Brazil experienced significant levels of inflation at several points throughout its history between 1930 and 1980. Brazilians speculated that the inflation was started to serve special interests. Although inflation reached its peak, it faced many hurdles to the world's second largest growing economy. Between 1994 and 1995, the assignment discusses and contrasts the political and economic perspectives on eliminating hyperinflation in Brazil. According to the author, there has been an endemic problem attributed to the lack of clarity as to what social group should bear the finance of government programs. After the civilian government took over the presidency, inflation proved hard to control back from the 1970s. All the unsuccessful attempts failed to reduce the inflation since they lacked robust fiscal instruments. After the appointment of Minister of Finance along with other economists, they formed an immediate action plan to tighten collection of taxes and resolve financial relationships with the governmental organizations. In a few months later, a new program was established with the aim to stabilize the situation through avoiding weaknesses of the previous plan. Later on, with the introduction of the currency, the public believed that they would reduce the purchasing power through constant bargaining. Along with the starting of the new money, the government also came up with a restrictive policy thus impacting on inflationary expectations of the investors.1
High exchange rates were served to control inflation and entirely depended on the
1. Edmund Amann. The Illusion of Stability: Brazilian Economy Under Cardoso. World Development Vol. 28, No. 10, pp. 1805±1819, 2000.
nature of the country’s economy. The period between 1990 and 1994 was marked with average tariffs of the imported commodities. With the decrease in importation currency, prices among the producers were moderated. The strategy was applied in the short term and long term, and a more fiscal adjustment was to be required at all if the strategy was restraint and sustainable to inflation. While the high exchange rates targeted to reduce inflation, it as well deteriorated the market balances.2 The deterioration was caused by increasing imports and reducing export growth rates.
Following deteriorations and adherence to the high exchange rates, the government campaigned to the Congress to pass fiscal adjustments. The government also encouraged privatization to make their fiscal adjustments possible. The initiative was commenced by President Cardoso but was limited to petrochemical and steel sectors during the time which is applied to all public utilities.
Due to the increase in performance as witnessed by Real Plano, the growth was related to the consumption of commodities with stable prices between 1994 and 1995. However, the decreasing growth rates were associated with dampening the impact of high-interest rates witnessed in the export sector. With the opening of the Brazilian economy, many areas were subjected to foreign competition thus upgrading the technology of both international and local firms. The greater competition was marked with lowering the cost of production through an increase in productivity.
Therefore, a significant population of Brazilians hit with the hyperinflation became wage earners. As a result, the purchasing power of the group of lower income earners was eroded.
2. Ibid., 1807
The unresolved physical dilemma also led to the end of hyperinflation (Edmund, 1909). The period between 1995 and 1998 was marked by price stability. However, government deterioration was also evident. The deterioration witnessed in the primary balance failed to promote the rising expenditures at all government sectors despite the increased revenues. The failure promoted the initiation of pension reforms. The pension costs were marked with rapid rise as part of the personnel costs. By late 1990, the pension costs stood at 43% with inflation standing at only 15% and were applied to the benefit of the pension system. With shrinking surplus in the public sector, it recorded difficulty in checking the continued deficit in Brazilian social security system.
Political Perspective to end Hyperinflation by Armijo
According to the author, economic effects are a result of shift from the political regime to mass democracy. One standard answer he gives to the puzzling questions is that political policymaking in technocratic manner is responsible for facilitating fiscal retrenchments that play an important role in reducing trade and budget deficits thus pulling down inflation. The author argues that expansion of political participation in the form of competitive politics in the country ultimately improves the policies in the country to favour economic success. The low social classes and the poor play a significant role in enhancing the stable economy.
According to the history of Brazil economy, three periods were hit by the inflation, that is 1930-1945, 1945-1964, and 1964-1984. Most economic analysts have attributed the inflation differences in the rules of the political contest in these periods. The Brazilian long-term economic inflation in the three regimes was just a political choice.
Under the three regimes, the successive leaders utilized a mix of distributive policies that led to the current inflation. 3
The democratization of Brazil in 1985 further enlarged the democratic dysfunction in the economic war by admitting more contestants in the game. The Democratic transition was contributed to by franchise expansion and decentralization in the political system. The democratic change immediately led to deepening of the Brazil’s deficit. However, eventual economic stabilization did not occur in Brazil until the year 1994, ten years after democratic transition. The level of the crisis had become acute to the point where the combatants were willing to reduce inflation for the sake of stable prices.
Following the transition to democracy, the resulting cost of political stabilization dropped below the inflation level despite taking a long time to work in the system. The expansion of franchise enabled voting by all the adults in the country which made the previous election to constitute of relevant political actors. According to the author, the lasting solution to the problem of inflation in Brazil needs to take a political stand. The government sectors with no advantages from inflation need to have mass power to coerce the financial institution into accepting the alteration of rules governing finance for the sake of stability.
Government acts as an everyday player in increasing and decreasing the inflation rates. The government can lower down its fiscal deficit to defeat the other players. The menace of ending inflation in public finance requires defeat to be imposed on the financial institutions by the government.
3. Leslie Elliot Armijo. Mass Democracy: The Real Reason that Brazil Ended Democracy. World Development Vol. 33, No. 12, pp. 2013–2027, 2005.
The government thereby reduces the inflation in the country through regulatory actions. The government's preference minimizes the inflation through the financial institutions.
Real Plano’s main achievement in 1995 was bringing down the inflation rates through sets of regulations. Three significant results were achieved from the implementation of rules. First, there was decreased indexation but was not entirely erased. Secondly, deficits were recorded in overvaluation and liberalization of the trade. The foreign exchange produced trade deficits from 1994, thus distressing trade surpluses in the later years.
Conclusion
As mentioned at the beginning of the paper, Brazil has been faced with inflation and thus seeks to eliminate the burden. However, the period was marked with political and economic measures initiated towards ending inflation in the country despite working in different ways.
Bibliography
Edmund Amann. The Illusion of Stability: Brazilian Economy Under Cardoso.
World Development Vol. 28, No. 10, pp. 1805±1819, 2000.
Leslie Elliot Armijo. Mass Democracy: The Real Reason that Brazil Ended
Democracy. World Development Vol. 33, No. 12, pp. 2013–2027, 2005.
