How Brazil solved their economic troubles in the 1990s

Brazil, well-known for being the only Portuguese-speaking nation in the Americas, has been independent for nearly two centuries. As an independent nation, today, it is an emerging market economy that has suffered under years of leftist presidents such as Lula da Silva. Bolsonaro's economic and social reforms will likely decide the future of Brazil's economy and its people.

Today, I will take a look at Brazil between 1986 and 1994, a string of economic stabilization plans that ultimately failed. Because emerging market economies keep making the common mistake of inertial inflation, and that central banks do not help on these economies.

• 28 February 1986: Plano Cruzado: The economic stability plan replaces Brazil's currency, the cruzeiro, with the cruzado, with one cruzado equal to 1000 cruzeiros. The price freeze worked initially, with monthly inflation going down from 12.47% on February 1986 to 1.43% on October of the same year. However, price controls have had an adverse effect on the supplies of goods, resulting in a shortage and the soaring of consumer prices across the board once again. This is why government regulation in prices does not work. As a result, a black market for currency exchange emerges. On November of the same year, currency controls were abolished with the Plano Cruzado II.
• 12 June 1987: Plano Bresser: Another stabilization plan of the Brazilian economy, during the presidency of José Sarney, the plan tried to adjust wages for inflation, then workers' strikes occur, as they are against the economic plan, resulting in seriously negative effects on the Brazilian economy. Inflation picked up again, at a rate of at least 10% per month. Inflation for the year 1987 was 394.61%, and it got worse in 1988, reaching 993.28%.
• 15 January 1989: Plano Verão: Meaning "summer plan," this is another economic stability plan during the Sarney administration, which redenominated the cruzado at the rate of 1000 to 1, and the new currency was known as the cruzado novo. Officially equal to the U.S. dollar initially, the parallel market value was trading lower than the official value of the cruzado novo due to the price controls by the government. Savings accounts were greatly mismatched, with losses exceeding 20%. The plan ultimately ended in catastrophe, with Brazil entering hyperinflation by the end of the year, and inflation for 1989 reached 1,863.55%.
• 16 March 1990: Plano Collor is the set of economic reforms carried out in Brazil during the presidency of Fernando Collor de Mello. The plan replaces Brazil's currency, the cruzado novo, with the cruzeiro, at parity. Eighty percent of private assets were frozen for 18 months. Financial transactions were taxed very high. Floating exchange rate adopted. Economic deregulation occurs. Inflation in 1990 was 1,585.18%, 564.89% in 1991, and 1,149.05% in 1992. One problem of these plans is inertial inflation; prices were changed with respect to the general consumer prices, and so inflation rates remained high.
• The cruzeiro real replaced the cruzeiro on 1 August 1993, at the rate of 1000 cruzeiros to one cruzeiro real. With the continued increase in consumer prices because of inertial inflation, in 1993, prices rose 2,489.11% compared to last year. The Plano Real was later announced, creating the new unidade real de valor (real value unit) on March 1994. The URV was set equal to one U.S. dollar. With the unit of account pegged to the U.S. dollar, Brazilians are becoming accustomed to using a hard (stable) currency to protect their savings, as prices continued to rise in cruzeiros reais. On the final day of publication of the URV, it was equal to 2750 cruzeiros reais. The cruzeiro real was replaced by the real (equal to the URV), which is still in use today. It is the shortest lived incarnation of Brazilian currency since independence, lasting only 11 months.
• With the real's link to the United States dollar, the economy became sustainable again, and for two years since the introduction of the real, it was worth more than the U.S. dollar. However, central bank currencies in emerging markets remain risky, which is proven by the devaluation of the real on January 1999.

By linking a unit of account to a stable currency (the United States dollar) and by discouraging inertial inflation, Brazil saved their economy.

Central banks in emerging market economies prove that they do not do well because they are more susceptible to economic crises following devaluations and economic reforms. There should be no government control of the private sector, and the currency should be linked to a hard currency, ensuring a stable economy.