Review of Radical Political Economics 34 (2002) 109–135
Inﬂation and stabilization in Brazil:
a political economy analysis
, Maria de Lourdes R. Mollo
Department of Development Studies, SOAS, University of London, Thornhaugh Street,
Russell Square, London WC1 0XG, UK
Departamento de Economia, Universidade de Bras
ılia, Brasilia D.F., Brazil
Received 6 October 1999; accepted 28 June 2000
This article outlines a political economy analysis of Brazilian high inﬂation and stabilization. The
paper explains the distributive and monetary aspects of inﬂation and the gradual fragmentation of
the Brazilian currency. It also reviews the most important aspects of the Real stabilization plan, the
de-indexationof the economy, and its rapid “liberalization” and “internationalization.” The paper shows
that, in spite of the successful reduction of inﬂation, the Real plan was highly vulnerable to shifts in
international liquidity; partly for these reasons, it led to de-industrialization and high unemployment.
In addition to this, the Real plan contributed to an increase in income inequality and the development
of sharp social conﬂicts in Brazil. These weaknesses were the main factors responsible for the currency
crisis in January 1999. © 2002 URPE. All rights reserved.
JEL classiﬁcation: E61; O54
Keywords: Brazil; Inﬂation; Stabilization policy
Between 1949 and 1980, annual GDP growth in Brazil averaged 7.3 percent (3.8 percent per
capita). This impressive performance deteriorated sharply after 1980, when growth rates fell
to 1.8 percent per annum (0 percent per capita). In contrast, inﬂation rates accelerated almost
relentlessly, from under 20 percent in 1972 to around 5,000 percent (annual rate) in mid-1994.
After several failed stabilization attempts the “Real plan” successfully reduced inﬂation rates
Corresponding author. Tel.: +44-20-7898-4504; fax: +44-20-7898-4519.
E-mail addresses: email@example.com (A. Saad-Filho), firstname.lastname@example.org (M.d.L.R. Mollo).
0486-6134/02/$ – see front matter © 2002 URPE. All rights reserved.
110 A. Saad-Filho, M.d.L.R. Mollo/Review of Radical Political Economics 34 (2002) 109–135
to 5 percent or less. This paper outlines a Marxist analysis of high inﬂation in Brazil,
critically examines the stabilization program implemented in 1994.
StudiesofBrazilian highinﬂationcanbeclassiﬁed intotwogroups.Theﬁrst,includingmost
structuralist, neostructuralist, post-Keynesian, and Marxist contributions, argues that distribu-
tive conﬂicts and the widespread indexation of prices and incomes were the main causes of
inﬂation.Incontrast,neoclassical writersgenerally blamethe largeandpersistent ﬁscaldeﬁcits
for the high inﬂation (Silva & Andrade, 1996). This articleshows that the distributive conﬂicts
were the main underlying cause of inﬂation. However, this “real” approach is insufﬁcient. In
order to explain high inﬂation, the fragmentation of the currency, and the deterioration of the
of the Brazilian experience, which integrates theoretically the “real” and “monetary” aspects
This analysis builds upon radical monetary theory, especially the hypothesis that
money is endogenous and non-neutral. The theoretical analysis of inﬂation is developed in
Section 1. Section 2 contextualizes Brazilian high inﬂation as a form of monetary crisis. The
causes of the deterioration of the Brazilian currency are identiﬁed through the relationship
between money and production. We look particularly closely at the relationship between the
money endogeneity and the reproduction of the general equivalent when analyzing Brazilian
inﬂation. Section 3 analyzes the Real plan, especially its impact upon the distributive conﬂict
and the supply of money. In its ﬁnal section, the paper explains why the stabilization program
was limited and fragile.
1. Conﬂict, money, and inﬂation
1.1. Conﬂict inﬂation
Non-mainstream writers of different persuasions, especially post-Keynesians, neostruc-
turalists, and Marxists, often argue that distributive conﬂicts are generally the main cause of
inﬂation or, more broadly, that inﬂation is the monetary expression of the distributive conﬂicts
(Barkin & Esteva, 1982: 48–49).
In brief, conﬂict theories usually presume that the money
supply is endogenous, and that important social groups (unionized workers, monopoly cap-
italists, rentiers, etc.) have monopoly power, and can determine the price of their goods or
Brazil experienced several years of high inﬂation between the mid-1970s and the early 1990s, but not hyper-
inﬂation. This distinction is relevant because, although inﬂation occasionally exceeded the conventional threshold
of 50 percent per month, the domestic currency was never annihilated as it famously was, for example, in Hungary
and Germany (see Section 2.2).
We employ the terms “real” and “monetary” for illustrative purposes only. These categories are generally
unhelpful and often misleading, because capitalist economies are necessarily monetary (Itoh & Lapavitsas, 1999;
Conﬂict theories are surveyed by Dalziel (1990) and Lavoie (1992: Chap. 7). Burdekin and Burkett (1996)
provide an outstanding theoretical and empirical investigation, but see also Boddy and Crotty (1975), Glyn and
Sutcliffe (1972), Marglin and Schor (1990), and Rowthorn (1980: Chaps. 5–6). The Brazilian experience is inter-
preted in this light by Bacha (1982), Bresser Pereira and Nakano (1983), and Mollo and Silva (1987). The Mexican
case is analyzed by Barkin and Esteva (1979, 1982).
A. Saad-Filho, M.d.L.R. Mollo/ Review of Radical Political Economics 34 (2002) 109–135 111
services strategically. If some of these groups use their market power to increase their share
of the national income, and if other groups react using the same weapons, conﬂict inﬂation
may be the result. In this case, inﬂation reconciles ex post demands over the national product
that are, ex ante, incompatible. In this model, the rate of inﬂation is a positive function of the
size of the overlapping claims and the frequency of the price changes, and a negative func-
tion of the rate of productivity growth. The conﬂict approach can be extended to show that
inﬂation rates may become rigid downward if some agents index-link their prices or incomes
(inertial inﬂation). In this case, any negative shock or additional income demand can lead to
permanently higher inﬂation. The conﬂict approach illuminates several important aspects of
persistent inﬂation, but it isoften insufﬁcientfor two reasons. First,the process ofincome gen-
eration and expenditure should not be conceptualized independently of the circuit of capital,
in which wages and proﬁts are determined sequentially rather than simultaneously; therefore,
there is no “cake” to be shared other than in retrospect (Fine, 1980). Second, conﬂict inﬂation
cannot exist unless sufﬁcient extra money is provided in order to accommodate the income
demands (see Section 1.2).
In the conﬂict approach, three types of conﬂict are usually critical. First, as indicated pre-
viously, when large ﬁrms have monopoly power, mark-up target pricing can lead to conﬂict
inﬂation. Second, organized labor can try to impose a “fairer” distribution of income, or to
obtain compensation for losses due to past inﬂation, through money wage increases. The cap-
italist sector may accept these pay rises in principle, perhaps in order to defuse conﬂicts in the
production line but, later, respond through higher prices. The third type of conﬂict is the dis-
pute between ﬁnancial and industrial capitalists forshares of the total surplus value, especially
through the level of interest rates.
Higher wages, prices, or real interest rates increase costs
across the economy, and they can spark a conﬂict with “real” consequences whose winners
can be difﬁcult to identify other than in retrospect. More broadly, the persistence of conﬂict
inﬂation is contingent upon the institutional structure of the economy, theﬁnancial system, the
ﬁscaland monetary policies ofthestate, the balanceofclassforces, and themodeof expression
of the social conﬂicts at each point in time (see Section 2).
1.2. Extra money inﬂation
Recognition of the fact that certain types of monetary institutions and policies tend
to accommodate high inﬂation almost automatically, while others are more rigid, led to
two important developments in the Marxian inﬂation literature. First, de Brunhoff (1982),
Fine and Murﬁn (1984: Chap. 7), Kotz (1987), and Weeks (1979), among others, criticized
conﬂict theories for their relative neglect of the monetary sphere. Their critique highlights the
need to develop a monetary, but non-monetarist, theory of inﬂation, in which institutions have
an important role to play. Second, Aglietta (1979: Chap. 6), de Brunhoff and Cartelier (1974),
Inﬂation beneﬁts debtors at the expense of creditors if the debt service declines in real terms. However, in
Brazil most credit transactions were index-linked, which eliminates these transfers. In contrast, the erosion in the
real valueof bank deposits duetoinﬂation was the source of substantial transfers to the bankingsystem (on average,
equivalent to 2.5 percent of GDP; see Cysne, 1994). For a general analysis of these income transfers, see Dum
evy (1999); the Brazilian case is analyzed by Lees et al. (1990).
112 A. Saad-Filho, M.d.L.R. Mollo/ Review of Radical Political Economics 34 (2002) 109–135
deVroey(1984),Fine (1980: Chap.4),and Lipietz (1983) developedthetheory of extramoney
This theory (for a detailed presentation, see de Vroey, 1984; for a critical review,
see Saad-Filho, 2002) argues that circumstances intrinsic to the circuit of capital regularly
create discrepancies between value production and the supply of (credit or ﬁat) money, which
may be inﬂationary.
In brief, and somewhat loosely, extra money inﬂation can happen if
extra money (this concept is deﬁned below) validates prices higher than values, or lowers the
relationship between the value of the output and the circulating money, and if the original re-
lationship is not subsequently restored by output growth or the destruction of the extra money
(de Brunhoff & Cartelier, 1974).
Extra money can be created in different ways, both privately and by the public sector.
