Brazil's Incomplete Stabilization and Reform

Abstract

SINCE THE INITIATION of the Real Plan in July 1994, after a decade of failed stabilizations, Brazil has made dramatic progress. Figure 1 makes the point forcefully: starting from hyperinflation levels, inflation has been under control for the past three years and there is no sign of it coming back. But the stabilization program is unconventional and this raises doubts about its eventual success. Brazil has big budget deficits, large real appreciation, and a large and growing external deficit; there has been a major increase in real wages and incomplete progress on broad-based economic reform. These conditions recall the many failed programs of Latin America, including Brazil's own Cruzado Plan of 1986. Will Brazil stay the course and return to the high growth rates that it experienced in the 1960s and 1970s and that are common in Asia? Or will it continue with makeshift policies that lead to increased vulnerability and stand in the way of such dramatic improvements as have occurred in Chile and are now underway in Argentina? In particular, how will Brazil handle the significant real appreciation, growing external deficits, and incomplete structural reform? With politics seeming always to take the front seat, will there ever be a good time to attend to these important issues, which stand in the way of economic improvement? If Brazil fails to make dramatic improvements, it is very unlikely that it will experience a Mexican-style collapse or a pervasive loss of confidence. There are 150 million Brazilians, and they are relentless optimists. Beyond that, trade controls, a more rapid crawling peg, a