The engineer and economist Winston Fritsch, 77, one of the idealizers of the Real Plan, received an invitation from Fernando Henrique Cardoso to work on the team that would stabilize inflation in 1994 after a phone call from Washington, answered at the pool of his house in the mountain range of Rio de Janeiro.
On a Saturday. On Sunday, he was in Brasília with Gustavo Franco and Edmar Bacha to begin to assemble the plan.Winston Fritsch, one of the “fathers of the Real Plan”, in his apartment in Leblon, in the southern zone of Rio de Janeiro.
Franco as his deputy, and Bacha as special advisor to the Ministry of Finance. At the time, it was said that the plan could be Elizabeth Taylor’s (1932-2011) eighth marriage, famous for her several marriages.
Brazil had tried before: Cruzado, Bresser, Verão, and Collor plans, some with more than one version — but all failed.”Wow! It wasn’t a trick. It worked!” he remembers.
“The plan solved and brought down inflation consistently.” Fritsch says, however, that the Real, with 30 years of existence, left some “unfinished business,” such as the fiscal issue that still haunts the Brazilian economy today.
According to him, the international crises faced by former president FHC (1995-2002) disrupted, but there were not few achievements and reforms during that period.
Fritsch looks back on the past few years in Brazil, starting from the Real Plan, and says he hopes that Lula’s (PT) government still has the potential to surprise positively.
The Brazilian economy experiences ups and downs, periodic crises, and bitter growth rates for a country with so much poverty, potential, and tasks ahead.
How do you evaluate the launch of the Real Plan at that time and what needs to be done?We improved in several aspects, but structural problems remain latent. The Real left some “unfinished business.” Some structural; others, for maintenance.
Fiscal policy can be seen as a structural problem. Because we have a very inefficient system, full of band-aids. And fiscal balance is something we will have to always seek.
The Real was absolutely spectacular from the point of view of reducing inflation. But it had a great dependence, to maintain stability, on the exchange rate, on the exchange rate anchor.
And in a fragile situation, because we had very low foreign reserves, about a tenth of what we have today.This in an extremely unstable international economy in developing countries.
At the exit [of the plan’s launch], there was a crisis in Mexico. Later, Korea, Southeast Asia, and finally, Russia.
Every time this happened, the only way to keep the balance of payments relatively strong, to avoid pressures on the real, was by using the interest rate as an instrument, meddling with the interest rate differential.
It’s as if you had a horse that wanted to run, but every time you had to pull the reins because a hurdle was coming.But investors’ expectations, after the Real Plan, were spectacular.
And reforms were also made, with a reasonable ruling coalition. In Fernando Henrique’s government, coalition presidentialism worked. It was not easy to make a constitutional reform, but passing laws did not require talking to anyone. And the reforms were being made, some very important.
Fernando Henrique had a big stick. He privatized Vale!He also closed or privatized about 30 state banks, deficitary and inflationary sources at that time. Exactly. That is, these structural reforms were made, but the economy lost, so to speak, the entrepreneurial spirit.
At the plan exit, expectations were very high, with everyone thinking that “now Brazil will take off.” But it ended up that, well, the high-interest rates… The economy remained in the same old pattern.
Winston Fritsch, then Secretary of Economic Policy of the Ministry of Finance in 1994, the year of the Real Plan’s launch.
There was also a significant increase in the tax burden to try to control the fiscal deficit, but not a structural adjustment of the State, right? Yes, some structural reforms were not made.
And almost continuously, that post-Real environment, which was very positive, was lost. Because it was one crisis after another.
And the Central Bank with the instrument, basically, of raising interest rates. Because the goal was inflation, to keep it under control.
But growth was mediocre. And then there was an election on top of that, which was Fernando Henrique’s second election.
So, the Central Bank couldn’t raise the interest rates much earlier. Time was wasted. And then there was a huge capital outflow [in 1999].
Fernando Henrique won the election, but almost lost the Real.But then came Armínio [Fraga, former president of the Central Bank], and we transitioned to a floating exchange rate regime.
This was very important because it gave the real the status of a currency of a large country. The Central Bank was well managed, using the interest rate as an instrument to control inflation and with a promise of fiscal adjustment.
In fact, there was a fiscal band-aid during Armínio’s tenure, the CPMF [Provisional Contribution on Financial Movements], which provided about 3% of GDP [revenue].
What is your assessment of what came after Fernando Henrique, what he didn’t do, and the foundations he left? Lula wins the election in 2002 and has two successful terms, with a growth rate almost twice that of FHC.
Lula inherited an adjusted economy, but still with a structural fiscal deficit. But Lula has a great advantage, which is luck.
We had China, which started growing exponentially, consuming Brazilian agricultural produce. This change, which is very much China in globalization, allowed Lula to ride the wave.In 2005, 2006, he lets the reserves rise, but the exchange rate would still appear, reaching almost US$1 to R$1 again, which had a spectacular deflationary effect.
And reserves go from US$50 billion to almost US$300 billion today. He, so to speak, removed the immediate danger of instability in our peripheral economy.
Then comes Dilma.Now, before Lula, Fernando Henrique’s poor performance is exclusively due to having to drive on a road full of potholes, the international crises.