For example, the commercial banking system creates extra money when it reﬁnances the
irretrievable debts of the productivesector. The extra money maybe inﬂationary if the ensuing
output growth is insufﬁcient to compensate for the increase in liquidity, in which case the
extra money when it supports, through the discount window, banks suffering substantial loan
losses.Extramoneymayormay not be inﬂationary; thisoutcomeiscontingent upon the output
response and the ability of the central bank and the private banking system to stave off the
More speciﬁcally, extra money increases the nominal national income relative to what it
wouldbe otherwise.If the extra moneyis spentrather than savedor destroyed in the repayment
of loans, it may induce a quantity response in those industries operating below capacity,
potentially leading to higher investment and demand (the “Keynesian” scenario). In this case,
the additional productive capacity and the additional demand may compensate for the extra
money, and inﬂation does not materialize. At the end of the circuit, there will be more money
and more commodities in circulation, which may restore the previous relationship between
value and money at a higher level of income and output. However, if the extra money increases
demand in those sectors operating at full capacity, and if additional imports are not available
(the “monetarist” scenario), the relationship between prices and money is not restored. A new
relationship is established through an increase in prices in this market, ostensibly because of
excess demand; this is extra money inﬂation.
Extra money inﬂation is more likely in monetary systems based on inconvertible paper
currency than in any other monetary system, because this type of money introduces additional
mediationson the relationshipbetweenlabor,value,andmoney(Itoh& Lapavitsas,1999). The
monetary role of the state is prominent in inconvertible systems, because the state produces
Extra money should not be confused with the monetarist concept of “excess money,” as is shown below.
Money is not neutral, and extra money may or may not be inﬂationary, depending on its impact upon the structure
of production and the type of expenditure which it induces.
Post-Keynesian horizontalist writers (e.g. Moore, 1988) argue that if the money supply is endogenous there
can never be excess money supply. For a critique, see Lapavitsas and Saad-Filho (2000).
For example, in the event of a liquidity crisis (scarcity of money preventing the synchronization of the stages
of the circuit of capital), a liquidity increase can avoid generalized insolvency. The stimulus which additional
liquidity provides to production indicates that extra money is not necessarily inﬂationary. For a similar approach
to the relationship between money and crisis, see Marx (1981: Chap. 34) and Minsky (1980, 1982, 1986).
A. Saad-Filho, M.d.L.R. Mollo/ Review of Radical Political Economics 34 (2002) 109–135 113
the legal tender, regulates the ﬁnancial system (which produces credit money), and it heavily
inﬂuences the rules of convertibility of the domestic currency into world money. However,
the state cannot control all the variables of accumulation across the economy and, when it
creates or validates the private production of credit money, the state may sanction prices that
are very imperfect expressions of value.
Extra money inﬂation does not generally interrupt
tramoneycan facilitatethe saleof theoutput.However,therearelimits toextramoney-induced
economic growth. The continuous production of extra money can introduce distortions into
the relationship between prices and values and between economic sectors, because “certain
commodities sell above while others sell below their value” (de Brunhoff & Cartelier, 1974:
125). The cumulative effect of these distortions may, eventually, create severe difﬁculties for
economic reproduction because they erode the social stature of the currency.
This may lead
to its rejection and currency substitution (see Section 2.2). Obviously, there is a direct rela-
tionship between extra money and conﬂict inﬂation, because conﬂicts can lead to long-term,
widespread, and substantial price increases only if extra money is regularly created, and if the
output fails to respond proportionately.
In spite of their apparent similarity, the theory of extra money inﬂation is incompatible
with the quantity theory of money. The quantity theory’s assumptions that money supply
is exogenous, that money is only a medium of exchange, and that money is not hoarded,
are unacceptable from the perspective of the extra money approach. First, extra money is
regularly and endogenously created by the interaction between the central bank, commercial
banks, ﬁrms, and workers, and its quantity cannot be controlled, or even known precisely, by
the state. In contrast, the quantity theory presumes that the banking system is always fully
loaned up, and that the central bank can determine autonomously the supply of money directly
(through the monetization of government deﬁcits or purchases of government securities in the
open market) or indirectly (through changes in compulsory bank reserves, which should lead
unproblematically to changes in the outstanding stock of loans). Other potential sources of
the possibility that changes initiated by the central bank will be neutralized by hoarding,
compensatory changes in bank loans, or the repayment of these loans.
Second, extra money is non-neutral in the short and the long run; it may change irreversibly
the level and composition of the national product and the structure of demand, depending on
how it is created and how it circulates. In contrast, the quantity theory presumes that money
is neutral in the long and, in extreme cases, even the short run.
Third, the effects of extra
Marx’s theory of labor, value, price, and money is reviewed by Saad-Filho (1993, 1997, 2002); its relationship
with the value of money is critically examined by Fine, Lapavitsas, and Saad-Filho (1999) and Mollo (1991).
For deBrunhoffand Cartelier(1974:125)inﬂationis aform ofthe crisiswhich“doesnotrupture thecirculation
of commodities but, rather, weakens it.”
In mainstream analyses full employment necessarily holds in the short or the long run, and money is, cor-
respondingly, neutral in the short or the long run; only the length of time until neutrality holds is the subject of
dispute. In contrast, extra money can change relative prices and the level and composition of output in the short
and the long run. There are no necessary proportions between the extra money injected and the price changes,
as in the quantity theory, because money affects the “real” economy. In sum, “monetary” and “real” analyses are
inseparable, in spite of monetarist claims to the contrary.
114 A. Saad-Filho, M.d.L.R. Mollo/ Review of Radical Political Economics 34 (2002) 109–135
money (whether quantity, price, or both) cannot be anticipated. All that one can say is that
high rates of capacity utilization and activist state policies increase the probability of extra
money inﬂation, but there is never likely to be a simple relationship between them. In sum,
state validation of the private creation of credit money offers no guarantee that the output
will be compatible with the circulating money (Itoh & Lapavitsas, 1999). In contrast, for the
quantitytheory therelationshipbetween moneysupplyandinﬂation isusuallystraightforward.
Because of the underlying assumptions of perfect competition, full employment, and money
neutrality, a change in the supply of money (initiated by the central bank and automatically
propagated by the commercial banks through the money multiplier) unproblematically leads
to a predictable change in the price level.
In sum, the regulation of the quantity of extra money by the state is always highly impre-
cise, because the state cannot control the main variables of accumulation, especially the level
and structure of interest rates, the rate of return of new investment, and the terms of trade
(Lapavitsas & Saad-Filho, 2000; Mollo, 1991, 1999). Since the creation of extra money can-
not be fully controlled by the state, and since the state is inﬂuenced by, and responds to, a
wide range of economic and political pressures, it cannot be naively “blamed” for inﬂation
as if it were fully autonomous. Recognition of this fact further distinguishes the extra money
approach from the quantity theory (de Brunhoff & Cartelier, 1974).
1.3. Currency reproduction and fragmentation
The ﬁrst basic function of money is the measurement of commodity valuesand their expres-
sion as prices. Although the state can choose the standard of prices (dollars, rupiahs, reais, or
whatever), the measurement of valueinvolvesa social process that is largely independent from
the state (Saad-Filho, 1993, 2002 ch5). The second basic function of money is as medium of
exchange. In contrast with the quantity theory, and following the endogenous money tradition
of Steuart, Tooke, Marx, Schumpeter, Kalecki, and the post-Keynesians, we believe that the
quantity of circulating money and its velocity are generally determined by the level of output,
commodity prices, value of money, and the economic institutions, regardless of the monetary
Changes in output, prices, or the value of money can induce changes in the velocity
of money or its circulating quantity, especially through changes in hoards or outstanding loans
(which are settled by money as the means of payment).
In the international sphere, transactions are settled in international currency (world money).
Thisform ofmoneyfulﬁls thefunctions outlinedpreviouslyinthe globalarena. Itexpressesthe
prices of tradable goods, is generally accepted in foreign transactions, and it preserves through
time a relatively stable command over commodities and ﬁnancial assets located or registered
across the globe. The convertibility of the domestic currency into world money, and the size
of the central bank’s hoards, are important constraints upon each country’s participation in the
Lapavitsas and Saad-Filho (2000) and Mollo (1999) show that Marx’s approach to money endogeneity is
richer and more convincing than the post-Keynesian horizontalist analysis in Minsky (1986) and Moore (1988).
A. Saad-Filho, M.d.L.R. Mollo/ Review of Radical Political Economics 34 (2002) 109–135 115
The functions of money are mutually complementary, and they are fulﬁlled by a large
set of forms of money, potentially including credit money, central bank money, ﬁnancial
assets, precious metals, and foreign currencies. For de Brunhoff (1978, 1985), the smooth
convertibility between the various forms of money, and their ability to fulﬁl all the functions
of money, is the reproduction of the general equivalent. Its reproduction provides the objective
basis for the social recognition of money (see Mollo, 1993).
