Working Paper
Country Study 11

Brazil has undergone three stabilization programmes since 1980: without the IMF in 1981-82; with the IMF in 1983-84, and the Cruzado Plan of 1986. The first two could be said to have been more orthodox in character, given the political and social constraints which have a strong bearing upon the conduct of economic policy, while the third - the 1986 Cruzado programme - was more unorthodox.The first two programmes both helped to improve the trade balance, the immediate policy objective. The effects of the first were however over-ridden by the 1981-82 world recession and the return of positive real interest rates, while the benefits of the second were overshadowed by the effects of the US recovery and the upturn in world trade.The first was thus followed by the deepest recession in Brazilian history, while the second opened up the entrancing prospect of strong internal growth coupled with an easing of external constraints for the first time since 1980. Inflation had however become endemic, thanks to the policy of general indexation. It thus remained the biggest threat to a sustained recovery and the restoration of foreign confidence. The upshot was the Cruzado programme.Essentially, this tried to break inflation expectations by imposing a sudden sharp shock in the form of a currency reform, a price freeze, and de-indexation. The hopes raised by the plan's reception and initial impact were dashed by two main faults of implementation. One lay in the failure to let 'obviously wrong' prices be corrected. This was prompted by the need to erase inflation expectations but it led to debilitating distortions in the demand-supply pattern. The second was the failure to act soon enough when signs of overheating, in the monetary aggregates, for example, became unmistakable.