate at the end of 1990 reached 1,477%. In 1991,
Collor implemented a second unsuccessful attempt to control inflation by freezing prices and
eliminating indexation. However, Collor had lost all his support. The population could not
forgive him for confiscating their savings. The Brazilian congress did not like the fact that the
president was constantly attacking it, and the business community was disgruntled with the
recession and the opening process. It did not take long to organize all these forces and find a
reason to put Collor out of office. On September 29, 1992, following allegations of corruption in
his government, the chamber of deputies suspended Collor from the presidency for 180 days,
during which time he faced impeachment before the senate who decided to remove him
permanently from office. On December 29, 1992, minutes after they had brought corruption
charges against him, Collor resigned, three years before the end of his term. The senate still
impeached him by a large majority.
The Real Plan
On December 29, 1992, Itamar Franco, Collor’s vice president, took office as president
of Brazil. Franco’s greatest public role prior to becoming president was as mayor of Juiz de Fora,
a city in the countryside of the state of Minas Gerais. Franco promised a government without
corruption and without economic shocks. He developed his image as a simple man working for
the public by criticizing mayors and governors for the high inflation rates in the countryside. At
the beginning of 1993, politicians, media, and entrepreneurs saw the new president in a positive
light.
Franco inherited a devastating economic situation. Inflation was 25% a month (about
1200% per year) and Brazil was in a recession. The first months of his presidency were
tumultuous. In the first month, Gustavo Krause resigned from his office as minister of finance,
and Paulo Haddad was appointed to replace him. However, Haddad also left the office in March,
after disagreements with Franco. Eliseu Resende was appointed to occupy the post, but after
accusations of maintaining inappropriate relationships with contractors in his previous position
as the chief of the national department of highways, Franco dismissed him in May 1993, and
appointed Senator Cardoso, who was the minister of foreign affairs, as the new finance minister.
Franco was betting that Cardoso’s liaisons and political influence would bring stability to the
government.
Cardoso immediately formed a team to address the economic problems including the high
inflation, the government’s budget deficit, high foreign debt, and the intrusive government
involvement in the economy. The first stage of the economic stabilization program was the
Immediate Action Plan, which cut government expenditures by US$ 6 billion and contained
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measures to improve tax collection and to speed the privatization of state-owned companies. As
the constitution of 1988 transferred tax collection to the states, the team also decided to transfer
the responsibilities, such as health, education, social services, housing, basic sanitation, and
irrigation.
13
By the end of 1993, inflation increased to 38% per month (more than 2000% per year).
By the end of his term, Franco was not as popular as he had been so there was no possibility for
his reelection. The favored opposition candidate for the upcoming elections in October 1994,
was Lula, and if the stabilization plan were successful, Cardoso would be a natural candidate to
oppose Lula.
On March 1, 1994, the government implemented one of the key components of the Real
Plan, the creation of the Unidade Real de Valor, URV (unit of real value). Cardoso explained that
the economy would operate with two currencies: the cruzeiro real, Brazil’s official currency
(which replaced the cruzeiro in August 1993, 1000 cruzeiros = 1 cruzeiro real), and the URV.
The cruzeiro real would be maintained as legal tender, and at the same time there would be an
additional currency, the URV, a unit of account in which all prices and wages would be quoted.
The URV was tied to the dollar at a 1:1 exchange rate, and its value relative to the cruzeiro real
rose daily based on the current inflation rate. The URV was to be replaced with a new currency,
the real, at a 1:1 exchange rate at a future point.
Under the Real Plan, every transaction was supposed to be indexed on URVs, but paid
with cruzeiros reais. If a car was priced 10,000 URVs, its price in URV would not change,
provided that other things (such as productivity, raw material costs, and wages) were constant.
However, the car’s price in cruzeiro real would increase on a daily basis. Official prices,
contracts, and taxes were denominated in URV, and the government encouraged its use on a
voluntary basis by private economic agents. The URV began to be used extensively for private
contracts. This way, all contracts would be voluntarily set in URVs, but when it came time to pay
the bills, they would be paid in cruzeiros reais.
Customers were told that prices in URV were supposed to be stable. However, the
government did not impose any threat to suppliers or implement any price-freezing plan. They
focused their advertising on advising the customer to check prices and to shop for the best price.
For the first time, the Brazilian consumer experienced sustained price stability and learned to
bargain. The population understood the mechanism of the URV quickly. In the first two months
of its existence (March and April), the inflation in URV was above 10% a month but in May, it
was already falling, and in June it was below 5%.
Once the economic team felt that Brazil’s inflationary culture was eliminated, they
decided to phase out the URV in July 1994. The index now would be called Real, the new
currency for the country. All contracts in URVs were automatically converted to the new
currency on a one-for-one basis. The URV and the Cruzeiro real were abolished. At the time of
13
Baer.
-10- UVA-BP-0429
the final conversion of prices from URV to Reais, many supermarkets, stores, and business
people took advantage of the initial confusion and increased prices. They also feared a price
freeze. The government refrained from freezes and, by using its public relations network,
suggested that the public minimize its purchase of necessities in order to force a price
retrenchment. The merit of this strategy was that, as people did not expect prices in URVs to
increase, they did not expect prices in Reais to increase. The strategy succeeded, not for the
arithmetical complexity it represented, but rather for the psychological effect of destroying the
inflationary culture.
Another important element of the Real Plan was its exchange rate policy. When the real
was introduced, the upper limit of the exchange rate was fixed to the U.S. dollar at a 1:1 parity.
The real was free to appreciate against the dollar, depending on market forces.
A low inflation rate gave incentive to consumption. Real wages were 18.9% greater in the
first two months of 1995 than they were in 1994. In the first eight months of the Real Plan,
consumption was 20% higher than in previous years. The increased confidence in the economy
also stimulated private investment. The government implemented a tight monetary policy and
increased interest rates to control demand and to prevent speculative stockpiling of goods.
With a stronger economy, a stable currency, and high interest rates, Brazil started to
attract both long- and short-term capital from abroad (see Exhibit 4B). Part of this capital
entered Brazil due to the acceleration of the privatization program (see Exhibit 8). In addition,
multinational companies started to invest in expanding or starting facilities in Brazil, as a result
of the new confidence in the stability plan in place and the future market potential. With respect
to the privatization program, Gustavo Loyola, former president of the Central Bank, noted:
14
The privatization program of Collor had an immediate impact on the monetary
stabilization… [The] state reform initiated by Collor was very important to the
mid-term success of the Real Plan. Beyond its positive impacts on fiscal
performance, the privatization process has been contributing to the change
process of the Brazilian economy, especially in terms of the productivity gains
associated with the improvement of the telecommunication and transportation
infrastructure.
The increase in the demand for reais associated with the capital inflows led the currency
to appreciate (see Exhibit 9G for exchange rates). In October 1994, the exchange rate was
R$0.84 per US$1. The appreciation was the target of much criticism of the Real Plan. The
appreciation combined with the removal of trade barriers, and increased real wages and demand
contributed to the first trade deficit in many years in November 1994. Exhibits 4B and 5A show
the surge of the trade deficit. However, the increase in imports did have a positive side. If Brazil
had not increased imports to meet the national demand, the domestic demand would have
exceeded the supply of goods, which would have brought inflation back.
