Brazil's Lost Decade of Hyperinflation

Published: 10th March 2010
Views: N/A

This article provides a brief overall description of the history of inflation in Brazil. We focus particularly on what has now become known as the 'lost decade' of hyper-inflation as well as the policies that were used to curb its effects, which have proven to secure the country's position as a rising global power.



For most of the 1970s and early 1980s the country's economic 'miracle' period seemed never ending and no one could explain the onset of extreme price increases commencing in 1987. Up to 1997, 40 percent of Brazil's Gross National Product (GNP) was eaten up by inflation and it was not uncommon to hear of prices doubling every 10 weeks; credit card companies charging up to 25 percent interest and savings declining by up to 2000 percent in a year. At the time, most of the Brazilian population would not save money (apart from the upper classes who were able to protect their money through sophisticated banking instruments).



The government initially thought the simple solution would be to adapt index prices, wages and contracts to establish a floor under buying power - but the real comparative costs soon became difficult to deduce out of the constantly changing figures. It was soon discovered that public income and expenditure were not out of balance (they were expanding together) and the issue was, therefore, not a fiscal one.



Subsequently, the 'inertial inflation' theory was initiated: established by Pedro Malan (then chair of the Central Bank), it was aimed at halting the inertial slide upward by a prize freeze shortly followed by a new currency. The overall intention with this approach was that, in the time it took for the public to get used to the value of a new currency, the memory of the old currency would fade and expectations would be cooled. After five tests in various guises, this approach failed and the government adopted the more orthodox approach of effectively controlling the amount of money circulating in the financial system by effectively removing it.



Led by President Fernando Collor de Mello, money was effectively 'taken away' from Brazilian saving accounts which, at first, was viewed as a success: inflation dropped from 30,000 to 400 percent in the space of one year. However, as money was eventually gradually returned back to savers, the objective turned on itself as the government failed to address the core cause of inflation: runaway deficit spending (by 1992, inflation was peaking at 1,000 percent).



It was at this point when Collor resigned and economists in the Ministry of Finance, led by Henrique Cardoso, attacked the root causes of inflation with straightforward economic theory. The Plano Real?s main aim was to cut government spending (particularly off budget spending) and bad loans from banks to fund government projects that were not being underwritten correctly or with good reason.



The new policies imposed higher taxes to decrease national debt; made cuts in social services; increased unemployment and elevated interest rates considerably to curb the effects of spending (which naturally led to less private investing). For a period the effects of these measures were not positively visible, leading many to doubt the plan's effectiveness. Indeed, Cordoso's policies met stiff opposition from all ends of the political spectrum (including President Lula da Silva). Yet eventually, along with monetary stability, hyper-inflation was able to become back under control.



Cardoso went on to serve two terms as President between 1995 and 2003 and sought to establish long term growth in the country; reduce Brazil's socio-economic imbalances; open the economy to greater foreign investments and implement a number of reforms (including improved social security policies, government administration regulation and taxation to eliminate excessive public spending). Many attribute and credit the current success of Brazil to his strong leadership during the crisis.



Most Brazilian adults would remember the period unhappily and the increased democratic nature of the country would significantly decrease the likelihood of hyper-inflation occurring again. Furthermore, one of the main issues that prompted the problem was excessive government spending which, as a result of a number of legislative measures, has been reduced significantly. The government has also consciously taken less of a role in the affairs of the Central Bank, allowing them to operate in a manner that revolves around their own expertise (and therefore without any political influence).





------



The latest Brazilian inflation statistics are available via our monthly factfiles as well as FREE e-books, news, state guides, hints and tips for anyone with an interest in real estate, land and renewable energy investment in Brazil - please click on the following link: http://www.brazilinvestmentguide.com/

Video Source: Youtube


Report this article Ask About This Article


Loading...
More to Explore