Defending the Brazilian Real

3244 Words Feb 19th, 2014 13 Pages
Executive Summary
Brazil is Latin Americas largest economy and since the 1990’s has shown steady economic reforms. These reforms were necessary as Brazil suffered years of hyperinflation as high as 1000% and deficit spending. The government decided to pursue economic policies that changed the Brazilian economy into a dynamic market based system.
Some of the key policy changes made were the privatization, of state owned enterprises, deregulation that allowed for greater domestic and foreign competition, perusing regional and multinational free trade agreements and the removal of red tape associated with foreign investment. The mainstay of all these reforms was the Plano Real (Real Plan).
This real plan involved the scrapping of the old
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The Real Plan brought the economy under control and stabilized Brazil’s currency because Brazil was supplying money beyond the demand. When implemented in 1994, annual inflation rate was running at 1000%. This level discouraged economic activity and foreign direct investments (FDI). To fight inflation, the Brazilian government replaced its previous currency, the cruzeiro with the real. The real was pegged to that of the US dollar. Interest rates were repeatedly increased to maintain the value of the real to that of the US dollar. For Brazil, the high cost of credit helped reduce expansion of the monetary supply and brought inflation under control. This plan ignited economy growth and increased FDIs in Brazil. The study further explained, in the midst of all of the economic growth, the trade deficit continued to grow. Although the Real plan was effective the trade was affected, the trade deficit was due in part to an overvalued real, which hindered exports, while bringing imports into the country. Estimates showed the real was actually valued higher than the US dollar. It was also mentioned that the rigid structure of the government was to blame for the trade deficit. Taxes and constitutionally mandated budget items consumed 90% of the government revenues. With inflation now under control the government could no longer rely on it to reduce the value of public-sector commitments. Cardoso made several attempts to solve the structural deficit, but
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