14
Gustavo Loyola was interviewed by the case writer in May 2000.
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Keeping up with the Plan
In the short term, the results of the Real Plan were impressive. Inflation was brought
down from a monthly rate of 47% in June to 1.5% in September 1994. Growth seemed to pick up
in the third quarter of 1994 (see Exhibit 2). Sales were rising, reflecting purchases from lower-
income groups, whose real incomes were boosted by the fact that their monthly losses from
quasi-hyperinflation had disappeared (see Exhibit 3B.1).
The initial good results, however, were just the beginning of a long process. Cardoso,
who won the presidential election in October 1994, had great challenges ahead. The first
challenge was the Mexican crisis in December 1994, which negatively affected confidence in the
whole of Latin America. On December 20, 1994, Mexico was forced to let its currency, the peso,
which was previously tied to the U.S. dollar, float. Subsequently, the peso lost about 50% of its
value by early March 1995. Factors contributing to the peso devaluation were: rising U.S.
interest rates, an overvalued exchange rate, a current account deficit, and falling foreign
exchange reserves. The loss of investor confidence resulting from the Mexican crisis spread all
over Latin America. This effect is now known as the “tequila effect.”
Brazil suffered initially, since international investors regarded Brazil as next in line, and
withdrew their short-term investments in the country (see Exhibit 4C for impacts on the capital
account during the crisis). In order to keep the capital from fleeing, Brazil’s Central Bank
sharply increased interest rates. Nevertheless, capital outflows put pressure on the exchange rate.
Due to this pressure for a devaluation of the real, Brazil modified its exchange rate system in
March 1995. The new system, a crawling-peg system with bands, allowed the Central Bank to
gradually devalue the real, by adjusting the target exchange rate band versus the U.S. dollar
periodically. The initial band was set at 0.86 to 0.90 real per dollar and had to be adjusted almost
immediately to 0.88 to 0.93 real per dollar as markets appeared to expect further depreciation.
Subsequently, the Central Bank let the real devalue between 0.5 and 0.65% monthly (equivalent
to 6.1% and 7.5% yearly)
15
by adjusting the bands. These policies combined with a high level of
international reserves of the Brazilian Central Bank were successful in convincing investors that
Brazil’s situation was different from Mexico’s.
In Loyola’s view, the Mexican crisis brought disagreement to the government:
16
In the exchange rate issue, the change in the policy was done awkwardly, due to
the absence of consensus within the economic team. The decision, then, was to
substitute the floating rates policy by an explicit band policy, forcing the
devaluation of the Brazilian currency. There was, thus, in February 1995, the
introduction of the exchange rate horizontal broad band, which would change
15
Gustavo Franco, O Desafio Brasileiro. 1st ed. Editora 34 (São Paulo, 1999), 306. Translation provided by
case writer. Gustavo Franco was the president of the Central Bank from August 1997 to January 1999, and one of
the economists who developed the Real Plan.
16
Interview with the case writer (May 2000).
-12- UVA-BP-0429
every 12-month period. The Mexican crisis brought, for the first time,
disagreement to the team that conceived and executed the Real Plan. It had the
direct consequence of making the president of the Central Bank—Pérsio Arida—
leave the office, four months after the crisis. From the Mexican crisis, the Cardoso
government team took two different sides regarding the exchange rate policy.
In the political arena, Cardoso was struggling to keep up with the privatization plan,
which started in the Collor era, and slowed down during Franco’s term. Sacred cows, such as the
state-owned enterprises (SOE) in the oil and mining industries, were part of the privatization
agenda. See Exhibit 8 for balance of privatizations. This caused great concern from the
opposition. Their arguments were two-fold: (1) the government would be giving away the
country’s resources (a return to the “The oil is ours!” xenophobic manifest of the 1960s.);
17
(2)
they were charging the government with selling SOEs very cheap in order to finance the Real
Plan and the BOP. Demonstrations were held all over the country, especially in front of the stock
exchanges in São Paulo and Rio de Janeiro (the two major financial centers in Brazil). Despite
the manifest, the government went forward with the privatization.
Another initiative in the political arena was Cardoso’s effort to amend the constitution
and allow the president to run for reelection. The opposition resisted this plan because the
success of the Real Plan and the resulting popularity of Cardoso lowered its chances to defeat
Cardoso in the election. After Cardoso included mayors and governors in his proposal of
reelection, the amendment was approved. Finally, Cardoso was also able to approve
administrative and social security reforms that would ease the fiscal deficit.
The end of inflation also brought problems to the banking system in Brazil. Before the
Real Plan, commercial banks earned up to half of their income from the free float provided by
inflation. Banks could generate easy profits by lending surplus cash in checking accounts in the
overnight market. This effortless source of profit masked inefficiencies in the Brazilian banking
system, which was overstaffed and had too many branches. With the end of inflation, banks had
to return to their traditional role of intermediaries in the capital markets, making money with
spreads obtained between borrowing and lending money, and they had to relearn the most basic
banking skills, such as taking deposits, lending, and charging for services, almost overnight. Not
all banks learned how to lend and many suffered high levels of nonperforming loans as a result.
In order to avoid a crisis of the banking system, the Central Bank intervened heavily in
the banking sector by taking control of two of the top ten commercial banks in Brazil in 1995
and developing an institution to protect assets (an equivalent to the American FDIC). More than
190 financial institutions went under one of the several types of Central Bank interventions. In
order to finance these interventions, the government decided to create a fund, the PROER
(program for restructuring financial institutions), funded by the required reserves of commercial
banks with the Central Bank, to invest in these troubled organizations.
17
For an interesting description of the xenophobia in Brazil since the 1960s, refer to Roberto Campos, Lanterna
na Popa, Topbooks, not available in English.
-13- UVA-BP-0429
These actions of the central bank were criticized by the opposition, who claimed that the
government was using their money to finance the “thieves” who owned the troubled banks. The
government’s rationale, however, was straightforward. It had to prove to the domestic and
international market that it was in control of the situation, and that it would go after the banks’
shareholders and try to recover most of the losses. As the president of the Central Bank, Gustavo
Franco, noted:
18
The opposition tried to make the PROER a political issue, without giving
importance to what the bad outcomes of a banking system crisis would mean to
Brazilians. The Brazilian who remembers the Collor Plan knows pretty well the
feeling of having his own assets blocked in the bank, out of reach. Well, the
PROER has prevented that. About 4 million account holders had their money
locked in long-lasting liquidation processes.
Although the government’s actions were costly, the commercial banking sector emerged
strengthened from the crisis. International players, such as the HSBC (Hong-Kong Shanghai
Bank), ABN-AMRO, Sudameris, Credit Agricole, and the Spanish Banco Santander and Banco
Bilbao Vizcaya, entered Brazil and increased the competitiveness of the banking sector. The
arrival of big competitors started a wave of mergers and acquisitions, and consolidation in the
financial markets.