Thereproduction of thegeneralequivalent dependsupona highly speciﬁcsetof institutions,
including the money market and the central bank, usually (but not necessarily) regulated at
the national level. However, at least as important as the institutional framework is the rhythm
of accumulation. Regular capital accumulation (what is usually called economic growth) indi-
cates that relativeprices are not severelydistorted, which helps to ensure the social recognition
of the currency as the general equivalent. If this is not the case, the currency may be rejected,
and substitutes will gradually fulﬁl certain functions of the currency. Currency fragmentation
(when certain forms of money become inconvertible into others) and currency substitution
(when certain forms of money become unable to fulﬁl their previous functions and are re-
placed by others) create obstacles to the circulation of commodities and, therefore, to capital
accumulation. The tendency towards currency fragmentation and substitution under high in-
ﬂation indicates that inﬂation can be interpreted as a form of monetary crisis (Barkin & Esteva,
1979, 1982 explore the relationship between crisis and inﬂation in the context of distributive
In contemporary monetary systems, the convertibility between the distinct forms of money
depends to a large extent upon the state, which introduces an important discretionary element
into monetary circulation. Direct state intervention can help to reduce the costs associated
with “market-led” economic ﬂuctuations, such as those under the gold standard or currency
board regimes, which are associated with substantial shifts in employment and output levels.
However, greaterstate discretionincreases thescope forarbitrarinessincurrencymanagement,
as prices. If this leads to the rejection of the domestic currency, there may be a systematic
increase in the velocity of circulation, a declining ratio between the circulating currency and
the value of output, and the devaluation of the domestic currency vis-à-vis world money.
2. Inﬂation and monetary crisis in Brazil
2.1. Conﬂict inﬂation in Brazil
Import-substituting industrialization (ISI) provided the main thrust of capital accumulation
in Brazil between 1930 and 1980.
Under ISI, a large manufacturing sector was built, produc-
ing a wide variety of goods primarily for the domestic market. ISI was associated with highly
concentrated market structures, partly because of the technologies used, and partly because of
the small degree of openness of the economy until the early 1990s. These market structures
ISI policies are critically evaluatedby Bruton (1998) and Gerefﬁand Wyman (1990). The Brazilian experience
is reviewed by Baer and Kerstenetzky (1975), Hewitt (1992), and Tavares (1975).
116 A. Saad-Filho, M.d.L.R. Mollo/ Review of Radical Political Economics 34 (2002) 109–135
facilitated the adoption of rigid mark-up pricing rules by the leading ﬁrms (Considera, 1981).
Mark-up pricing protected the revenue of the largest ﬁrms and the highest income brackets
against demand shifts or adverse ﬂuctuations in the level of activity, which may have protected
investment in certain key industries, especially consumer durables. However, the rigidity of
the pricing system helped to make the economy chronically vulnerable to conﬂict inﬂation
(Bresser Pereira, 1981, 1992; Lafer, 1984).
Rapid industrialization through ISI was also conducive to labor market segmentation. For
historical and political reasons, the skilled workers of the leading industries, based mostly in
São Paulo, were relatively well organized and their real wages were much higher than the
Brazilian median, even under the military regime (1964–85).
The high degree of industrial
concentration may have contributed to these gains. Large ﬁrms often offered relatively low
resistance to wage demands, especially in the 1980s, because their market power allowed
them to transfer to prices the impact of wage increases (Amadeo & Camargo, 1991). It is
generally accepted that the simultaneous concentration of industrial and union activity in
the Southeast has played an important role in the growth of regional and income inequality
Widespread dissatisfaction with the level and distribution of income across categories of
workers and regions of the country, and with discrimination based on income, gender, skin
color, and other factors, have contributed to the development of severe distributive and other
conﬂicts in Brazil. In addition to this, the attempt by small and medium companies to emulate
the pricing behaviorof their larger competitors, suppliers, and customers, and income disputes
between industrial, commercial, ﬁnancial, and landed capital, generated a highly conﬂictive
process of price and wage determination. In Brazil, these conﬂicts developed largely through
the indexation of prices and incomes.
Indexation to past inﬂation was introduced gradually across the economy between the late
1960s and the mid-1990s. Indexation was institutionalized by the federal government in the
late 1960s, primarily in order to expand the market for its own securities.
At a later stage,
it was used as an incomes policy which partly contained the distributive conﬂicts, and partly
shifted them over time. Under the military regime, the rate of increase of wages was generally
towards the “technical” rather than the “political” or industrial spheres. This shift increased the
degree of indexation of the economy, because wage increases became inﬂexibly determined
by past inﬂation.
The exchange rate, household rents, and many other prices were also
In São Paulo, the largest and most industrialized city in Brazil, executive pay increased by 75 percent in real
terms between 1964 and 1985, while skilled workers’ wages increased by 83 percent. In contrast, unskilled worker
wages increased only by 38 percent and ofﬁce workers’ wages by 33 percent. In this period, the real minimum
wage declined by 43 percent (Amadeo & Camargo, 1991; Sab
Usury law restricted annual interest rates to 12 percent. As inﬂation rates were usually higher (peaking at 90
percent in 1964), there was no scope for the development of a deep ﬁnancial system. The way around this legal
restriction was to index-link most ﬁnancial assets, and apply the 12 percent limit only to real, rather than nominal
gains (Studart, 1995).
Nominal wages increased once a year until 1979, twice yearly until 1985, approximately every 3 months
until 1987, and monthly afterwards, in which case nominal wages were known only after they were paid (see
Balbinotto Neto, 1991; Barbosa & McNelis, 1989; Macedo, 1983).
A. Saad-Filho, M.d.L.R. Mollo/ Review of Radical Political Economics 34 (2002) 109–135 117
index-linked. The indexation of prices and wages helped to provide social stability in the
short-term, because it seemed to guarantee future compensation for the losses due to current
inﬂation. In spite of this, the distribution of income deteriorated sharply in the period of high
inﬂation. The Gini coefﬁcient increased from 0.56 to 0.64 between 1970 and 1989 (this year’s
Lorenz curve envelops the former completely). By 1990, the top quintile of the population
appropriated 64.6 percent of the national income, and the lowest quintile only 2.3 percent (in
1981, the corresponding ﬁgures were 61.8 and 2.8 percent), one of the highest concentration
ratios in the world (Bonelli & Sedlacek,1991; Cacciamali, 1997; Ferreira & Litchﬁeld, 1996).
Indexation made Brazilian inﬂation rigid downwards for three reasons. First, ﬁrms and
workers tended to adopt simple pricing rules which perpetuated past inﬂation by simply pro-
jecting it into the future. Second, in order to protect their proﬁts ﬁrms usually increased their
mark-up when inﬂation was rising, or was expected to rise. Third, indexation made the econ-
omy prone to rising inﬂation after negative supply shocks (especially the oil shocks in 1973
and 1979–80 and the currency devaluation in 1983). These shocks were largely responsible
for the stepwise rising inﬂation between 1972 and 1985 (Amadeo, 1994).
The acceleration of inﬂation created a tendency for the reduction of the interval between
the price and wage increases. This has a clearly regressive distributive effect, because some
agents are better able to protect their real income than others. Moreover, it has been abun-
dantly shown in the literature that the shorter the adjustment period and the higher the rate of
inertial inﬂation, the more rigid it becomes, and the more sensitive it is to negative shocks.
In the mid-1980s, the Brazilian economy became increasingly disorganized as relative prices
became highly variable in the short run. This disorganization introduced substantial uncer-
tainty into economic calculation, which probably contributed to the decline in the level of
Inertial inﬂation sharply increased the cost of contractionary monetary and ﬁscal policies,
because higher interest rates or lower government expenditures tended to have little effect on
ﬁrms’ pricing strategy. Contractionary policies could even lead to higher prices rather than
lower, if ﬁrms tried to maintain their gross proﬁts in spite of their declining sales and higher
ﬁnancial costs. By the mid-1980s, it was generally accepted in Brazil and elsewhere that con-
ventional ﬁscal and monetary policies were largely ineffective against inertial inﬂation, and
Dornbusch & Fischer, 1986, 1993; Vegh, 1992). In Brazil, a group of neostructuralist writers
developed “heterodox shock” as a policy alternative.
This strategy involves the simultane-
ous freezing of prices and wages at their average real level and the abolition of indexation
and changes in contracted interest rates in order to reﬂect the expected decline in inﬂation.
ﬁrst experience with a heterodox shock was in February 1986. The “Cruzado Plan” reduced
inﬂation rates from 15 to 1 percent per month for several months. However, this and other
Heterodox shocks are discussed, from different angles, by Arida and Lara-Resende (1986), Bresser
Pereira (1987), Bresser Pereira and Nakano (1985), Cardoso and Dornbusch (1987), Feij
o and Cardim de
Carvalho (1992), and Lopes (1986).
Courtchallengesagainst governmentinterventionincontracts between third parties have led to heavypenalties
being imposed upon the Brazilian government.
118 A. Saad-Filho, M.d.L.R. Mollo/ Review of Radical Political Economics 34 (2002) 109–135
Fig. 1. Brazil: monthly inﬂation rate, 1986–99 (%). Source: FGV.
heterodox plans invariably collapsed after a few months, and inﬂation rates tended to explode
in the aftermath (see Fig. 1).
Their failure was largely due to two reasons.
First, heterodox shocks create a tendency towards real wage decline because, in practice,
the wages are frozen at their average real level while prices are frozen at their nominal peak.
Suppose, for example, that in the year before the shock the peak real wage for a category of
workers was equivalent to $400, and the trough was equivalent to $200. The shock freezes
the wage at its dollar average, $300, and turns this average into the new peak wage. The
by stabilization, especially the elimination of inﬂation losses. However, if the stabilization
program collapses, leading to a new round of inﬂation and to another shock, the real wages
tend to decline. The newly frozen wage will be determined by its previous peak, equivalent
to $300, and by the new trough, equivalent, say, to $180. On average, the real wage after the
ﬁrst shock has declined to $240, which becomes the nominal peak after the second shock.