And you had a car [the Real Plan] with a weak suspension. But time ran in favor. As one year passed, two, three years and inflation dropped… Wow! It’s not a trick. It worked.You mention Fernando Henrique’s bumpy road and a somewhat organized path with Lula.
But the U-turn on this path, which was more or less organized, was Dilma’s government [Rousseff – 2011-2016], right?.
But then we have to step out of the economy and look at politics. The thing is, Fernando Henrique’s government had a reform project and a coalition to govern.
When Lula was elected, coalition presidentialism collapsed. The PT never had more than 20% of the votes in the Chamber of Deputies.
He always had to fall into the hands of the farthest right spectrum. And then, before you get into the more ideological right, which in Brazil only really appeared after [Jair] Bolsonaro, you come to the middle of the lobbies.
The core, the center, is lobbying. It is very difficult to make alliances like this.But as Lula became very popular because the economy was doing very well, and the deputies don’t fight against a popular president. He carried an 80% popularity for a long time, a crazy thing.
So, the center and everyone voted with Lula. Lula was a king, a beloved king.Then he brought Dilma, who was clearly a flop because he wanted to return in four years.
But Dilma faced a crisis. In the beginning, the big 2009 [global] crisis didn’t affect Brazil much, but later [during Dilma’s government], came the serious turbulence in Europe.
Then a team [economic] came in and, well, it was completely hallucinated. When they had to hold back, they stepped on the accelerator, leading to a disaster shortly after.
She ended up suffering impeachment. The fact that she was not even minimally competent was a disaster. She messed up there, spending, pedaling, and whatnot. It was pathetic.
She completely lost the market’s trust. It only got worse. And Congress reacted. Later on, all that confusion resulted in Bolsonaro.
Following this historical arc, we have the Michel Temer government [2016-2018], a transitional one, and Jair Bolsonaro [2019-2022].
Now, Lula 3. How do you assess the current scenario?Lula was elected by a very narrow margin. There is a lot of criticism. But, in my view, he is doing a very good job in the area of energy transition. And has a huge international popularity.
But since he is not popular in Brazil and has to govern with Congress, he needs to be careful not to lose his shine, as he may end up being “thrown away” [by Congress].Especially in a polarized environment like the one we are currently in, something that has never existed in Brazil before.
And the international economy, although not so great, is not good either.Now, Brazil has a spectacular opportunity today to grow based on green investments, and there is another possibility, which is to grow by exporting oil.
Trade balances have been great. We have a current account deficit [in transactions with the world] of about 1% of GDP, which we can finance with external capital if we do things right. There is a lot of criticism, but I believe that Brazil will regain its “investment grade” [investment grade, lost in 2015].
And it may even happen during Lula’s government. Because the “investment grade” depends a lot on the risk of default (international default), on the balance of payments. Lula can still surprise.
But the Achilles’ heel is still the fiscal issue, right?More or less. Of course, the projections are not good, as they are in almost every country in the world. Covid had a profound impact. Look at the United States [with a primary deficit of 5.5% in 2023].
[Fernando] Haddad is giving a speech that no one can say is the same as Dilma’s.And it cannot be said that interest rates are where they are because of the fiscal situation. It’s because of the post-Covid inflation shock.
The response from the Central Bank, independent, was given a year before the United States, and it was very aggressive. But it worked.Only now, to lower it, the talk starts about, well, look at the fiscal situation. But the fiscal issue didn’t make the rate rise.
It was the exogenous inflation shock. And with short-term U.S. interest rates at 5.5%, we can’t lower it much here. If it drops too much in Brazil, there is a capital exodus, the dollar goes through the roof. That’s what’s happening.
Every time the idea of lowering the interest rate pops up, the dollar goes up. It became a kind of trap. Because crisis hit, the rate went up.
The Americans raised it, and now we have a level determined by the capital account, not the domestic economy. So, you have to wait for the Fed [the U.S. Central Bank] to lower the rate for us to follow suit.
Now, are the rates high because of the fiscal situation? “Bullshit.” It’s high because of the Fed’s rate of 5.5% per year. But all the conservative talk of the Faria Lima comes up.
Of course, you have to have a low primary deficit, but it doesn’t have to be zero. There are countries with much higher primary deficits than Brazil and they are still functioning.
Fritsch, 77He was Secretary of Economic Policy at the Ministry of Finance during FHC’s government and was part of the team that formulated the Real Plan.
With a bachelor’s and master’s degree in engineering from UFRJ, he holds a PhD in economics from the University of Cambridge.
A Meritorious Counselor of the Brazilian Center for International Relations (Cebri), he has extensive experience in the financial sector as a partner, CEO, or director of Brazilian and international institutions.
Currently, he is dedicated to teaching and entrepreneurship in the area of financing the transition to a low carbon economy.
Throughout this month, Folha publishes the Real Plan series, 30, with reports and interviews about the three decades since the introduction of measures that tamed inflation of almost 5,000% per year.
The pressure of rising prices and the balance of public accounts, two issues that were at the heart of the stabilization program, still dominate the economic debate.