Asian Crisis: The Second Challenge
In the last quarter of 1997, a financial crisis erupted in Asia, when Thailand was forced to
devalue its baht currency due to massive capital outflows resulting from a loss of confidence in
the Thai economy. The baht devaluation led investors to question the soundness of their
investments in other Asian countries and they quickly shifted their money out of other countries
as well. The withdrawal of investments forced other Asian countries, such as Indonesia,
Malaysia, and South Korea, to abandon their exchange rate peg as well. Investors lost their
money in Asia, and started to worry about their portfolio in other developing countries. The
contagion effect of the Asian crisis quickly reached Latin American economies. The real was
under a lot of pressure, but the government promptly responded. The Central Bank doubled its
basic lending rate to 43½%, and the government enacted a package of revenue-raising measures
and expenditure cuts equivalent to about 2½% of GDP.
19
After the storms, interest rates returned
to pre-crisis level. Brazil learned how to respond to attacks. The high interest rates, however,
were a big burden to state governors, who saw the interest they paid on federal loans increase
substantially. The stabilization plan was once more paying its dividend. The measure that was
implemented restored the confidence of the international financial community, and capital began
to flow back into Brazil by December of 1997.
18
Gustavo Franco, O Desafio Brasileiro. Editora 34 (São Paulo, 1999), 280.
19
Brazilian Letter of Intent to the IMF (November 13, 1998).
-14- UVA-BP-0429
Cardoso Reelection: What is Next?
Eleven days prior to the October 1998 election, Cardoso delivered a public speech saying
that a major fiscal adjustment and reform effort would represent a cornerstone of a second
mandate for his government. The Real Plan’s success led to the reelection of Cardoso by a large
majority in the first round in October 1998. Once more, Cardoso defeated the Labor Party’s Lula.
The scenario this time, however, was quite different. His second term started in the beginning of
1999, but even before Cardoso finished his first term, a series of events threatened to jeopardize
all the positive outcomes realized by the Real Plan, and observers voiced concerns about the true
extent of Brazil’s economic reforms.
In August 1998, Russia was faced with a balance of payments crisis resulting from a
decline in oil revenues due to declining oil prices. Faced with declining foreign currency
reserves, the Russian authorities decided to devalue the ruble to unilaterally restructure short-
term public debt, and to impose a 90-day moratorium on private-sector payments of foreign
obligations. Investors immediately pulled their money not only out of Russia, but also out of
Brazil. They worried about the size of Brazil’s budget deficit and its leaders’ ability to take tough
steps to address the gap.
As 1998 was an election year, Cardoso decided not proceed with the big, unpopular
reforms, such as fiscal reform. However, the country’s fiscal deficit had been increasing in recent
years and was reaching 8% of the GDP, which was an unacceptable figure in the international
economy. Several factors contributed to the budget deficit: (1) Brazil’s fiscal systems suffered
from chronic structural problems stemming from the federal nature of the tax and spending
system. States spent, and the federal government taxed, giving no one a political incentive to
reduce the deficit. (2) The high real interest rates of 1995 and 1997 contributed to much of the
debt. See Exhibit 6 for the nominal and operational budget balance. (3) Loyola suggested that
the fiscal problem could also be attributed to the elimination of inflation:
20
There were several mistakes in the economic policy during the Real Plan.
However, the worst of them was the underestimation of the effect of the
decreasing inflation rate on the public accounts… Inflation helped to adjust the
public accounts, which nominal value was inflexible to the downside. It is the
typical example of wages, which were sub-indexed. During inflation times,
politicians developed an irresponsible strategy of giving high nominal wage
increases, because they knew that such increases would be somewhat offset by
inflation. Despite the inflation and indexation times, there was still a certain
monetary illusion on the part of workers and money-savers in Brazil. When
monetary stability came, the politicians did not take into account that all of a
sudden the real wages had become inflexible too. This generated many fiscal
problems.
20
Interview with the case writer.
-15- UVA-BP-0429
An additional problem was that, according to many experts, the real was overvalued in
real terms. Despite the nominal devaluations of the crawling peg exchange rate system, the real
had appreciated in real terms since the beginning of the Real Plan, because of the initial
appreciation of the real and because the rate of depreciation under the crawling peg system was
not always large enough to compensate for the inflation rate differential. Goldman Sachs
estimated that this real appreciation resulted in an overvaluation of 14 to 20% in 1998, while
Rudiger Dornbusch, a prominent economist from MIT estimated the extent of the overvaluation
to be in the range of 25 to 35%. In contrast, Franco, the president of Brazil’s Central Bank
maintained that the real was valued correctly.
21
He explained that:
22
Overvaluation, these days, has become a relative notion. One would hardly find in
Brazil, before the Russian crisis, much people giving importance to the
overvaluation argument. The currency was some 10% stronger at that point than it
was at the beginning of the plan, inflation was zero, and the Central Bank was
devaluing the real at a pace of 7% per year more or less. But the true issue is not
really whether the PPP rate was the right rate, but whether the president, in his
second term, would maintain his support to the existing policies.
The third problem facing Cardoso was the increasing imbalance in the balance of
payments. The Real Plan had resulted in a large deterioration in the current account. The current
account deficit increased steadily from $1.1 billion in 1994 to $33.8 billion in 1998. The current
account deficit was financed by capital inflows, which kept Brazil’s large stock of Central Bank
reserves stable and even increasing. However, the capital outflows in the wake of the Asian crisis
resulted in a negative overall balance in the fourth quarter of 1997. The Russian crisis led again
to massive capital outflows.
The Asian crisis had not affected Brazil much, but the Russian crisis really hurt the
country. In response to capital outflows, Brazil brought interest rates back to 42½% in October
1998. International reserves, which amounted to US$70.2 billion at July’s end, declined to
US$45.8 billion at the end of October. Devaluation seemed to be the only way out. However, the
government was reluctant to give away the currency stability, which was a basic pillar of the
Real Plan. See Exhibits 3 and 9 for impacts of both Asian and Russian crises.
While Cardoso needed the support of congress to quickly approve some reforms,
congress had its own agenda. It could help the president, but not without payback. Congress was
willing to trade its support for the most selfish and narrow-minded reasons, to obtain small
advantages for specific groups or regions. Initially, President Cardoso was not willing to pay so
high a price.
What should Cardoso do? His challenges were to control the flight of the capital, adjust
the budget deficit (especially through fiscal reform), and address the real devaluation issue, but
21
Franco, O Desafio Brasileiro.
22
Interview with the case writer.
-16- UVA-BP-0429
in such a manner that it would not trigger inflation. Additionally, he would have to push reforms
even further and try to approve tax and fiscal reforms in congress.
-17- UVA-BP-0429
Exhibit 1
Map of Brazil
-18- UVA-BP-0429
Exhibit 2
Gross Domestic Product
GDP Per Capita
GDP
1998 Prices
GDP
Real
Variation
Implicit
GDP
Deflator
**
GDP
Current Prices
Population 1998
Prices
Real
Variation
Current
Prices
*
Inflation
CPI
∗∗
Money
Market Rate
(R$ MM) (%) (%) (US$ MM) (MM) (R$) (%) (US$) (% Change) (Average %)
1980 621,500 9.2 92.1 237,772 118.6 5,242 7 2,005
1981 595,086 -4.3 100.5 258,553 121.2 4,909 -6.3 2,133
1982 600,026 0.8 101.0 271,252 123.9 4,843 -1.3 2,190
1983 582,445 -2.9 131.5 189,459 126.6 4,602 -5.0 1,497
1984 613,897 5.4 201.7 189,744 129.3 4,749 3.2 1,468
1985 662,082 7.8 248.5 211,092 132.0 5,017 5.6 1,599
1986 711,672 7.5 149.2 257,812 134.7 5,285 5.4 1,915
1987 736,794 3.5 206.2 282,357 137.3 5,368 1.6 2,057
Estimate derived from the division of the GDP at current prices by the average exchange rate, calculated in accordance with Central Bank methodology.
