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Brazil: Getting the fundamentals right

Brazil is still learning to live without inflation. Before the Plano Real, it could sustain a fiscal deficit through monetary expansion. Now it needs to boost exports and cut government borrowing. Marcelo Starec reports

Brazil has undergone a huge change since the start of its stabilization plan (Plano Real) in June 1994. Before this was implemented, inflation was the great concern for all Brazilians. With an average annual level of over 1,000% between 1988 and 1993, it was the main determinant of a commercial transaction's profitability. There were enormous opportunities for speculation. Goods purchased just before a 50% price increase could generate a huge gain. A sale under the same conditions could mean a big loss.

With annual indices currently at around 5%, Brazilians experience almost the same inflation regime as Americans, British or Germans. Up to now this has probably been the government's main achievement and is a central plank in president Fernando Henrique Cardoso's campaign for re-election next October. Cardoso is the strong favourite to win.

But Brazil still has important economic challenges to face up to, and the failure to tackle them has made it vulnerable to acute crisis in the world financial markets. Up to now, however, the economic team has shown great skill in overcoming obstacles. At the end of 1994, for example, the Mexican crisis put Brazil's stabilization plan at peril for the first time.

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