The implementation of several heterodox shocks in rapid succession can reduce average real
wages substantially. In sum, real wage levels tended to decline between the mid-1980s and the
mid-1990s because of inﬂation and the failure of the heterodox stabilization programs.
The second reason for the failure of the heterodox programs is that a price freeze transforms
short-term imbalances in relative prices, usually created by high inﬂation, into permanent
differences. The shock freezes certain prices at exceptionally high real levels, for example if
they had increased the day before the shock, while other prices are frozen at exceptionally
low levels (for example if they were due to rise the day after the shock). These imbalances
can be substantial. In addition to this, the difﬁculty of importing competing products allowed
the companies operating in the domestic market to avoid the price limits imposed by the
government. The heterodox shocks, and the continuing disputes for income under the new
The most important stabilization plans in Brazil were the Cruzado (1986), Bresser (1987), Summer (1989),
Collor I (1990), Collor II (1991), and Real (1994). For an account of the differences between them, see
Cardim de Carvalho (1993) and Feij
o and Cardim de Carvalho (1992).
A. Saad-Filho, M.d.L.R. Mollo/ Review of Radical Political Economics 34 (2002) 109–135 119
circumstances, can lead to arbitrary shifts in the proﬁt rates, the breakdown of supply chains,
bankruptcies, illegal trading, economic disorganization, and, eventually, the collapse of the
The failure of several heterodox programs contributed to the disorganization of relative
prices, increased inﬂationary expectations, and, at the same time, reduced the social toler-
ance to high inﬂation. In addition to this, the failure of these programs sharpened the tensions
associated with high inﬂation, especially the distributive conﬂicts involving key worker cat-
egories such as car assembly workers in São Paulo, employees of state enterprises, and civil
servants. In spite of these conﬂicts, rising inﬂation did not degenerate into hyperinﬂation or
the dollarization of the economy, mainly because it was contained by the central bank’s high
interest rate policy. Between the early 1980s and the mid-1990s, the Brazilian central bank
systematically increased interest rates and the liquidity of its securities in order to avert the
threat of ﬂight from currency into commodities (hyperinﬂation) or into other reserve assets
2.2. Extra money inﬂation and currency fragmentation
The Brazilian government provided generous quantities of extra money in the postwar era,
initially in order to support ambitious public and private investment programs, and later to try
to preserve the level of activity in spite of the oil, debt, and other crises. The private ﬁnancial
system was similarly geared to provide extra money liberally (with state support), especially
for working capital and consumer credit (large scale manufacturing investment was usually
ﬁnanced by retained earnings, state-owned banks, or foreign capital; see Lees, Botts, & Cysne,
1990 and Studart, 1995). In spite of its obvious shortcomings, this strategy was successful,
as is shown by the high growth rates between 1947 and 1980. However, in the absence of a
robust tax system (Theret, 1993), ﬁscal deﬁcits were generally high, especially in the early
1960s and in the late-1970s. Between 1981 and 1993 the operational public deﬁcit was, on
average, 3.3 percent of GDP, while the nominal public deﬁcit was 33.4 percent of GDP (see
Thedomestic public debtincreasedrapidly duringthe1980s and especiallythe1990s
(see Fig. 3), partly because of these deﬁcits, and partly because of the high domestic interest
rates (see Fig. 4), which were allegedly necessary to attract foreign capital, reduce domestic
inﬂation, and avoid the dollarization of the economy.
It was shown in Section 2.1 that, between the mid-1980s and the mid-1990s, the
Brazilian government implemented several (failed) stabilization programs. These programs
usually included important heterodox elements, plus conventional contractionary ﬁscal and
monetary policies. It is noticeable that the latter gradually tended to become more prominent,
while the former tended to lose relevance in each successive shock. This gradual and uneven
policy shift was reinforced by the increasingly orthodox policies implemented between the
adjustment programs. One of the most important implications of the shift towards orthodoxy
The nominal public deﬁcit (PSBR) is the difference between total government expenditures and total revenues,
including all levels of public administration and the state enterprises. The primary deﬁcit is the difference between
non-ﬁnancial expenditures and revenues, and the operational deﬁcit is the primary deﬁcit plus the real interest paid
on the public debt. The difference between the nominal and the operational deﬁcits is due to inﬂation.
120 A. Saad-Filho, M.d.L.R. Mollo/ Review of Radical Political Economics 34 (2002) 109–135
Fig. 2. Brazil: nominal, operational, and primary public deﬁcits, 1983–99 (%GDP). Source: Central Bank of Brazil.
was the compression of the levels of investment and current expenditures at all levels of gov-
ernment (because of the contractionary ﬁscal policy), and the growing weight of the interest
payments on the domestic public debt in the federal budget (because of the contractionary
In addition to this, the increasingly orthodox government policies induced a reduction
in the private expenditures, largely because of the demand decline and the rising cost and
reduced availability of consumer and industrial credit. Persistently contractionary ﬁscal and
monetary policies go a long way towards explaining the Brazilian economic slowdown since
1980 (Bresser Pereira, 1996). However, the slowdown was insufﬁcient to reduce inﬂation
because of the indexation of prices and incomes, the market power of the oligopolistic groups,
and paradoxically because contractionary policies increased the disposable income of the
Fig. 3. Brazil: net domestic debt (%GDP). Source: Central Bank of Brazil.
A. Saad-Filho, M.d.L.R. Mollo/ Review of Radical Political Economics 34 (2002) 109–135 121
Fig.4. Brazil: realinterest rates, 1990–99 (%).Annualized quarterly Selic(overnight)rates, deﬂated bythe IGP–DI.
Source: Central Bank of Brazil.
wealthier sections of the society (see further). In spite of these problems, inﬂation helped to
preserve the continuity of capital accumulation (see Section 1.2). This helps to explain why
unemployment rates were relatively low until the mid-1990s (see below).
In order to generate demand for the rapidly growing stock of government securities, and
to avoid hyperinﬂation and the dollarization of the economy, the central bank offered increas-
ingly attractive combinations of liquidity and high interest rates to the ﬁnancial institutions
In the mid-1980s, the central bank allowed the ﬁnancial institutions to swap
government securities for currency on demand, which reduced the cost of the banks’ compul-
sory reserves substantially (zeragem automática, see Banco Central do Brasil, 1995: 37–38;
Pastore,1990; Paula, 1996; Ramalho, 1995). The complete liquidity of the treasury and central
bank securities for the ﬁnancial institutions guaranteed the stability of the domestic ﬁnancial
systemand createdasubstantial additionaldemand for government securities;however,it dealt
a severe blow to the Brazilian currency, as is shown by the widening gap between money and
securities (included in M2, see Fig. 5) and the rising velocity of circulation of M1 (see Fig. 6).
In the late 1980s, several banks used this opportunity to offer index-linked current ac-
counts to their high-income customers. Money invested in these accounts earned a share of
the nominal interest paid on the government securities, which could be anything up to 40
percent per month, depending on the rate of inﬂation. In addition to these interest payments,
the deposits were available on demand because of the central bank liquidity guarantees to
the banks. These index-linked accounts were equivalent to the creation of a parallel currency
whose value increased daily because of the real interest paid on the securities (which is a
form of extra money creation). The injection of extra money through index-linked accounts
When inﬂation is very high, treasury bills remain attractive even at negative real interest rates (as long as
alternatives such as foreign currency or capital ﬂight remain costly), because of the losses associated with holding
the domestic currency. In spite of this, real interest rates in Brazil were generally strongly positive throughout the
1980s and 1990s.
122 A. Saad-Filho, M.d.L.R. Mollo/ Review of Radical Political Economics 34 (2002) 109–135
Fig. 5. Brazil: monetary aggregates, 1980–98 (%GDP). M1 includes cash and sight deposits; M2 includes M1 and
government securities. Source: Central Bank of Brazil.
Fig. 6. Brazil: velocity of circulation of money (M1), 1981–99. Source: Central Bank of Brazil.
increased substantially the degree of indexation of the economy, because revenues could be
easily swapped for interest-bearing treasury securities through the ﬁnancial system. However,
the interest-bearing accounts helped to increase the severity of the distributive conﬂict further,
because distinct forms of income were index-linked in very different ways.
Contractionary monetary policies were counter-productive, because they increased indus-
trial costs and inﬂation through indexation. They also increased the cost of the domestic public
debt and the size of the government deﬁcit, which could be contained only through further ex-
penditure cuts. The shift of the public expenditures toward interest payments on the domestic
The banks gradually relaxed the conditions for the supply of index-linked accounts, but they always excluded
the majority of the population, who was too poor to qualify. Kane and Morisett (1993) estimate that the asset gains
of the higher income brackets more than compensated their losses due to inﬂation between 1980 and 1989. In
contrast, inﬂation reduced the annual income of the poorest quintile by 19 percent.
A. Saad-Filho, M.d.L.R. Mollo/ Review of Radical Political Economics 34 (2002) 109–135 123
debt was regressive in distributive terms, because it contributed to the decline in the living
standards of the majority, while raising further those of the rich. These imbalances and vicious
circles increasingly distorted the relative prices, put into question the role of money as the
general equivalent, and accelerated the loss of its stature. The fragmentation of the general
equivalent was visible through the rejection of the domestic currency and the increasingly
frequent use of the U.S. dollar and indexed government securities, especially in large value
The deterioration of the domestic monetary system was contained by the small
degree of openness of the trade and capital accounts of the Brazilian balance of payments
until the early 1990s. The exchange rate was determined by the government, mostly through a
passive crawling peg based on the daily rate of domestic inﬂation. This rule of thumb helped
to maintain relative price stability, but it validated high inﬂation because the price of imported
inputs increased steadily alongside the domestic prices (imported consumer goods were virtu-
ally unavailable until 1990). The gradual collapse of the currency rewarded ﬁnancial acumen
more handsomely than production efﬁciency, and helped to turn Brazilian banks into highly
sophisticated organizations, able to extract large proﬁts from speculation disguised as defen-
sive indexation. These distortions increasingly led to the rejection of the domestic currency,
and they helped to legitimize not only the use of alternative forms of money, but also the harsh
stabilization policies implemented since the mid-1980s.