∗∗
The implicit deflator reflects the inflation of value added to the economy. The CPI is an inflation measurement of the overall supply of goods including
tradables.
-19- UVA-BP-0429
Exhibit 2 (continued)
1988 736,352 -0.1 628.0 305,707 139.8 5,266 -1.9 2,186
1989 759,620 3.2 1,304.4 415,916 142.3 5,338 1.4 2,923 1431.3
1990 726,577 -4.3 2,737.0 469,318 144.1 5,042 -5.5 3,257 2947.7
1991 734,060 1.0 416.7 405,679 146.4 5,014 -0.6 2,771 432.8
1992 730,097 -0.5 969.0 387,295 148.7 4,910 -2.1 2,605 952.0 1574.28
1993 766,017 4.9 1,996.2 429,685 150.9 5,075 3.4 2,847 1927.4 3284.44
1994 810,829 5.9 2,240.2 543,087 153.1 5,295 4.3 3,546 2075.9 4820.64
1995 845,046 4.2 77.6 705,449 155.3 5,441 2.8 4,542 66.0 53.37
1996 868,370 2.8 17.3 775,409 157.5 5,514 1.3 4,924 15.8 27.45
1997 900,326 3.7 7.4 804,182 159.6 5,640 2.3 5,038 6.9 25.00
1998
∗∗∗
901,406 0.1 3.9 776,873 161.8 5,571 -1.2 4,802 3.2 29.50
Source: Central Bank Annual Report 1998, and IMF, International Financial Statistics, various years.
∗∗∗
Central Bank estimate.
-20- UVA-BP-0429
Exhibit 3
Social Indicators
A. Poverty and Social Data
Brazil Latin America &
Caribbean
1998
Population, mid-year (millions) 165.9 502.0
GNP per Capita (Atlas method, US$) 4,570 3,940
GNP (Atlas method, US$ billions) 758.0 1,978.0
Average Annual Growth, 1992–98
Population (%) 1.4 1.6
Labor Force (%) 1.7 2.3
Most Recent Estimate (latest year available, 1992–98)
Poverty (% of population below national poverty line) 17 -
Urban Population (% of total population) 80 75
Life Expectancy at Birth (years) 67 70
Infant Mortality (per 1,000 live births) 34 32
Child Malnutrition (% of children under 5) 6 8
Access to Safe Water (% of population) 69 75
Illiteracy (% of population age 15+) 16 13
Source: Brazil at a Glance, World Bank Web site, 9/9/1999.
-21- UVA-BP-0429
Exhibit 3 (continued)
B. Selected Social Data
3B.1 – Purchasing Power of
Minimum Wage
60%
90%
99%
106%
104%
106%
0%
20%
40%
60%
80%
100%
120%
1994*
1995
1996
1997
1998
1999**
As % of the food basket – average.
Source: PROCON/DIEESE.
*
First day of the Real Plan.
**
June/98 to May/99.
3B.2 – Average Earnings
of Employed Individuals
$559.00
$705.00
$-
$200
$400
$600
$800
1992-94 1995-98
In reais, as of April 1999.
Source: IBGE/PME.
3B.3 – Children Finishing School
79%
61%
32%
84%
68%
41%
0%
20%
40%
60%
80%
100%
1st Grade
4th Grade
8th Grade
1992
1997
Elementary and junior high school.
3B.4 – Net Schooling Rate
86%
89%
91%
93%
95.80%
80%
85%
90%
95%
100%
1991 1994 1996 1997
1998
Net Schooling Rate identifies the percentage of
the population age seven to 14 enrolled in
elementary education.
Source: Brazilian Government, Five Years of the Real Plan, 1999.
UVA-BP-0429
-22-
Exhibit 4
Balance of Payments
A. Balance of Payment in the 1970s
Source: Conjuntura Economica and Boletim do Banco Central do Brasil, in Werner Baer, The Brazilian Economy, 1995.
Year Exports Imports
Trade
Balance
Services
Factors
Services
Nonfact.
Services
Total
Current
Account
Amortiz.
Capital
Account
Balance o
Paym.
Chan
g
e
Reserves
Gross
Debt
1970 2
,
739.00 2
,
507.00 232.00
(
353.00
)
(
462.00
)
(
815.00
)
(
562.00
)
(
672.00
)
1
,
015.00 545.00
(
378.00
)
5
,
295.60
1971 2
,
904.00 3
,
245.00
(
341.00
)
(
420.00
)
(
560.00
)
(
980.00
)
(
1
,
037.00
)
(
850.00
)
1
,
846.00 530.00
(
483.00
)
6
,
621.60
1972 3
,
991.00 4
,
235.00
(
244.00
)
(
520.00
)
(
730.00
)
(
1
,
250.00
)
(
1
,
489.00
)
(
1
,
202.00
)
3
,
492.00 2
,
439.00
(
2
,
369.00
)
9
,
521.00
1973 9
,
199.20 9
,
192.20 7.00
(
712.40
)
(
1
,
009.70
)
(
1
,
722.10
)
(
1
,
688.00
)
(
1
,
672.50
)
3
,
512.10 2
,
178.60
(
2
,
145.40
)
12
,
571.50
1974 7
,
951.00 12
,
641.30
(
4
,
690.30
)
(
900.50
)
(
1
,
532.10
)
(
2
,
432.60
)
(
7
,
122.40
)
(
1
,
920.20
)
6
,
253.90
(
936.30
)
946.10 17
,
165.70
1975 8
,
669.90 12
,
210.30
(
3
,
540.40
)
(
1
,
732.70
)
(
1
,
429.30
)
(
3
,
162.00
)
(
6
,
700.20
)
(
2
,
172.10
)
6
,
188.90
(
950.00
)
941.70 21
,
171.40
1976 10
,
128.30 12
,
383.00
(
2
,
254.70
)
(
2
,
189.10
)
(
1
,
573.90
)
(
3
,
763.00
)
(
6
,
017.10
)
(
2
,
986.90
)
6
,
593.80 1
,
191.70
(
1
,
136.10
)
25
,
985.40
1977 12
,
120.10 12
,
023.00 97.10
(
2
,
558.60
)
(
1
,
575.70
)
(
4
,
134.30
)
(
4
,
037.30
)
(
4
,
060.40
)
5
,
278.00 630.00
(
611.70
)
32
,
037.20
1978 12
,
658.90 13
,
683.10
(
1
,
024.20
)
(
4
,
232.30
)
(
1
,
804.90
)
(
6
,
037.20
)
(
6
,
990.40
)
(
5
,
323.50
)
11
,
891.40 4
,
262.40
(
4
,
275.40
)
43
,
510.70
1979 15
,
244.40 18
,
083.10
(
2
,
838.70
)
(
5
,
542.20
)
(
2
,
378.00
)
(
7
,
920.20
)
(
10
,
741.60
)
(
6
,
384.70
)
7
,
656.90
(
3
,
214.90
)
3
,
321.10 49
,
904.20
UVA-BP-0429
-23-
Exhibit 4 (continued)
B. Balance of Payments (yearly, 1993-1998)
International Transactions (US$ MM) 1993 1994 1995 1996 1997 1998
Current Accounts, nie (78ald) 20 -1,153 -18,136 -23,248 -30,491 -33,829
Goods: exports f.o.b (78aad) 39,630 44,102 46,506 47,851 53,189 51,136
