The Americas: Anatomy of Failure: The Collapse of Brazil's Cruzado Plan
RIO DE JANEIRO -- Last May, in the northern mining town of Carajas, a jubilant President Jose Sarney met with his top economists to discuss the anti-inflation Cruzado Plan. Launched two months before, the "Plan" had slashed inflation by freezing prices and wages. It had also sparked national enthusiasm, transforming President Sarney from has-been to hero. However, government economist Edmar Bacha, a Brazilian trained at Yale and an architect of the Plan, was worried.</br></br>He wasn't the only one. "We went to Carajas convinced we'd go down the drain if we did not make serious adjustments," says Andre Lara Resende, another of the U.S.-trained economists behind the Plan. He and Mr. Bacha warned the president the price freeze was provoking overheated demand and repressed inflation.</br></br>Mr. Bacha recalls the president's response: "You make this sound like a torture chamber. You don't realize you've performed a miracle and created a social revolution."</br></br>The divisions that emerged in Carajas have since evolved dramatically, culminating in this week's resignation of Central Bank President Fernao Bracher and his top director, Persio Arida. For months Mr. Bracher's warnings about the dangers of repressed inflation had also been discounted. As a result, Brazil, once again, is on the brink of hyperinflation. The cruzado, a symbol of hope when it was created by lopping three zeros off the cruzeiro, is losing value almost as fast as the former currency was when Mr. Sarney announced the Plan on Feb. 28 last year. Inflation then was 15%, or an annualized rate of more than 400%: It's about that now. Interest rates have soared more than 600% on expectations of high inflation. And commerce has slowed as industrialists await signs of the government's intentions.</br></br>A close look at what went wrong illustrates how a policy designed to beat inflation was twisted into an electoral platform and a nebulous program of social reform. It suggests that Brazil -- which is beginning talks on rescheduling its $108 billion foreign debt -- is heading into an economic crisis that could lead to mounting calls for unilateral debt action. Quite simply, post-cruzado Brazil is drugged with illusions and drained of resources.