3. The Real plan
The Real plan virtually eliminated inﬂation in Brazil because it shifted and repressed the
distributive conﬂict, and reduced the creation of extra money. The Real plan was initially
welcomed by the majority of the population because it reduced inﬂation drastically, and was
associated with rapid economic growthbased on the expansion of consumption. The combina-
tion of low inﬂation and falling unemployment led to substantial income gains for the poor, at
least initially. It will be shown below that, in spite of its success in reducing inﬂation, the other
beneﬁcial aspects of the plan rapidly petered out. Moreover, the plan was highly vulnerable
because of its dependence upon foreign ﬁnance, and its social impact was generally negative
in the medium run.
3.1. Curbing high inﬂation
The Real plan was the outcome of many years of research by the same group of aca-
demics that had designed the heterodox shocks (see Section 2.1).
The plan was based on
Grossi (1995) shows that houses and second-hand cars were increasingly priced in dollars or treasury bills by
the late 1980s. For a neoclassical account of the currency collapse, see Barbosa, Pereira, and Sallum (1995).
See Amadeo (1996), Bacha (1995), and Nogueira Batista (1993). The Real plan was ﬁrst outlined by
Arida and Lara-Resende (1986). This group of academics was based at the Catholic University of Rio de Janeiro.
They were mostly neostructuralist writers whose stabilization theory derives from a synthesis of structuralism
and mainstream economics (Edmar Bacha, Andr
e Lara-Resende, and P
ersio Arida have PhDs from MIT, and
Francisco Lopes has a Harvard PhD). This group managed Brazilian economic policy between the mid-1980s and
124 A. Saad-Filho, M.d.L.R. Mollo/ Review of Radical Political Economics 34 (2002) 109–135
the de-indexation of the economy and the liberalization of the trade and capital accounts of
the balance of payments. In January 1994 the government imposed the ﬁrst stage of the plan,
including measures to reduce the ﬁscal deﬁcit and increase its control over the expenditures
of all levels of government. In March, when inﬂation was creeping towards 50 percent per
month, the government created the URV (unidade real de valor, or real value unit), a unit of
account linked to the U.S. dollar. Under this transitory monetary system, most commodities
had two prices, one ﬁxed in URV, and the other determined daily in the domestic currency.
The URV helped to stabilize real wages and key prices in the economy, and it prevented the
decline of real wages in spite of high inﬂation in the old currency. Stability in these prices
provided the anchor for the gradual emergence of a coherent price system in URV, free from
most distortions introduced by high inﬂation.
In July 1994, after the new price system had been established, the URV was transformed
into the Real. The government’s publicity machine generated excitement because the Real’s
ﬂoor exchange rate, equal to $1, allegedly “proved” that the Real and the dollar were equally
strong. The conversion was effected through the division of prices in the old currency by
2,750 in order to generate their value in reais. In spite of its apparent complexity, the transi-
tion was easily managed by most Brazilians, who were highly proﬁcient in price calculations
across different currencies. The policy-makers set interest rates at 8 percent per month, be-
cause of their belief that stabilization should be accompanied by contractionary policies in
order to avoid consumption bubbles. High interest rates, the optimistic turn of expectations,
ﬁnancial liberalization, and high liquidity in the international capital markets attracted large
short-term capital ﬂows, which raised the value of the Real to around R$0.85 per dollar. On a
trade-weighted basis, the Brazilian currency appreciated 16 percent in the second half of 1994.
The government cheerfully presented these speculative inﬂows as proof of the conﬁdence of
the ﬁnancial markets in the stabilization program. In sum, the Real plan was a resounding
success initially, because it brought low inﬂation and eliminated the inﬂationary erosion of
wages. Moreover, dollar wages were rising because of the revaluation of the currency, and
cheap imported consumer goods became widely available, ﬁnanced by foreign capital inﬂows.
Two important problems were addressed in the ﬁrst weeks of the Real. First, experience
had shown that, in the wake of a sudden decline in inﬂation, money demand rises sharply
because the new currency is widely recognized and can fulﬁl a broader range of functions.
This demand must be satisﬁed in order to avoid a sharp increase in interest rates and a de-
cline in economic activity; however, if the remonetization is too rapid it may lead to extra
money inﬂation. Second, the decline in inﬂation from over 40 percent per month to 0 re-
duces drastically the nominal interest rates accruing on savings deposits. If savers suffer from
money illusion, or if they anticipate that the stabilization program will collapse shortly, they
may decide to spend rather than save, which may also create extra money inﬂation. In or-
der to control the remonetization of the economy and preserve the stock of savings, the Real
plan used high interest rates, a barrage of publicity, and administrative measures such as a
100 percent marginal reserve on bank deposits. The monetary base increased smoothly by
300 percent between July and September 1994, showing that extra money is not necessarily
The reversal of the international capital ﬂows in mid-1994, triggered by rising U.S. in-
terest rates, led to capital outﬂows that were the immediate cause of the collapse of the
A. Saad-Filho, M.d.L.R. Mollo/ Review of Radical Political Economics 34 (2002) 109–135 125
Fig. 7. Brazil: visible and invisible trade balance, 1990–99 ($ million per quarter). Source: Central Bank of Brazil.
Mexican peso. The Mexican crisis created severe problems for ﬁnancing of the current ac-
count deﬁcits in Argentina and Brazil, among other countries. The rapid loss of reserves led
the Brazilian government to raise interest rates to nearly 50 percent, and to introduce a ﬂex-
ible exchange rate band between R$0.86 and R$0.90 to the dollar (the central bank often
intervened to maintain the currency within tighter “minibands”). The Real was subsequently
devalued regularly by a few points in excess of the inﬂation differential vis-à-vis the United
States, in order to reduce its overvaluation gradually. This was achieved primarily through
manipulation of the base rates, which were also used to maintain the target level of interna-
tional reserves and to control domestic demand. This is obviously a complex exercise, and,
whenever the targets were incompatible, domestic activity was the adjustment variable. The
overvaluation of the Real was largely responsible for a rising trade deﬁcit (see Fig. 7), and
it led to persistent complaints by the exporters. In spite of the evidence, the government
never publicly admitted that the Real was overvalued, until it collapsed in January 1999 (see
3.2. Shift and repression of the distributive conﬂict and limits to the creation of extra money
Certain key aspects of the Real plan were important to maintain the social consent required
bythegovernment’s economic strategy.The plan reduced distributiveconﬂict,at least initially,
by preserving the level of real wages in spite of disinﬂation through the URV (see above), and
repressed conﬂict when consent ﬂagged at a later stage. This has been one of the main factors
which has prevented the resumption of high inﬂation in Brazil. Moreover, rising dollar wages
and falling unemployment until 1995 (see Fig. 8) led to a larger wage mass. These factors
contributed to a substantial increase in the purchasing power of wage earners, which was
reﬂected in rising consumption levels and in widespread satisfaction with the Real plan.
The drastic decline in inﬂation reduced the real income loss of the lowest strata of the
populationthat hadnoaccess tosophisticated ﬁnancialinstrumentswhich mighthelpto defend
their real wages.Economic stabilization contributedto a decline in the number of people living
126 A. Saad-Filho, M.d.L.R. Mollo/ Review of Radical Political Economics 34 (2002) 109–135
Fig. 8. Brazil: open and total unemployment rate, 1990–99 (%). Sources: IBGE and Dieese.
under absolute poverty by 12.5 million between 1990 and 1996 (Cepal, 1999). Whereas in
1990 47.9 percent of the population (41 percent of households) was considered “poor,” in
1993 the poor were 45.2 percent (37 percent of households), and in 1996 only 37.8 percent
(29 percent of households).
Finally, lower import barriers, the simpliﬁcation of economic
calculation, and the government’s publicity barrage also helped to increase the popularity of
the Real plan and to marginalize its critics.
The Real plan inserted the Brazilian economy much more deeply into international ﬁnan-
cial and productive circuits. In spite of the obvious differences, this process has substantial
similarities with the simultaneous trade, ﬁnancial, and capital account liberalization in such
countries as Mexico (Huerta, 1997; Lopez, 1999) and South Korea (Arestis & Glickman,
forthcoming; Chang, 1999). In these countries, the allure of relatively cheap foreign capital;
pressure from international organizations such as the OECD, the IMF, and the U.S. Treasury;
and ideological conviction provided the grounds for the sharply liberalizing turn of economic
policy in the early 1990s. In Brazil and other Latin American countries, trade liberalization
and currency overvaluation helped to contain inﬂation because these countries were ﬂooded
by cheap consumer goods, while imported machines helped to foster investment and produc-
tivity growth in key industrial sectors, especially car assembly. Foreign competitive pressure
reduced the monopoly power of the large ﬁrms in key industrial sectors, which helped to re-
duce costs across the economy and repress the distributive conﬂict. However, trade and capital
account liberalization also created a tendency towards the integration of Brazilian manufac-
turing industry into transnational supply chains. The international integration of production
and the substantial rise in imports led to a large number of plant closures and a substantial de-
cline in manufacturing employment, affecting especially the food, clothing, and toy industries
For Cepal (1999), the poverty reduction between 1990 and 1993 was primarily due to structural changes in the
economy, especially the increasing share of self-employment in trade andservices at the expense of urbanindustry.
