Plano Collor
Encyclopedia
President of Brazil
The president of Brazil is both the head of state and head of government of the Federative Republic of Brazil. The president leads the executive branch of the federal government and is the commander-in-chief of the Brazilian Armed Forces...
of Fernando Collor de Mello
Fernando Collor de Mello
Fernando Affonso Collor de Mello was the 32nd president of Brazil from 1990 to 1992, when he resigned in a failed attempt to stop his trial of impeachment by the Brazilian Senate...
of Brazil
Brazil
Brazil , officially the Federative Republic of Brazil , is the largest country in South America. It is the world's fifth largest country, both by geographical area and by population with over 192 million people...
, between 1990 and 1992. The plan was officially called New Brazil Plan (Portuguese:Plano Brasil Novo), but it became closely associated with Collor himself, with "Plano Collor" becoming its de facto
De facto
De facto is a Latin expression that means "concerning fact." In law, it often means "in practice but not necessarily ordained by law" or "in practice or actuality, but not officially established." It is commonly used in contrast to de jure when referring to matters of law, governance, or...
name.
The Collor plan combined fiscal and trade liberalization with radical inflation stabilization measures. The main inflation stabilization was coupled with an industrial and foreign trade reform program, the Industrial and Foreign Trade Policy (English: Política Industrial e de Comércio Exterior), better known as PICE, and a privatization program dubbed the "National Privatization Program" (Portuguese: Programa Nacional de Desestatização), better known as the PND.
The plan's economic theory was previously laid out by economists Zelia Cardoso de Mello
Zélia Cardoso de Mello
Zélia Maria Cardoso de Mello served as Brazil's Minister of Economy from 1990 to 1991 under Fernando Collor de Mello . She was married to Brazilian comedian Chico Anysio, with whom she has two children, Rodrigo and Victoria...
, Antônio Kandir, Álvaro Zini and Fábio Giambiagi. The actual plan to be implemented was written by Antônio Kandir and economists Ibrahim Eris, Venilton Tadini, Luís Otávio da Motta Veiga, Eduardo Teixeira and João Maia.
The plan was announced on March 16, 1990, one day after Collor's inauguration. Its intended policies included:
- Replacement of the existing currency, the Cruzado Novo by the Cruzeiro at a parity exchange rate (Cr$ 1.00 = NCz$ 1.00),
- Freezing 80% of private assets for 18 months (receiving the prevailing rate of inflation plus 6% in interest while frozen),
- An extremely high tax on all financial transactions,
- Indexation of taxes,
- Elimination of most fiscal incentives,
- Increase in the prices charged by public utilities,
- The adoption of a floating exchange rateFloating exchange rateA floating exchange rate or fluctuating exchange rate is a type of exchange rate regime wherein a currency's value is allowed to fluctuate according to the foreign exchange market. A currency that uses a floating exchange rate is known as a floating currency....
, - Gradual economic opening to foreign competition,
- Temporary freeze on wages and prices,
- The extinction of several government agencies, with plans for a reduction of over 300,000 government employees,
- Stimulus of privatization and the beginning of economic deregulation.
Inflation stabilization plans
Three separate plans to stabilize inflation were carried out during Collor's two years in power. The first two, Collor Plans I and II, were headed by the finance minister, Zélia Cardoso de MelloZélia Cardoso de Mello
Zélia Maria Cardoso de Mello served as Brazil's Minister of Economy from 1990 to 1991 under Fernando Collor de Mello . She was married to Brazilian comedian Chico Anysio, with whom she has two children, Rodrigo and Victoria...
. In May 1991, Zélia was replaced by Marcílio Marques Moreira
Marcílio Marques Moreira
Marcílio Marques Moreira , was the Brazilian Minister of Finance during right wing government of Fernando Collor de Mello, responsible for overseeing the Plano Collor...
, who carried out a homonymous plan, the Marcílio Plan (Portuguese: Plano Marcílio).
