Pedro Sampaio Malan, Brazilian Finance Minister since January 1995, argues that Brazil is at last emerging from years of boom and bust into a period of sustained stability

The Real Plan, which was introduced on 1 July 1994, has been the most successful stabilisation programme in Brazil's history. The electorate endorsed the plan at elections in October 1994, and we will spare no effort to see its success. I believe that we may be seeing the beginning of an era of sustained growth and social justice.

At the end of June 1994, just before the launch of the Real Plan, inflation stood at 7,000 per cent a year; now it is at 0.7-1.7 per cent a month, and is expected to fall further. Brazil has seen inflation rates this favourable in only three of the past 35 years; we hope to reach single-digit inflation in 1998.

GDP should reach a trillion dollars before the end of the century. Achieving higher rates of growth on a sustained basis - which is what really matters - requires a sustained increase in domestic and public savings as a share of GDP, and less reliance on external savings. A sharp fall in public deficit is fundamental if we are to achieve this. Our rate of domestic savings is at present only about 20 per cent of GDP - compared with nearly 25 per cent in the 1970s, when the economy was growing on average 7 per cent a year.

Moreover, any serious effort to stabilise the economy must address the disarray of the public sector. We have made substantial progress in this direction:
Preliminary figures indicate that total net public debt as a share of GDP is relatively low by international standards and fully compatible with the size of the Brazilian economy. However, Federal, State and Municipal Governments must be provided with the tools to achieve fiscal equilibrium on a permanent basis - the true anchor of long-term stability. As there are definite limits to the scope for both borrowing and increasing revenues, these problems must be solved by controlling the volume and rate of increase in expenditures, and by maximising our public spending efficiency.

The greatest challenge now facing Brazil is to achieve permanent stability and single-digit inflation. Successful reform of the 1988 Constitution is vital to enable us to modernise our public sector - another of the anchors of the stabilisation programme.

The Executive has already sent three proposals to Congress: one to simplify the tax and fiscal systems; the second to reform public administration; and a third to reform the social security system. The complexity of these three areas and the depth of the changes envisaged must be kept in mind, particularly when they are taking place in the context of a democracy such as Brazil's, and setbacks must be expected. Reform will eventually succeed because it is the wish of society as a whole that it should do so.

The government also places a high priority upon the privatisation programme which began in the 1980s. Previous administrations sold more than US$8 billion-worth of assets, mainly in the steel and petrochemical sectors. In early 1995 President Cardoso formed the National Privatisation Council, composed mainly of Ministers of State and, as administrator of the programme, the National Bank for Economic and Social Development. In a parallel move, State Governments are launching comprehensive privatisation programmes; the Governors of Minas Gerais and Ceara have already decided to privatise their state banks.

On the external front, Brazil has, for some time, pursued a conservative policy with regard to its balance of payments - a policy vindicated by the events in Mexico in 1994. Our balance of trade reached equilibrium (a very small US$3 million surplus) in July 1995 after eight consecutive months of deficit, and that surplus has in general remained since then. We have also opted for a flexible system of official exchange rate bands, which will remain in place. Lower rates of inflation, together with substantial growth in exports, are clear signs that this exchange rate system suits the stabilisation project. Since November 1995, our currency, the Real, has featured in futures and options traded on the Chicago Commodity Exchange - another clear indication of international optimism in the performance of the economy and our exchange rate policy. Brazil will not return to its former policy of exchange rate indexation based on consumer prices; exports will become more competitive through further reductions in production costs.

The Real Plan has not changed Brazilian society; we, as a nation, had changed before the plan was introduced - thus making its success possible. Brazilians had become tired of inflation and eager for economic stability. Price stability is not, however, an end in itself, but a means to address the key issue that will define us in coming years - Brazil's enormous social problems. It is not necessary, desirable or acceptable to wait for the consolidation of stability before implementing realistic social policies which emphasise the importance of investment in our people.

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©Kensington Publications 1996