In 1993–96, the decline in poverty was due to transfers to poor households and the decline in inﬂation and in food
A. Saad-Filho, M.d.L.R. Mollo/ Review of Radical Political Economics 34 (2002) 109–135 127
Fig. 9. Hours worked in Sao Paulo manufacturing industry, 1990–99 (June 1994 = 100). Source: FGV.
(1 million manufacturing jobs, one-third of the total, were lost in the 1990s). Largely as a
result of the liberalization of trade and high domestic interest rates, unemployment increased
rapidly since 1996 (see Figs. 8 and 9).
Capital account liberalization, high interest rates, and the large domestic market attracted
substantial inﬂows of portfolio capital and direct investment under the Real. They were sup-
ported by the policy-makers because of their positive implications for the balance of pay-
ments, and the presumed technology gains. However, they were also responsible for the per-
sistent overvaluation of the currency and a large increase in foreign takeovers of Brazilian
ﬁrms, especially banks and manufacturing companies (Gonçalves, 1999). The privatization
of state enterprises such as the telecommunications holding was a prime example of gov-
ernment support for foreign takeovers through credit and state guarantees (see Fig. 10 and
Saad-Filho & Morais, 2000).
The rapid liberalization of trade and ﬁnance in the mid-1990s triggered a round of con-
centration and centralization of capital, especially through a wave of bankruptcies, mergers,
Fig. 10. Brazil: foreign investment, 1991–99 ($ million). Source: Central Bank of Brazil.
128 A. Saad-Filho, M.d.L.R. Mollo/ Review of Radical Political Economics 34 (2002) 109–135
and acquisitions that was an important cause of the rising unemployment in this period. The
concentrationof the ﬁnancial system is especially relevant. The number of banking institutions
declined from 271 in 1994 to 248 in 1997; 22 of them have fallen under foreign ownership
since 1996, and 24 have foreign minority stakes (Barros & Almeida, 1997). The government
of President Fernando H. Cardoso supported this process politically and ﬁnancially, arguing
that it wouldreinforce Brazil’s international competitiveness.
Little was done to alleviatethe
impact of the rising unemployment or the reduction in the wage mass after 1995. Unemploy-
ment increased from 4.2 percent of the labor force in 1990 to 8.4 percent in early 1999, while
the central bank’s index of the wage mass increased from 107.3 in 1993 to 122.3 in 1995, and
subsequently declined to 118.1 in 1998 (1992 = 100).
In sum, the Real plan was successful largely because of the trade and capital account
liberalization, which helped to shift and contain the distributive conﬂict. However, given its
inability to solve the causes of the conﬂict, the plan subsequently repressed it directly (mainly
throughlabormarketliberalization, including more ﬂexible rules for dismissal, lowerpensions
and beneﬁts, and the use of punitive measures against industrial action), and indirectly (the
plan reduced the ability of industrial capital to transfer higher wages to prices, which made
managersincreasingly intransigentwhenbargainingwiththeirworkers).In additionto this,the
reduced the ability of the system to create extra money. The capital inﬂows, for example, were
diverted to the open market, and the tight credit conditions depressed the economy’s ability to
ﬁnance an expansion of production through extra money.
The ability of the central bank and the commercial banking system to create money was
severely limited by the exchange rate regime associated with the Real plan until early 1999.
Even though the Brazilian exchange rate system was not as rigid as the currency board of
neighboring Argentina, the need to maintain exchange rate stability and high foreign reserves
kept interest rates high, which constrained domestic economic activity and reduced the scope
for the creation of extra money by the central bank and the private sector. In addition to
this, the compression of ﬁscal expenditures reduced domestic demand, which worsened the
deﬂationary aspects of the Real plan (for a detailed analysis of the macroeconomic impact of
the Real plan, see Saad-Filho & Morais, 2000).
The rigid exchange rate bands imposed in 1995 prevented the substantial devaluation of
the Real that was necessary to restore Brazil’s external competitiveness, largely in order to
maintain ﬁnancial market “conﬁdence” in the currency. The bands also restricted the supply
of (credit) money, which depended to a large extent upon the inﬂow of foreign capital. These
In his youth, Cardoso was a well-known dependency school writer (see, for example, Cardoso, 1972 and
Cardoso & Falleto, 1972). His intellectual proﬁle has changed substantially since, at least, the early 1980s, and
his political trajectory in this period is characterized by a steady movement upwards and towards the right (not
necessarily in this order). As minister of ﬁnance (1993–94), he famously asked readers to “forget everything he
had ever written.” He was the minister responsible for the implementation of the Real plan, and was elected
president in 1994, and re-elected in 1998, in the wake of the plan’s perceived success. Ironically, his analysis of
“dependent development” through the integration between the “advanced” parts of the underdeveloped economy
and the capitalist center can illuminate certain aspects of the current shifts in the Brazilian economy, implemented
by Cardoso’s own government (dependency analysis is, however, vulnerable to a wide range of heavy criticisms;
see, for example, Barkin, 1981 and Hunt, 1989: Chap. 7).
A. Saad-Filho, M.d.L.R. Mollo/ Review of Radical Political Economics 34 (2002) 109–135 129
limitations,andtheneedtosupportthe stabilizationprogram, impliedthat thedomestic interest
rates had to be much higher than the foreign interest rates (Brazilian interest rates reached,
on average, 24 percent per annum between 1994 and 1998). De-indexation through the URV,
repression of the distributive conﬂict, and the constraints imposed upon the creation of extra
money virtually eliminated inﬂation in Brazil. The simpliﬁcation of economic calculation
and ﬁnancial management, the income gains due to lower inﬂation, and the greater degree
of openness of the economy gave legitimacy to the Real plan, and helped to rebuild social
recognition of the currency. This was essential for the Real to fulﬁl the functions of the general
equivalent, and to reproduce itself (see Section 1.3).
3.3. Vulnerability of the Real
The decline in inﬂation and the creation of a viable currency are important achievements
of the Real plan. The poorest strata of the population gained substantially with the lower
inﬂation transfers, but only in the ﬁrst few months of the Real. Rising dollar wages and import
liberalization made desirable imported consumer goods affordable to many for the ﬁrst time.
These gains have helped to imprint the positive aspects of economic stability deeply into
the minds of millions, and they have been used to justify the continuous use of deﬂationary
policies, which are allegedly necessary to preserve low inﬂation. We have shown above that
these policies were later used to repress the distributive conﬂict, especially through high
unemployment, which reduced the bargaining power of the workerssubstantially.
in spite of the lower market powerof the oligopolies, the workers’share of the national income
declined, which replicates the result of the previous stabilization programs.
Two aspects of the Real plan were important obstacles to the translation of lower inﬂa-
tion into sustained welfare gains to the majority: permanently high domestic interest rates
and the liberalization of international trade and capital ﬂows. The level of interest rates and
the cost of sterilizing the foreign capital inﬂows are the main causes of the explosive growth
of domestic debt after 1994, and of the increasing ﬁnancial fragility of the state (Morais,
1998). High interest rates have a highly heterogeneous impact on industry, depending on
such variables as their size, degree of internationalization, and ﬁnancial strategy. Large com-
panies heavily involved in international trade can obtain cheap funds from state-owned de-
velopment banks or the international ﬁnancial system, which are not generally available to
smaller ﬁrms producing non-tradables. This has potentially important implications for the
country’s industrial structure, because it increases its heterogeneity and tightens the bal-
ance of payments constraint. It can also worsen the distribution of income and wealth, be-
cause heterogeneous growth and industrial fragmentation tend to concentrate economic and
The potential complementarity between expansionary policies and repression of the distributive conﬂict is
explored by Barkin and Esteva (1982: 60–61).
Since 1993 the wage share of the national income has been below its average for 1985–92. In agriculture, it
declined from 20.5 percent of the value added to 15.1 percent, and in manufacturing from 28.4 to 25.9 percent.
In contrast, in the services sector it increased from 45.2 to 53.3 percent because of the increase in self-employed
130 A. Saad-Filho, M.d.L.R. Mollo/ Review of Radical Political Economics 34 (2002) 109–135
Fig. 11. Brazil: nominal exchange rate ($/R$). Source: Central Bank of Brazil.
ﬁnancial power, reduce the real wage of the unskilled workers, and depress the domestic
Rising trade and current account deﬁcits, increasing unemployment and poverty, the con-
centration of income after 1996, and the increasing centralization of economic power, have
eroded popular support for the Real plan.
This internal legitimacy crisis and the ﬁnan-
cial fragility of the public sector led to a substantial loss of international conﬁdence in the
government’s economic strategy in the late 1990s. This was one of the main causes of the
vicious circle which fatally destabilized the Real after the Russian crisis in mid-1998. More
generally, in spite of the government’s best efforts, Brazil experienced several sudden re-
versions of capital ﬂows after the Real plan (most famously after the Mexican, East Asian,
and Russian crises). Each of these crises led to large reductions in Brazil’s foreign reserves.
For example, $9.7 billion were lost during the Mexican crisis; and, in November 1997, the
central bank had to push interest rates to 43.4 percent in an attempt to stem the outﬂow
due to the Asian crisis (in quieter times, in May 1998, rates were “only” 21.7 percent).