Collor Plan I
Brazil had suffered through several years of hyperinflation: in 1989, the year before Collor took office, average monthly inflation was 28.94%. The Collor Plan sought to stabilize inflation by "freezing" government liability (such as internal debt) and restricting money flow in order to halt inertial inflation.The freeze caused a strong reduction in trade and output of industry. With the reduction in the money supply from 30% to 9% of GDP, the rate of inflation dropped from 81% in March to 9% in June. The government faced two choices: they could either hold the freeze, and risk a recession brought about by the reduction of economic activity, or re-monetize the economy by "unfreezing" money flow and risk the return of inflation.
Rapid, uncontrolled re-monetization of the economy had been named as the cause the failure of the previous economic stabilization plans in controlling inflation. The Collor government would have to "throttle" the re-monetization in order to keep inflation down. To do so, it could utilize a wide combination of economic tools to affect the speed of re-monetization, such as taxes, exchange rates, money flow, credit and interest rates.
For the next few months after the plan was implemented inflation continued on an upward trend. By January 1991, nine months after the plan began, it had climbed back to 20% a month.
The failure of the Plano Color I in controlling inflation is credited by both Keynesian and monetarist
Monetarism
Monetarism is a tendency in economic thought that emphasizes the role of governments in controlling the amount of money in circulation. It is the view within monetary economics that variation in the money supply has major influences on national output in the short run and the price level over...
economists to the Collor government's failure to control the re-monetization of the economy. The government had opened several "loopholes" which contributed to the increase of the money flow: Taxes and other government bills issued prior to the freeze could be paid with the old Cruzado, creating a form of "liquidity loophole" which was fully exploited by the private sector. A number of individual exceptions to individual sectors of the economy were opened by the government, such as retirees' savings and "special financing" for the government payroll. As the government issued more and more exceptions granting liquidity, these were later dubbed little faucets (Portuguese: torneirinhas).
According to Carlos Eduardo Carvalho, from Departamento de Economia da Pontifícia Universidade Católica de São Paulo : The Collor Plan itself began to be formatted by the president-elects advisors at the end of December 1989, after his victory in the runoff election. The final draft was probably strongly influenced by a document discussed by the advisors of PMDB party candidate Ulysses Guimarães, and later by advisors of PT party candidate Luís Inácio Lula da Silva, during the period between the general election and the runoff. In spite of the differences in their general economic strategies, these competing candidates failed to develop their own stabilization policies at a time of rapid price increases and risk of hyperinflation during the second half of 1989. The proposal to block liquidity originated in academic debate and was imposed upon the main presidential candidacies.
Ultimately, the government was unable to reduce spending, reducing its ability to use many of the aforementioned tools. Reasons ranged from an increased share of the federal tax revenue to be shared with the individual states to a "job stability" clause for government employees in the 1988 Brazilian Constitution which prevented the size reduction as announced at the start of the plan. This vindicated economists such as Bresser Pereira and Mário Henrique Simonsen, both former finance ministers, who had predicted at the start of the plan that the government's fiscal situation would make it impossible for the plan to work.
Collor Plan II
The second Collor Plan took place in January 1991. It included a new freezing of prices and the replacement of the overnight rateOvernight rate
The overnight rate is generally the rate that large banks use to borrow and lend from one another on the overnight market. In some countries , the overnight rate may be the rate targeted by the central bank to influence monetary policy...
with new financial instruments which included in its yield calculation the anticipated rates of both private and federal papers.
The plan managed to produce only a short-term drop in inflation, and it began to climb again in May 1991.
Marcílio Plan
Georgetown University
Georgetown University is a private, Jesuit, research university whose main campus is in the Georgetown neighborhood of Washington, D.C. Founded in 1789, it is the oldest Catholic university in the United States...
-educated economist who was at the time of his nomination the Brazilian ambassador to the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
.
Marcílio's plan was considered more gradual than its predecessors, utilizing a combination of high interest rates and a restrictive fiscal policy. At the same time, prices were liberalized and, working along with Pedro Malan
Pedro Malan
Pedro Sampaio Malan , is a Brazilian economist and former Minister of Finance for Brazil.-Early life:Pedro Sampaio Malan was born in 1943 in Petropolis, a town in honor of Dom Pedro II to the north of Rio de Janeiro...