Goods: imports f.o.b (78aad) -25,301 -33,241 -49,663 -53,304 -59,841 -57,739
Trade Balance (78acd) 14,329 10,861 -3,157 -5,453 -6,652 -6,603
Services: credit(78add) 3,965 4,908 6,135 4,655 5,989 7,631
Services: debit (78aed) -9,555 -10,254 -13,630 -12,714 -15,298 -16,676
Balance on Goods & Services (78afd) 8,739 5,515 -10,652 -13,512 -15,961 -15,648
Income: credit (78agd) 1,308 2,202 3,457 5,350 5,344 4,914
Income: debit (78ahd) -11,630 -11,293 -14,562 -17,527 -21,688 -24,531
Balance on Goods, Services, & Inc
(78aid)
-1,583 -3,576 -21,757 -25,689 -32,305 -35,265
Current Transfers, nie: credit (78ajd) 1,704 2,577 3,861 2,699 2,130 1,795
Current Transfers: debit (78akd) -101 -154 -240 -258 -316 -359
Capital Account, nie (78bcd) 81 173 352 494 482 375
Capital Account, nie: credit (78bad) 86 175 363 507 519 488
Capital Account, nie: debit (78bbd) -5 -2 -11 -13 -37 -113
Financial Account, nie (78bjd) 7,604 8,020 29,306 33,142 24,918 20,063
Direct Investment Abroad (78bdd) -491 -1,037 -1,384 467 -1,042 -2,721
Dir. Invest. in Rep. Econ., nie (78bed) 1,292 3,072 4,859 11,200 19,650 31,913
Portfolio Investment Assets (78bfd) -606 -3,052 -936 -257 -335 -594
Portfolio Investment Liabilities, nie
(78bgd)
12,928 47,784 10,171 21,089 10,393 19,013
Other Investment Assets (78bhd) -2,696 -4,368 -1,783 -3,327 2,251 -5,992
Other Investment Liabilities, nie (78bid) -2,823 -34,379 18,379 3,970 -5,999 -21,556
Net Errors and Omissions -815 -442 1,447 -1,992 -3,160 -2,911
Overall Balance (78cbd) 6,890 6,598 12,969 8,396 -8,251 -16,302
Reserves and Related Items (79dad) -6,890 -6,598 -12,969 -8,396 8,251 16,302
Reserve Assets (79dbd) -8,709 -7,215 -12,920 -8,326 8,284 6,990
Use of Fund Credit and Loans (79dcd) -504 -133 -49 -70 -33 4,773
Exceptional Financing (79ded) 2,323 750 0 0 4,539
Source: IMF International Financial Statistics, various years, Washington, D.C.
UVA-BP-0429
-24-
Exhibit 4 (continued)
C. Balance of Payments (quarterly, 1996-1998 Q3)
International Transactions (US$ MM) 96Q1 96Q2 96Q3 96Q4 97Q1 97Q2 97Q3 97Q4 98Q1 98Q2 98Q3
Current Accounts, nie (78ald) -3,451 -4,154 -5,739 -9,904 -4,944 -7,659 -7,035 -10,853 -6,006 -7,332 -9,062
Goods: exports f.o.b (78aad) 10,297 12,633 12,986 11,935 10,712 14,196 14,951 13,330 11,913 14,068 13,494
Goods: imports f.o.b (78aad) -10,751 -12,478 -14,238 -15,837 -11,580 -15,464 -16,588 -16,209 -13,753 -14,072 -15,276
Trade Balance (78acd) -454 155 -1,252 -3,902 -868 -1,268 -1,637 -2,879 -1,840 -4 -1,782
Services: credit(78add) 1,100 984 1,169 1,402 1,082 1,564 1,573 1,770 1,963 1,821 1,921
Services: debit (78aed) -2,528 -2,901 -3,596 -3,689 -3,304 -3,712 -4,242 -4,040 -3,935 -3,884 -4,665
Balance on Goods & Services (78afd) -1,882 -1,762 -3,679 -6,189 -3,090 -3,416 -4,306 -5,149 -3,812 -2,067 -4,526
Income: credit (78agd) 1,150 1,568 1,237 1,395 1,181 1,567 1,436 1,160 1,247 1,267 1,293
Income: debit (78ahd) -3,493 -4,595 -3,833 -5,606 -3,532 -6,262 -4,576 -7,318 -3,800 -6,857 -6,187
Balance on Goods, Services, & Inc (78aid) -4,225 -4,789 -6,275 -10,400 -5,441 -8,111 -7,446 -11,307 -6,365 -7,657 -9,420
Current Transfers, nie: credit (78ajd) 837 700 597 565 552 531 520 527 438 429 450
Current Transfers: debit (78akd) -63 -65 -61 -69 -55 -79 -109 -73 -79 -104 -92
Capital Account, nie (78bcd) 96 96 129 173 130 100 144 108 113 94 152
Capital Account, nie: credit (78bad) 98 100 133 176 136 110 156 117 137 104 160
Capital Account, nie: debit (78bbd) -2 -4 -4 -3 -6 -10 -12 -9 -24 -10 -8
Financial Account, nie (78bjd) 8,828 8,042 4,389 12,169 4,953 8,008 10,391 1,566 23,047 12,933 -16,607
Direct Investment Abroad (78bdd) 1,352 -114 -329 -442 -120 -385 -256 -281 -176 -291 -1,409
Dir. Invest. in Rep. Econ., nie (78bed) 1,847 3,771 1,557 4,025 3,239 4,902 4,912 6,597 4,347 6,570 10,552
UVA-BP-0429
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Exhibit 4 (continued)
Portfolio Investment Assets (78bfd) -53 -62 -100 -42 -58 -45 38 -270 27 -21 -1,348
Portfolio Investment Liabilities, nie (78bgd) 3,743 5,173 3,643 8,530 4,358 5,355 6,087 -5,407 12,442 9,512 -6,088
Other Investment Assets (78bhd) 2,015 -3,634 187 -1,895 -1,146 1,040 163 2,194 -176 1,146 -6,892
Other investment Liabilities, nie (78bid) -76 2,908 -569 1,993 -1,320 -2,859 -553 -1,267 6,583 -3,983 -11,422
Net Errors and Omissions -1,177 244 135 -1,194 -1,050 -1,555 680 -1,235 -636 -3,383 568
Overall Balance (78cbd) 4,296 4,228 -1,086 1,244 -911 -1,106 4,180 -10,414 16,518 2,312 -24,949
Reserves and Related Items (79dad) -4,296 -4,228 1,086 -1,244 911 1,106 -4,180 10,414 -16,518 -2,312 24,950
Reserve Assets (79dbd) -3,987 -4,216 1,109 -1,232 934 1,106 -4,169 10,414 -16,508 -2,312 24,960
Use of Fund Credit and Loans (79dcd) -23 -12 -23 -12 -23 0 -11 0 -10 0 -10
Exceptional Financing (79ded) -286 0 0 0 0 0 0 0
Source: IMF International Financial Statistics, various years, Washington, D.C.