Finally, in the aftermath of the Russian crisis Brazil lost reserves worth $40 billion in 6
months, and interest rates increased to 50 percent in a fruitless attempt to stem the outﬂow
At the same time, the government’s ﬁnances have been seriously destabilized by the heavy
burdenof interest payments on the domestic debt, which has increased sharply because of high
interest rates and the need to sterilize capital inﬂows.This source of disequilibrium will tend to
become increasingly strong in the medium term, as potential privatization revenues are rapidly
being exhausted. These difﬁculties have contributed to the speculative attacks suffered by the
Real, and to the loss of reserves which led to the currency crash of January 1999 (Saad-Filho,
Coelho, & Morais, 1999; see Fig. 11).
Cepal (1999) shows that the distribution of income worsened between 1993 and 1996, when Cepal’s Gini
coefﬁcient increased from 0.52 to 0.54.
A. Saad-Filho, M.d.L.R. Mollo/ Review of Radical Political Economics 34 (2002) 109–135 131
The difﬁculties currently faced by the government, including speculative attacks, currency
instability, and mass protests demonstrate the declining legitimacy of the government’s eco-
nomic policies. The continuing trauma of high inﬂation, high interest rates, balance of pay-
ments vulnerability, and the government’s preception of the over-riding need to maintain low
inﬂation and exchange rate stability evenafter the crash have reduced the government’sability
to foster economic growth and engage in an effective poverty reduction program. Unless there
are signiﬁcant policy changes and profound social and economic reforms, high unemployment
and labor market, trade, and ﬁnancial liberalization will continue to be used to repress the dis-
tributive conﬂict, which can lead to the further fragmentation of the economy and society. In
sum, there is no reason to expect a substantial improvementin the quality of life of the majority
of the population, at least in the medium term (Rocha, 1994; Saad-Filho, 1998).
This depressing prospect could have been avoided. It was shown previously that the Real
inﬂation inertia and reduced the pressure to create extra money) and the internationalization
and liberalization of the economy, supported by high domestic interest rates. These policies
repressed the distributive conﬂict and reduced the state’s ability to tackle the social cost of
its own economic policies. In spite of government claims to the contrary, these policies need
not follow from one another. It would have been possible to use the political and economic
proceeds from an alternative disinﬂation strategy, possibly including the exchange rate anchor
initially, in order to facilitate the de-indexation of the economy. However, this should have
been supplemented by a competitive exchange rate, strict limits to short-term capital ﬂows,
and by industrial and regionalpolicies leading to higher employment levels; in addition to this,
tax and land reforms should have been introduced in order to reduce the inequalities of income
and wealth. Policies such as these would have reduced the distributive conﬂict (rather than
merely repressed it), improved the prospects for macroeconomic stability in the long-term,
and helped to build a more inclusive society. The ideological climate in Brazil and elsewhere
has prevented this option from being considered seriously. Instead, neoliberal policies have
been imposed by force, then justiﬁed by their purported inevitability.
We are grateful to Adriana Amado, David Barkin, Suzanne de Brunhoff, Gérard Duménil,
BenFine, RebeccaHovey, DominiqueLévy,Malcom Sawyer, and BehzadYaghmaianfortheir
helpful comments and suggestions, and to CNPq and the Nufﬁeld Foundation (SGS/LB/203)
for their ﬁnancial support. The responsibility for the remaining errors and omissions is our
Aglietta, M. (1979). A theory of capitalist regulation: The US experience. London: Verso.
Amadeo, E. J. (1994). Institutions, inﬂation and unemployment. Aldershot: Edward Elgar.
132 A. Saad-Filho, M.d.L.R. Mollo/ Review of Radical Political Economics 34 (2002) 109–135
Amadeo, E. J. (1996). The knife-edge of exchange-rate-based stabilization: Impact on growth, employment and
wages. UNCTAD Review, 1–25.
Amadeo, E. J., & Camargo, J. M. (1991). Mercado de trabalho e dança distributiva. In J. M. Camargo (Ed.),
Distribuição de renda no Brasil. Rio de Janeiro: Paz e Terra.
Arestis, P., & Glickman, M. (forthcoming). Financial crisis in South East Asia: Dispelling illusion the Minskyan
way. Cambridge Journal of Economics.
Arida, P., & Lara-Resende, A. (1986). Inﬂação zero: Brasil, Argentina e Israel. Rio de Janeiro: Paz e Terra.
Bacha, E. L. (1982). Inﬂação: Uma agenda não monetarista. In M. C. Tavares & M. D. David (Eds.), A economia
ıtica da crise. Rio de Janeiro: Vozes.
Bacha, E. L. (1995). Plano real: Uma avaliação preliminar. Revista BNDES, 2(3) (Junho).
Baer, W., & Kerstenetzky, I. (1975). A economia Brasileira dos anos 60. In A industrialização e o desenvolvimento
omico do Brasil. Rio de Janeiro: FGV.
Balbinotto Neto, G. (1991). A indexação salarial: Teoria e evid
encia. Rio de Janeiro: BNDES.
Banco Central do Brasil. (1995). Relatório annual. Bras
Barbosa, F. H., & McNelis, P.(1989). Indexation and inﬂationary inertia: Brazil 1964–1985. World Bank Economic
Review, 3(3), 339–357.
Barbosa, F. H., Pereira, P. L. V., & Sallum, E. M. (1995). A substituição de moeda no Brasil: A moeda indexada.
Pesquisa e Planejamento Econ
omico, 25(3) (Dezembro), 407–426.
Barkin, D. (1981). Internationalization of capital: An alternative approach. Latin American Perspectives, 8(3/4)
Barkin, D., & Esteva, G. (1979). Inﬂación y democracia: El caso de México. México D.F.: Siglo
Barkin,D., &Esteva,G.(1982).Social conﬂictandinﬂation inMexico.Latin AmericanPerspectives,9(1)(Winter),
Barros, J. R. M., & Almeida, M., Jr. (1997). Análise do ajuste do sistema ﬁnanceiro no Brasil. Pol
1(2) (Maio–Agosto), 89–132.
Boddy, R., & Crotty, J. (1975, Spring). Class conﬂict and macro policy: The political business cycle. Review of
Radical Political Economics, 7(1), 1–19.
Bonelli, R., & Sedlacek, G. L. (1991). Desigualdade salarial: Resultados de pesquisas recentes. In J. M. Camargo
(Ed.), Distribuição de renda no Brasil. Rio de Janeiro: Paz e Terra.
Bresser Pereira, L. C. (1981). A inﬂação no capitalismo de estadoeaexperi
encia Brasileira recente. Revista de
ıtica, 1(2) (Abril–Junho), 3–41.
Bresser Pereira, L. C. (1987). Inertial inﬂation and the Cruzado plan. World Development, 15(8), 1035–1044.
Bresser Pereira,L. C. (1992). A lógica perversada estagnação: D
ıvida, déﬁcite inﬂação no Brasil. In L. G. Belluzzo
& P. N. Batista Jr. (Eds.), A luta pela sobreviv
encia da moeda nacional. Rio de Janeiro: Paz e Terra.
Bresser Pereira, L. C. (1996). Economic crisis and state reform in Brazil. London: Lynne Rienner.
Bresser Periera, L. C., & Nakano, Y. (1983). Fatores aceleradores, mantenedores e sancionadores da inﬂação. Anais
do X Encontro Nacional da Anpec.
Bresser Periera, L. C., & Nakano, Y. (1985). The theory of inertial inﬂation: The foundation of economic reform
in Brazil and Argentina. Boulder: Lynne Rienner.
de Brunhoff, S. (1978). L’equilibre ou la monnaie. Economie Appliquée, 31(1/2), 35–59.
de Brunhoff, S. (1982). Questioning monetarism. Cambridge Journal of Economics, 6, 285–294.
de Brunhoff, S. (1985). Monnaie. In G. Labica & G. Bensussan (Eds.), Dictionnaire critique du Marxisme. Paris:
Presses Universitaires de France.
deBrunhoff, S.,& Cartelier,J. (1974).Une analyse Marxiste de l’inﬂation. CritiqueSociale de France,4. Reprinted
in: S. de Brunhoff (1979). Les rapports d’argent. Grenoble: Presses Universitaires de Grenoble/François
Bruton, H. J. (1998). A reconsideration of import substitution. Journal of Economic Literature, 36(June),
Burdelom, R. C. K., & Burkett, P. (1996). Distributional conﬂict and inﬂation: Theoretical and historical
perspectives. London: Macmillan.
A. Saad-Filho, M.d.L.R. Mollo/ Review of Radical Political Economics 34 (2002) 109–135 133
Cacciamali, M. C. (1997). The growing inequality in income distribution in Brazil. In M. Willumsen & E. Fonseca
(Eds.),The Brazilianeconomy: Structure andperformance in recent decades.Miami: North-South CenterPress.
Calvo, G. A. (1992). Are high interest rates effective for stopping high inﬂation? Some skeptical notes. The World
Bank Economic Review, 6(1), 55–69.
Cardim de Carvalho, F. (1993). Strato-inﬂation and high inﬂation: The Brazilian experience. Cambridge Journal
of Economics, 17(1) (March), 63–78.
Cardoso, F. H. (1972). Dependency and development in Latin America. New Left Review, 74(July), 83–95.
Cardoso, E., & Dornbusch, R. (1987). Brazil’s tropical plan. American Economic Review (May).
