While the 1988 ‘Citizen’ Constitution inserted social and human rights into law, a series of subsequent constitutional amendments and innovative programmes have made the Brazilian state more capable of delivering on such principles – even though the road to development remains lengthy and bumpy. As the starting point for important changes that would take place in the following years, how did the political process behind Plano Real, as the anti-inflation plan is known, unfold? And what can it teach us about potential mechanisms that may have enabled other equity-enhancing reforms?
Plano Real: the anti-inflation plan
Between 1993 and 1995, Plano Real caused the annual change in consumer prices to come down from four to two digits, getting the country’s inflation rate to its lowest since the 1950s. Then, in 1996-1997, it reached less than 10%, and inflation has remained there mostly unchanged until today. With hyperinflation defeated, the purchasing power of the poorer segments of society jumped instantaneously. Different from their formal peers who counted on an indexation shield protecting their financial assets and wages against inflationary corrosion, informal workers would have the value of their earnings, typically cash holdings, rapidly eaten away by spiralling prices.
Therefore, because macroeconomic stabilisation brought a bigger economic gain for people at the bottom half of the income distribution, it exerted a sizeable downward effect on poverty and inequality. Remarkably, econometric studies have found Plano Real correlated with both an equalisation of the income distribution, as measured by the Gini coefficient, and a drop in the income share held by the richest 1%.
Why it succeeded
Observing the political process that culminated with the launch and implementation of the plan, two key enabling mechanisms can be uncovered as playing relevant roles in its success. First, democratisation and electoral competition may have an especially powerful pro-poor bias in countries like Brazil, where a large share of the electorate is less well-off. Political parties of different stripes are encouraged to promise more benefits to low-incomers in the hope that their candidates will get more votes in return when election day comes.
Second, to the extent that elected presidents want to honour their campaign pledges of shared prosperity, and delivering on their promises is an effective way for incumbents to retain power, the chief executive in the Brazilian multiparty presidential system must form coalitions with other parties if they want their programme to pass the legislature. In this respect, a qualitative analysis of Plano Real points to the relevance of electoral incentives and effective coalition management as policy enablers.
The political context of Plano Real
In May 1993, with the annual inflation rate approaching 2000%, then President Itamar Franco (PMDB) appointed Fernando Henrique Cardoso (PSDB) to be his fourth economy minister in about as many months. Cardoso and some close advisors recognised that failing to bring prices under control could severely hamper his political career; however, success was likely to make him a very strong candidate in the upcoming 1994 presidential elections. With the electoral race about to begin at the same time that inflationary pressures receded, Cardoso’s campaign relied heavily on advertising the candidate as the one capable of addressing the economic challenges affecting the most vulnerable.
Throughout the campaign, Cardoso would signal to voters that uncontrolled raising prices were the core cause of inequality and impoverishment while also labelling his main rival, Luiz Inácio Lula da Silva from the Workers’ Party, as the inflation candidate. In sum, Cardoso won the 1994 presidential election by turning Plano Real into an electoral asset and attracting large parts of society to his side.
Meanwhile, enacting into law the legislative measures that eventually transformed the macroeconomic stabilisation plan into reality required negotiations and the formation of majoritarian alliances in Congress. Whilst the party of the president in Brazil is typically in a minority position in the national assembly, the chief executive has institutional and favour-exchanging tools that provide him or her with coalition-formation powers. In the case of Plano Real, an enduring cooperative arrangement firmed in 1992 between the three major parties in the legislature, the PSDB, PMDB, and PFL, gave critical backing for a constitutional amendment and other bills that consolidated the plan.
In return for their votes, allied legislators would receive coalitional gifts such as budget allowances and cabinet positions. These three parties occupied together all ministerial cabinets between 1992 and 2002. Besides, as another instrument in the president’s toolbox, special executive decrees that were automatically turned into law once issued, pending Congress verdict, helped to speed up Plano Real’s policy process. Therefore, effective coalition management can also be observed as an enabling mechanism for the stabilisation plan.
It is possible that other positive socio-economic initiatives that were successfully launched after 1994, such as conditional cash transfer programmes and a series of consequential education reforms, have also been enabled by electoral incentives and effective coalition management. In this sense, a decrease in Brazil’s democracy quality, affecting electoral competition, and a rise in polarisation, making cross-party cooperation harder, could be at the root of the worsening poverty and inequality levels that Brazilians have experienced in recent years.