(Opinion) Brazil’s Real Plan in the 1990s achieved two remarkable things. First, it halted a long spell of inflation.
Second, it averted the dollar’s grip on the economy, a path Argentina took with its Convertibility Plan.
Unlike Argentina, where the dollar rules, Brazil shuns the U.S. currency. Walk into a shop in São Paulo or Rio, and you’ll notice prices are in reais, not dollars.
So why the disparity? To understand, let’s go back a few decades. From the ’60s to the ’90s, Brazil faced persistent inflation.
High interest rates set by the U.S. Federal Reserve triggered a payment crisis. Multiple stabilization attempts failed. Despite this, the dollar didn’t become a go-to currency.
Brazil had its own tricks. Not just laws preventing individuals from buying dollars, but also a unique financial tool.
This was the ORTN, an inflation-indexed bond. Its value adjusted monthly based on inflation rates.
This clever tool was a game-changer. It was used in financial contracts and corporate pricing, among other things.
Now, economists Persio Arida and André Lara-Resende had a bright idea. Use the ORTN as the core of a new stabilization plan.
First, index everything—wages, rents, and other prices—to the ORTN. Then, replace the national currency, the cruzeiro, with the ORTN.
Once that was done, all prices would be stable in the new currency, no longer indexed and prone to inflation.
The Real Plan
This way, the Real Plan curbed inflation and steered clear of dollarization.
It gave Brazilians a stable currency in which to invest, without surrendering control to the U.S. dollar.
Today, Brazil doesn’t face the same kind of currency crises that plague its neighbors. It’s a lesson in the value of homegrown financial innovation.
Even when their currency depreciates against the dollar, the impact on domestic prices remains low.
So the next time you wonder why Brazilians don’t think in dollars, remember the ingenious Real Plan.
It’s not just a past success story; it’s a lesson for other countries in how to manage an economy smartly.
It also serves as a cautionary tale for nations like Argentina, still shackled to the dollar.
Brazil’s unique strategy offers a pathway for economic stability, independent of foreign currencies.