, a US$2 billion loan from the International Monetary Fund
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
secured to shore up internal currency reserves.
Inflation rates during the Marcílio Plan remained at hyperinflationary levels. Marcílio left the finance ministry to his successor, Gustavo Krause, on October 2, 1992. President Fernando Collor de Mello had been impeached by congress four days earlier, on September 28, 1992, over charges of corruption in an influence-peddling scheme, marking the end of his government's attempts at ending hyperinflation.
Between the end of the Marcílio Plan and the beginning of the next "named" plan, the Plano Real
Plano Real
The Plano Real was a set of measures taken to stabilize the Brazilian economy in early 1994, under the direction of Fernando Henrique Cardoso as the Minister of Finance, during the presidency of Itamar Franco....
, inflation continued to grow, reaching 48% in June 1994.
Industrial and Foreign Trade Policy (PICE)
Running along in parallel with the Collor Plan was the PICE, a program which aimed to both raise real wages and promote economic openness and trade liberalization.Selected policies included the gradual reduction of tariffs (with the selective protection of certain key industries), an export financing mechanism through the creation of a Foreign Trade Bank (similar to the American Ex-Im Bank
Export-Import Bank of the United States
The Export-Import Bank of the United States is the official export credit agency of the United States federal government. It was established in 1934 by an executive order, and made an independent agency in the Executive branch by Congress in 1945, for the purposes of financing and insuring...
), reduction in customs duties, implementation of anti-dumping
Dumping (pricing policy)
In economics, "dumping" is any kind of predatory pricing, especially in the context of international trade. It occurs when manufacturers export a product to another country at a price either below the price charged in its home market, or in quantities that cannot be explained through normal market...
mechanisms and the use of government-generated demand for high-tech sectors.
On paper, the PICE had seemingly contradictory goals: to stimulate the entry of foreign companies while increasing local innovation.
Later studies by the Institute of Applied Economic Research
Institute of Applied Economic Research
The Instituto de Pesquisa Econômica Aplicada or Institute of Applied Economic Research is a Brazilian government-led research organization dedicated to generation of macroeconomical, sectorial and thematic studies in order to base government planning and policy making.It was created on 1964 and,...
(IPEA), an independent government think tank
Think tank
A think tank is an organization that conducts research and engages in advocacy in areas such as social policy, political strategy, economics, military, and technology issues. Most think tanks are non-profit organizations, which some countries such as the United States and Canada provide with tax...
, argued that the policy seemed to have produced that very contradictory effect: local production saw improvements in quality and productivity in face of foreign competition, but it simultaneously curbed domestic innovation due to unrestricted competition from imported technology.
National Privatization Program (PND)
While previous privatizations had been conducted by the government in the 1980s, at time of Collor's inauguration, no large-scale privatization program had been attempted. Sixty-eight different companies were added to the PND and slated for privatization. Unlike traditional privatization programs, which sought to finance a government's deficit, the PND had a stated goal of providing the government with the means with which they could purchase back the public debt. Government bonds were used in large quantities as currency to pay for privatized companies.Altogether, some 18 companies worth US$4 billion were privatized between 1990 and 1992, mostly in the steel, fertilizer and petrochemical
Petrochemical
Petrochemicals are chemical products derived from petroleum. Some chemical compounds made from petroleum are also obtained from other fossil fuels, such as coal or natural gas, or renewable sources such as corn or sugar cane....
sectors. The PND also ended several government monopolies whose possible negative social impact was expected to be countered by the increased competition. This increased competition, resulting from the aforementioned PICE policies, was thought to reduce the chance of the emergence of oligopolies
Oligopoly
An oligopoly is a market form in which a market or industry is dominated by a small number of sellers . The word is derived, by analogy with "monopoly", from the Greek ὀλίγοι "few" + πόλειν "to sell". Because there are few sellers, each oligopolist is likely to be aware of the actions of the others...
.