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Exhibit 5
A. Trade Balance Components
(US$ MM) 1994 1995 1996 1997 1998
Brazilian Exports – FOB
Total 43,545 46,506 47,747 52,990 51,120
Primary Products 11,058 10,969 11,900 14,474 12,970
Industrial Products 31,852 34,711 35,026 37,672 37,493
Semi-Manufactured Goods 6,893 9,146 8,613 8,478 8,111
Manufactured Goods 24,959 25,565 26,413 29,194 29,382
Special Transactions 635 826 821 844 657
Brazilian Imports – FOB
Total 33,079 49,972 53,301 61,347 57,550
Consumer Goods 5,540 10,927 9,721 11,233 10,657
Durable 3,130 6,095 4,569 5,692 5,203
Non-Durable 2,410 4,832 5,152 5,541 5,454
Raw Materials 15,607 22,382 24,646 27,614 26,709
Fuels and Lubricants 4,356 5,217 6,228 5,824 4,127
Capital Goods 7,576 11,446 12,706 16,676 16,057
(%) 1994 1995 1996 1997 1998
Brazilian Exports – FOB
Total 43,545 46,506 47,747 52,990 51,120
Primary Products 25.39% 23.59% 24.92% 27.31% 25.37%
Industrial Products 73.15% 74.64% 73.36% 71.09% 73.34%
Semi-Manufactured Goods 15.83% 19.67% 18.04% 16.00% 15.87%
Manufactured Goods 57.32% 54.97% 55.32% 55.09% 57.48%
Special Transactions 1.46% 1.78% 1.72% 1.59% 1.29%
Brazilian Imports – FOB
Total 33,079 49,972 53,301 61,347 57,550
Consumer Goods 16.75% 21.87% 18.24% 18.31% 18.52%
Durable 9.46% 12.20% 8.57% 9.28% 9.04%
Non-Durable 7.29% 9.67% 9.67% 9.03% 9.48%
Raw Materials 47.18% 44.79% 46.24% 45.01% 46.41%
Fuels and Lubricants 13.17% 10.44% 11.68% 9.49% 7.17%
Capital Goods 22.90% 22.90% 23.84% 27.18% 27.90%
Source: Central Bank: Annual Report 1998, Brasilia.
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Exhibit 5 (continued)
B. Brazilian Trade by Area–FOB
US$ MM 1997
1998
Exports Imports Balance Exports Imports Balance
Total 52,990 61,347 -8,357 51,120 57,550 -6,430
EFTA 378 1,150 -772 360 1,159 -799
LAIA
1
12,828 12,277 551 12,618 11,567 1,051
Mercosur 9,044 9,631 -587 8,877 9,425 -548
Argentina 6,767 8,120 -1,353 6,747 8,028 -1,281
Paraguay 1,406 531 875 1,249 349 900
Uruguay 870 980 -110 881 1,048 -167
Chile 1,196 995 201 1,023 809 214
Mexico 828 1,186 -358 1,002 974 28
Others 1,760 466 1,294 1,716 359 1,357
Canada 584 1,453 -869 544 1,330 -786
European Union 14,513 16,335 -1,822 14,744 16,826 -2,082
Germany 2,608 5,131 -2,523 3,006 5,239 -2,233
Belgium/Luxembourg 1,483 695 788 2,194 668 1,526
Spain 1,057 1,154 -97 1,056 1,195 -139
France 1,113 1,662 -549 1,230 1,987 -757
Italy 1,709 3,470 -1,761 1,931 3,196 -1,265
Netherlands 3,998 589 3,409 2,744 711 2,033
United Kingdom 1,259 1,488 -229 1,339 1,498 -159
Others 1,286 2,146 -860 1,244 2,332 -1,088
Central and Eastern Europe
2
1,314 907 407 1,163 793 370
Asia
3
7,382 8,927 -1,545 5,366 7,631 -2,265
Japan 3,068 3,599 -531 2,202 3,253 -1,051
China, People’s Republic 1,088 1,188 -100 905 1,023 -118
Korea 737 1,368 -631 467 992 -525
Others 2,489 2,772 -283 1,792 2,364 -572
United States
4
9,407 14,343 -4,936 9,865 13,558 -3,693
OPEC 2,651 4,119 -1,468 2,749 3,224 -475
Others 3,934 1,837 2,096 3,711 1,460 2,251
Source: Central Bank: Annual Report 1998, Brasilia.
1
Venezuela included in OPEC.
2
Albania, Bulgaria, Hungary, Poland, Slovak Republic, Czech Republic, Romania, and countries of the former
Soviet Union.
3
Excludes Middle East. Indonesia is included in OPEC.
4
Includes Puerto Rico.
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Exhibit 6
Government Finances
A. Government Accounts, 1970-97 (Annual averages as % of GDP)
1970-75 1976-80 1981-85 1986-90 1991-93 1994-96 1997
Operational Concept
∗∗∗
Revenue 25.2 24.1 26.3 28.3 31.7 33.0 34.1
Expense 22.9 22.3 28.0 31.0 32.1 35.3 38.1
Deficit
-2.3 -1.8 1.7 2.7 0.4 2.3 4.0
Savings
∗∗
6.4 4.9 0.6 0.6 2.6 0.2 -1.5
Nominal Concept
***
Revenue 25.2 24.1 26.3 28.3 31.7 33.0 34.1
Expense 24.0 24.4 39.8 62.7 61.9 49.1 39.7
Current 20.0 21.3 37.4 58.4 58.8 46.7 37.2
Investment 4.0 3.0 2.3 3.3 3.1 2.5 2.5
Deficit
*
-1.2 0.3 13.5 34.3 30.2 16.1 5.9
Savings
**
5.2 2.8 -11.2 -31.0 -27.1 -13.6 -3.2
Revenue from “Inflationary
taxes”
0.8 1.7 2.3 3.6 3.2 0.6 0.2
Source: National Accounts and Central Bank. Elaborated by Depec-Bacen, in Gustavo Franco, O Desafio Brasileiro.
∗∗∗
The nominal or total deficit (PSBR) is the difference between total government expenditures and total
revenues, including all levels of public administration and the state enterprises. The operational deficit excludes the
nominal interest paid on public debt. It is usually more informative than the nominal deficit, because the latter tends
to rise with inflation, regardless of a simultaneous improvement in government finances.
Surplus (-), Deficit (+).
∗∗
Revenue minus current expenses.
