The “Economic Stabilization Plan (PEE)” popularly known as “Cruzado Plan ”, was a Brazilian economic plan created during the government of José Sarney in 1986, by the then Minister of Finance Dilson Funaro and economists João Sayad, Edmar Bacha, André Lara Resende and Persio Arida, with the aim of containing the process of galloping inflation .
Thus, by Law nº 2.283, of February 27, 1986, the economic plan is instituted, under the slogan of “zero inflation ”, which became effective on February 28, 1986 and lasted until January 16, 1989, when it was replaced by Cruzado Novo.
To learn more:José Sarney
Main Causes and Characteristics
The Brazilian hyperinflation during the 1980s allowed financial profits for those who dealt with the speculative process, as well as those companies that were more competitive in the market.
In turn, inflation had an inertial character, according to which inflation itself fed on itself in a feedback process, being the cause of the increase itself. For this reason, “de-indexing the economy” would be the only way to eliminate the origin of the financial speculation that caused this phenomenon.
Therefore, the following measures were adopted:
- Monetary reform, with the transformation of Cruzeiro currency into Cruzado, which was worth 1000 times more;
- Freezing all retail prices for a period of one year at the values of February 27, 1986;
- Freezing and automatic correction of salary when rates reach 20% inflation;
- Advance of 33% of the minimum wage;
- Exchange Rate Freeze;
- Creation of the National Development Fund (FND) for the implementation of the Goals Plan responsible for the area of economic infrastructure and basic inputs.
Historical Context
Between 1983 and 1985, inflation registered rates of 230% per year. However, the forecast for 1986 was up to 400% per year. Despite this, the internal and external condition of the country was relatively good, since there was a surplus in exports and oil prices were decreasing in the international market.
Meanwhile, public accounts were balanced and without the inflationary pressures of public deficits, which favored the implementation of a more radical economic reform.
In fact, if in February 1986 inflation reached 14.36%, in the following month, after the implementation of the PEE, there was already a deflation of -0.11%. In the following months, inflation remained under control.
However, the monetary policy of raising the interest rate to cool down consumption and encourage savings did not work as it should (in fact, there were withdrawals from savings accounts, directed towards the consumption of goods) and an imbalance situation was created between supply and demand, due to rising consumption. As the government was unable to control its spending or correct the flaws with unpopular measures, the Cruzado Plan began to show flaws.
In addition, the price freeze prevented producers from readjusting their prices, which ended up reducing the profitability of products or even making production unfeasible, especially of products affected by seasonal conditions.
The immediate result of this phenomenon was the shortage of goods and the long queues in supermarkets. Despite this, consumption continued to rise. On the other hand, the exchange rate freeze caused Brazil to lose a significant portion of its international monetary reserves.
Finally, after the elections of November 15, 1986, the PEE definitely failed and inflation would return more strongly than in the period before the Cruzado Plan.
In 1987, due to the rampant economic crisis, Brazil decreed a moratorium on foreign debt. Even so, the Cruzado will remain the national currency until January 1989, when it was replaced by the Cruzado Novo.