Arida says Real needs new reforms.

247 - Economist Persio Arida, author of the theoretical proposals that gave rise to the Real Plan, which is now 20 years old, publishes an article this Sunday in which he defends a new agenda of reforms in the Brazilian economy (read here (the full text).

"The Real Plan, more than a monetary reform, was conceived as a project to modernize the country. The structural reforms and the control of public finances instilled confidence in the new currency. The list of what was done in the years following the plan's launch is impressive: the end of the state monopoly in oil and telecommunications; the cleanup of the financial market and state banks; the privatization program; the creation of regulatory agencies; the Fiscal Responsibility Law; the beginning of pension reform and the macroeconomic tripod, among others. These were reforms that were extremely difficult to implement, but they created the foundations that support the Brazilian economy to this day. The Brazilian people embraced the Real and gave political support to the reforms to prevent the return of hyperinflation," he says.

According to him, Brazil needs a new reform agenda. "Twenty years later, the challenge is different. We have inflation around 6% per year, which would be higher if there were no price controls on public utility rates, in addition to energy and gasoline prices (...) But, in Brazil's 6% inflation, there is an extra distorting factor. What keeps inflation at 6% are very high real interest rates. A truly stable currency doesn't need high interest rates."

The great challenge now, he says, is to achieve interest rates compatible with international rates. "The real will be a truly stable currency when we can have inflation of, say, 3%, with real interest rates much lower than what we have today (...) The time has come to implement the second round of reforms and control public spending in order to reduce inflation to, say, 3% per year and unlock the Brazilian economy with low real interest rates. Many of the distortions in the Brazilian economy—low investment, deficient infrastructure, lack of competitiveness, low financial leverage, high bank spreads, scarcity of financing for long-term projects—result from having had high real interest rates for decades. With less inflation and lower real interest rates, Brazil can escape the low-growth trap in which it finds itself."