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Exhibit 6 (continued)
B. Primary, Operational, and Nominal Balances of the Nonfinancial Public Sector
1
(In percent of GDP)
1994 1995 1996 1997 1998
(A) Primary Balance (deficit -)
4.3 0.3 -0.1 -1.0 0.0
Central Government 3.1 0.6 0.4 -0.3 0.6
States and Municipalities 0.5 -0.2 -0.6 -0.7 -0.2
Public Enterprises 0.8 -0.1 0.1 0.1 -0.4
(B) Interest Payments (net)
*
3.8 5.1 3.7 3.3 7.6
Central Government 1.5 2.2 2.0 1.4 5.8
States and Municipalities 1.5 2.1 1.3 1.5 1.6
Public Enterprises 0.9 0.8 0.4 0.4 0.2
(C) Operational Balance (deficit -) (A-B)
0.5 -4.8 -3.8 -4.3 -7.5
Central Government
2
1.6 -1.6 -1.6 -1.8 -5.2
States and Municipalities -1.0 -2.3 -1.8 -2.2 -1.8
Public Enterprises 0.1 -0.8 -0.3 -0.3 -0.5
(D) Interest Payments
48.5 7.4 5.8 5.1 8.0
Central Government 19.9 2.9 3.0 2.3 6.1
States and Municipalities 19.5 3.3 2.1 2.3 1.8
Public Enterprises 9.3 1.2 0.7 0.5 0.1
(E) PSBR (=-Nominal Balance) (A-D)
44.2 7.1 5.9 6.1 8.0
Central Government
16.8 2.3 2.6 2.6 5.5
States and Municipalities 19.0 3.5 2.7 3.0 2.0
Public Enterprises 8.5 1.3 0.6 0.4 0.5
Accumulated Debt
3
20.7 24.9 29.4 30.2 36.0
Federal Government 6.4 9.8 14.3 16.8 21.1
States and Municipalities 9.4 10.3 11.2 12.5 13.7
Public Enterprises 5.0 4.9 3.9 0.9 1.3
Note: Slight differences between the numbers in Exhibit 6A and 6B are due to different data sources.
Data Source: IMF Staff Country Report No. 99/97, Washington, D.C.
1
Proceeds from privatization not included in revenue.
2
Includes federal administration, Central Bank, decentralized agencies, and social security system.
Interest payments on external debt plus the real portion of interest payments on domestic debt.
3
End of period stocks.
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Exhibit 7
Gross Foreign Indebtedness
US$ Million 1994 1995 1996 1997 1998
e
A - Total Debt (B+C) 148,295 159,256 179,935 199,998 235,058
B – Medium- and Long-Term Debt
1
119,668 128,732 142,148 163,283 210,458
IMF Loans 186 142 68 32 11
Renegotiated Debt Bonds 51,538 51,451 51,239 41,930 40,400
Other Bonds 1,616 2,452 3,637 7,457 8,900
Import Financing 35,711 36,113 34,165 50,785 65,040
Multilateral 10,473 10,680 11,325 12,353 17,379
Bilateral 19,473 18,976 15,821 14,348 15,339
Other Financing Sources 5,765 6,457 7,019 24,084 32,322
Currency Loans 30,387 38,347 52,836 62,898 95,949
Other Loans 230 227 203 181 158
C - Short-Term Debt 28,627 30,524 37,787 36,715 24,600
Credit Line for Petroleum Imports 2,530 3,067 4,985 5,695 4,276
Oth. Cred. Lines/Public Companies 56 354 177 - -
Commercial Banks (liabilities) 25,575 26,235 30,611 26,501 18,476
Rural Financing - 581 1,944 4,003 1,232
Special Operations
2
466 287 70 516 616
Source: Central Bank: Annual Report, 1998, Brasilia.
e
Estimated
1
Data refer to capital registration in the Central Bank. They are not compatible with the BOP figures, which
represent inflows and outflows that effectively occurred in the period.
2
As from 1997, besides Central Bank’s operations, bridge loans, and loans for on-lendings to export companies.
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Exhibit 8
Privatization Program
1994 1995 1996 1997 1998 TOTAL
Companies Privatized 9 8 11 4 7 39
Metal 0 0 0 0 0 0
“Petroquisa” System (oil) 6 7 5 0 0 18
Fertilizers 1 0 0 0 0 1
Electrical 0 1 1 0 1 3
Railroads 0 0 5 1 1 7
Others 2 0 0 3 5 10
Revenues (US$ MM) 620 1,123 4,198 3,805 1,234 10,980
Metal - - - - - -
“Petroquisa” System (oil) 411 604 212 - - 1,227
Fertilizers 11 - - - - 11
Electrical - 519 2,509 - 879 3,907
Railroads - - 1,477 15 206 1,698
Others 198 - - 3,790 149 4,137
Liabilities Transferred to Acquirers
(US$ MM)
349 624 670 3,559 1,082 6,284
Metal - - - - - -
“Petroquisa” System (oil) 84 622 84 - - 790
Fertilizers 2 - - - - 2
Electrical - 2 586 - 1,082 1,670
Railroads - - - - - -
Others 263 - - 3,559 - 3,822
Telecommunications
Minimum Sell Sell/Asking
Asking Price Price Price
US$ MM
US$ MM (%)
Telebrás System 11,552 18,944 64%
Fixed Telephony and Embratel (long distance) 9,147 11,970 31%
Cellular Telephony - A Band 2,405 6,974 190%
Cellular Telephony - B Band 1,425 2,879 102%
TOTAL 12,977 21,823 68%
Source: BNDES, in Central Bank: Annual Report 1998.
UVA-BP-0429
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-30,000
-20,000
-10,000
0
10,000
20,000
30,000
96Q1 96Q2 96Q3 96Q4 97Q1 97Q2 97Q3 97Q4 98Q1 98Q2 98Q3
US$ Bi
Current Account Capital Account Narrowly Defined Overall Balance
Reserves (International Liquidity Concept)
0
10
20
30
40
50
60
70
80
J
a
n-97
Mar-97
Ma
y
-
9
7
Jul-97
S
e
p-97
N
o
v-9
7
J
an
-98
M
a
r-98
May-
9
8
J
u
l-98
Sep-98
US$ Bi
Exhibit 9
Brazil in Charts
A. Balance of Payments (Quarterly, 1996-Quarter 3, 1998)
B. International Reserves
UVA-BP-0429
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Seasonally Adjusted (1995 = 100)
101
102
103
104
105
106
107
97Q1 97Q2 97Q3 97Q4 98Q1 98Q2 98Q3
Bank Rate – Money Market Rate (SELIC) (%
)
0
5
10
15
20
25
30
35
40
45
50
Jan-97
Mar-9
7
Ma
y-9
7
Jul-9
7
S
e
p
-
97
No
v-9
7
Jan-98
Ma
r
-9
8
May-9
8
Jul-9
8
S
e
p
-9
8
Exhibit 9 (continued)
C. Interest Rates
Source: IMF International Financial Statistics
D. Industrial Production
Source: IMF International Financial Statistics.
UVA-BP-0429
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17.40%
11.40%
10.50%
8.10%
7.70%
7.50%
6.20%
4.20%
3.40%
0%
5%
10%
15%
20%
Spai
n
(
03/
9
9)
France (04/99)
Ger
m
any
C
ana
da
BRAZIL
A
ust
r
a
li
a
U.K. (04/99)
U.S
.