Cardoso, F. H., & Faletto, E. (1972). Dependencia y desarrollo en América Latina. México, D.F.: Siglo Veintiuno.
Cepal. (1999). Panorama social da América Latina. New York: United Nations.
Considera, C. (1981). Preços, mark-up e distribuição funcional da renda na indústria de transformação: Din
de longo e de curto prazo, 1959/80. Pesquisa e Planejamento Econ
omico, 11(3) (Dezembro).
Cysne, R. P. (1994). Imposto inﬂacionário e transfer
encias inﬂacionárias no Brasil. Revista de Economia Pol
Dornbusch,R.,& Fischer,S. (1986). Stoppinghyperinﬂations past andpresent. WeltwirtschaftlichesArchiv,122(1),
Dornbusch, R., & Fischer, S. (1993). Stopping high inﬂation. The World Bank Economic Review, 7(1) (January),
Duménil, G., & Lévy, D. (1999). Costs and beneﬁts of neoliberalism: A class analysis. Unpublished manuscript.
Feijó, C. A., & Cardim de Carvalho, F. (1992). The resilience of high inﬂation: Recent Brazilian failures with
stabilization policies. Journal of Post-Keynesian Economics, 15(1) (Fall), 109–124.
Ferreira F., & Litchﬁeld, J. (1996). Inequality and poverty in the lost decade: Brazilian income distribution in
the 1980s. In V. Bulmer-Thomas (Ed.), The new economic model in Latin America and its impact on income
distribution and poverty. London: Macmillan.
Fine, B. (1980). Economic theory and ideology. London: Edward Arnold.
Fine,B.,Lapavitsas,C.,&Saad-Filho, A.(1999).Transformingthetransformationproblem:Why the‘newsolution’
is a wrong turning. Unpublished manuscript.
Fine, B., & Murﬁn, A. (1984). Macroeconomics and monopoly capitalism. Brighton: Wheatsheaf.
Gerefﬁ,G., & Wyman, D.L. (1990). Manufacturing miracles: Paths of industrialization in Latin America and East
Asia. Princeton: Princeton University Press.
Glyn, A., & Sutcliffe B. (1972). Workers, British capitalism and the proﬁt squeeze. Harmondsworth: Penguin.
Gonçalves, R. (1999). Globalização e desnacionalização. Rio de Janeiro: Paz e Terra.
Grossi, T. (1995). A complementariedade das funções da moeda e as altas inﬂações no Brasil. Undergraduate
dissertation, Departamento de Economia, Universidade de Brasilia.
Hewitt, T. (1992). Brazilian industrialisation. In T. Hewitt, H. Johnson, & D. Wield (Eds.), Industrialisation and
development. Oxford: Oxford University Press.
Huerta, A. (1997). La inviabilidad de retomar el crecimiento económico sostenido n contexto de liberalización
económica e incertidumbre: El caso de México. Unpublished manuscript.
Hunt, D. (1989). Economic theories of development. Hemel Hempstead: Harvester Wheatsheaf.
Itoh, M., & Lapavitsas, C. (1999). Political economy of money and ﬁnance. London: Macmillan.
Kane, C., & Morisett, J. (1993). Who would vote for inﬂation in Brazil? An integrated framework approach to
inﬂation and income distribution. World Bank Policy Research Working Paper, 1183 (September).
Kotz, D. M. (1987). Radical theories of inﬂation. In URPE (Ed.), The imperiled economy. Book 1: Macroeconomics
from a left perspective. New York: URPE.
Lafer, B. M. (1984). Planejamento no Brasil. Sao Paulo: Perspectiva.
Lapavitsas, C., & Saad-Filho, A. (2000). Three prerequisites for an alternative theory of money and credit. In A.
Freeman, A. Kliman, & J. Wells (Eds.), New value theory. Cheltenham: Edward Elgar.
Lavoie, M. (1992). Foundations of post-Keynesian economic analysis. Aldershot: Edward Elgar.
Lees, F. A., Botts, J. M., & Cysne, R. P. (1990). Banking and ﬁnancial deepening in Brazil. London: Macmillan.
134 A. Saad-Filho, M.d.L.R. Mollo/ Review of Radical Political Economics 34 (2002) 109–135
Lipietz, A. (1983). Le monde enchanté: De la valeur à l’envol inﬂationniste. Paris: La Découverte.
Lopes, F. L. (1986). O choque heterodoxo: Combate a inﬂacao e reforma monetaria. Rio de Janeiro: Campus.
Lopez, J. (1999). Economic crises in Latin America: Some considerations in the light of M. Kalecki’s Theory.
Macedo, R. (1983). Wage indexation and inﬂation: The recent Brazilian experience. In R. Dornbusch & M. H.
Simonsen (Eds.), Inﬂation, debt and indexation. Cambridge, MA: MIT Press.
Marglin,S. A.,& Schor,J. B.(1990). Thegolden ageof capitalism:Reinterpretingthe post-warexperience.Oxford:
Marx, K. (1981). Capital (Vol. 3). Harmondsworth: Penguin.
Minsky, H. P. (1980). Capitalist ﬁnancial process and the instability of capitalism. Journal of Economic Issues
Minsky, H. P. (1982). The ﬁnancial instability hypothesis: Capitalist process and the behavior of the economy. In
C. P. Kindleberger & J. P. Laffargue (Eds.), Financial crises. Cambridge, MA: MIT Press.
Minsky, H. P. (1986). Stabilizing an unstable economy. New Haven: Yale University Press.
Mollo, M. L. R. (1991). A relação entre moeda e valor em Marx. Revista de Economia Pol
ıtica, 11(2), 40–59.
Mollo, M. L. R. (1993). A questão da complementariedade das funções da moeda: Aspectos teóricos e a realidade
das hiperinﬂações. Ensaios FEE, 14(1), 117–143.
Mollo, M. L. R. (1999). The endogeneity of money: Marxian and post-Keynesian concepts compared. Research in
Political Economy, 18, 3–26.
14 (Agosto–Outubro), 73–76.
Moore, B. (1988). Horizontalists and verticalists: The macroeconomics of credit money. Cambridge: Cambridge
Morais, L. (1998). A crise Brasileira, a d
ıvida e o déﬁcit públicos: Para que superávit ﬁscal? Princ
Nogueira Batista, P. (1993). The monetary crisis, dollarization and the exchange rate. Cepal Review, 50, (August)
Pastore, A. C. (1990). A reforma monetária do plano collor. In C. Faro (Ed.), Plano collor – Avaliações e
perspectivas. Rio de Janeiro/São Paulo: Livros Técnicos e Cientiﬁcos Editora Ltda.
Paula, L. F. R. (1996). Liquidez e zeragem automática: Cr
ıtica da cr
ıtica. Estudos Econ
omicos, 26(3) (Setembro-
Ramalho, V. (1995). “Zeragem automatica” no mercado aberto e controle monetário. Estudos Econ
Rocha, G. M. (1994). Redeﬁning the role of the bourgeoisie in dependent capitalist development: Privatization and
liberalization in Brazil. Latin American Perspectives, 21(1) (Winter), 72–98.
Rowthorn, B. (1980). Capitalism, conﬂict and inﬂation. London: Lawrence & Wishart.
Saad-Filho, A. (1993). Money, labour and ‘labour-money’: A review of Marx’s critique of John Gray’s monetary
analysis. History of Political Economy, 25(1), 65–84.
Saad-Filho, A. (1997). Concrete and abstract labour in Marx’s theory of value. Review of Political Economy, 9(4),
Saad-Filho, A. (1998). Redeﬁning the role of the bourgeoisie in dependent capitalist development: Privatization
and liberalization in Brazil: A critical note. Latin American Perspectives, 98, 25(1) (January), 194–199.
Saad-Filho, A. (2002). The value of Marx: Political economy for contemporary capitalism. London: Routledge.
Saad-Filho, A., & Morais, L. (2000). The Brazilian economy in the 1990s: Counting the cost of neomonetarism.
International Papers in Political Economy, 1–39.
Saad-Filho, A., Coelho, W. & Morais, L. (1999). Financial liberalisation, currency instability and crisis in Brazil:
Another plan bites the dust. Capital & Class, 68 (Summer), 9–14.
Sabóia, J. (1991). Pol
ıtica salarial e distribuição de renda: 25 anos de desencontros. In J. M. Camargo (Ed.),
Distribuição de renda no Brasil. Rio de Janeiro: Paz e Terra.
Silva,M. L. F., & Andrade, J. P. (1996). Alternative theoreticalinterpretationsof the Brazilianinﬂationary process.
Anpec Conference Papers.
Studart, R. (1995). Investment ﬁnance in economic development. London: Routledge.
A. Saad-Filho, M.d.L.R. Mollo/ Review of Radical Political Economics 34 (2002) 109–135 135
Tavares, M. C. (1975). Da substituição de importações ao capitalismo ﬁnanceiro. Rio de Janeiro: Zahar.
Theret, B. (1993). Hyperinﬂationde producteurs et hyperinﬂation de rentiers: Le casdu Brésil. Révue Tiers Monde,
34(133) (Janvier–Mars), 37–67.
Vegh, C. A. (1992). Stopping high inﬂation. IMF Staff Papers, 39(3) (September), 626–695.
de Vroey, M. (1984). Inﬂation: A non-monetarist monetary interpretation. Cambridge Journal of Economics, 8,
Weeks, J. (1979). The process of accumulation and the proﬁt squeeze hypothesis. Science & Society, 43 (Fall),