Ne
t
her.
5.86%
5.30%
5.06%
4.64%
5.42%
5.66%
7.60%
0.00%
2.00%
4.00%
6.00%
8.00%
1992 1993 1994 1995 1996 1997 1998
Principal Exchange Rate (average of period)
0.95
1
1.05
1.1
1.15
1.2
Jan-
9
7
Mar-
97
M
ay
-
97
Jul-9
7
Sep-
9
7
N
o
v-97
Jan-
9
8
Mar-
98
M
a
y-
98
Jul-9
8
Sep-98
R$ to US$
CPI (1995=100)
118
120
122
124
126
128
130
97Q1 97Q2 97Q3 97Q4 98Q1 98Q2 98Q3
Exhibit 9 (continued)
E. Urban Unemployment Rate F. Unemployment Rates
F.
Comparison with other countries (May 99).
*
12-month average until May.
Source: The Economist (June 1999). Source: IBGE/PME.
G. Exchange Rate H. Consumer Price Index
Source: IMF International Financial Statistics, various years, Washington D.C.
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Exhibit 10
Brazil: Policymakers and Policies, 1985–1993
Year President Finance Minister Economic Policy Tools Politics
1985 F. Dornelles Orthodoxy
1986 D. Funaro Cruzado Plan General price freeze on final goods price
Wage freeze (average of previous 6 months plus 8% or 15%)
Rent and mortgage payments freeze, by the 6-month average
Wage escalation system (activated by selected triggers)
Indexation banned from contracts
New currency: Cruzado
1987 Jose Sarney Bresser Pereira Bresser Plan Price and wage freeze
Public deficit control as a means to control inflation
High interest rates (higher than inflation) to control consumption
Election of
governors/
constituent
assembly
1988 Mailson da
Nobrega
“Rice and Beans”
[Plain Vanilla]
No shock treatment
Prohibited government to hire
Currency devaluation
Constituent
assembly
1989 “Summer Plan” Price and wage freeze
Abolition of indexing
New currency: Cruzado Novo
Attempt to restrain monetary and credit expansion
Presidential
elections
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Exhibit 10 (continued)
1990 Zelia Cardoso Collor Plan I Assets freeze
New currency: Cruzeiro
Introduction of tax on financial transactions
Price and wage freeze
Liberalization of exchange rate
Opening of the economy
Preliminary measures to start privatization
1991 F. Collor Collor II Elimination of “overnight” investments
Price and wage freeze
Extinction of indexation
1992 Marcilio Moreira Orthodoxy Impeachment
process
1993 Gustavo Krause
1994 Itamar
Franco
P. Haddad
E. Rezende
F.H. Cardoso Real Plan
Source: Werner Baer, “The Brazilian Economy,” Table 9.1 adapted.
Thesis
Full-text available
Bu çalışma gelişmekte olan ülkelerde iktisadi hoşnutsuzluk endeksi ile cari açık arasındaki ilişkiyi incelemektedir. Gelişmekte olan ülkeleri temsilen Brezilya, Endonezya, Güney Afrika, Hindistan ve Türkiye’den oluşan kırılgan beşli ülkeleri analiz edilmiştir. Cari açık sorununa sahip bu ülkelerde, gelişmiş ülkelerle kıyaslandığında iktisadi hoşnutsuzluk endeksinin daha yüksek olduğu görülmektedir. Çalışmada iki değişkenli Okun’un iktisadi hoşnutsuzluk endeksi, dört değişkenli Barro ve Hanke’ın iktisadi hoşnutsuzluk endeksi ve üç değişkenli işsizlik, büyüme, faiz oranlarından oluşan iktisadi hoşnutsuzluk endeksi olmak üzere üç farklı iktisadi hoşnutsuzluk endeksi kullanılmıştır. Ülkeler öncelikle ayrı ayrı, daha sonra ise toplu bir şekilde analiz edilmiştir. İlk olarak, değişkenlerin durağanlık durumları Fourier birim kök testi kullanılarak incelenmiştir. Birinci farkı alındığında durağan hale gelen değişkenler arasındaki uzun dönemli ilişkiyi araştırmak amacıyla Fourier eşbütünleşme testi uygulanmıştır. Uzun dönemli katsayıların tahmini için Dinamik en küçük kareler yönteminden yararlanılmıştır. Farklı düzeylerde durağan olan değişkenler arasındaki uzun dönemli ilişkiyi araştırmak amacıyla sınır testi yaklaşımı kullanılmıştır. Uzun dönemli ilişkinin bulunmadığı durumlarda, değişkenler arasındaki nedensellik ilişkisini araştırmak amacıyla, değişkenlerin durağanlık durumları dikkate alınarak Granger ya da Toda-Yamamoto nedensellik testlerinden biri tercih edilmiştir. Ulaşılan sonuçlar, incelenen bütün ülkelerde iktisadi hoşnutsuzluk endeksi ile cari açık arasında ters yönlü ilişki olduğunu ortaya koymaktadır. Brezilya, Güney Afrika ve Hindistan’da cari açıktan iktisadi hoşnutsuzluk endeksine doğru tek yönlü uzun dönemli ilişki, Endonezya’da iktisadi hoşnutsuzluk endeksinden cari açığa doğru tek yönlü uzun dönemli ilişki, Türkiye’de ise iktisadi hoşnutsuzluk endeksi ile iv cari açık arasında çift yönlü uzun dönemli ilişki bulunmuştur. Ülkelerin ortalaması alınarak yapılan analizler de iktisadi hoşnutsuzluk endeksi ile cari açık arasında çift yönlü uzun dönemli ilişki olduğuna işaret etmektedir.
Article
Full-text available
U zemljama sa nastajućim tržištem investitorova percepcija visokog rizika neizvršenja obaveze (engl. default risk) kod obveznica generiše pritisak na tražnju za kratkoročnim fi− nansiranjem i nespremnost emitenata da osiguraju veći prinos na dugoročna nego na kratkoročna ulaganja u obveznice. Dakle, kriva prinosa na nastajućim tržištima je pretežno inverzna, tj. ima negativan nagib, posmatrano i u vremenskoj i u prostornoj dimenziji. Determinante investitorove percepcije visokog rizika ulaganja u obveznice zemalja sa nastajućim tržištem su nestabilnost i nelikvidnost finansijskog tržišta, visok nivo javnog, pre svega spoljnog duga, potrošačka orijentacija budžeta i veliki budžetski deficiti, nestabilnost deviznog kursa i česte valutne krize, visoka inflacija, niska stopa rasta bruto domaćeg proizvoda, štednje i investicija i veliko učešće potrošnje u društvenom proizvodu, intenzivnija primena na pravilima zasnovanih umesto tržišno zasnovanih instrumenata monetarne regulacije, korupcija, opasnost od rata i terorizma i neizvesnost ishoda političkih izbora i održivosti koalicionih i manjinskih vlada.
Real Plan Source: Werner Baer
  • F H Cardoso
F.H. Cardoso Real Plan Source: Werner Baer, "The Brazilian Economy," Table 9.1 adapted.