Thirty years of URV and the Real Plan of the 21st century – 02/29/2024 – André Roncaglia

Thirty years ago, on March 1, 1994, the most notable innovation of the Real Plan came into force: the Real Unit of Value (URV). This ingenious price synchronization mechanism played an important role in stabilizing inflation.

Conceived as a virtual currency, URV allowed the transition from “cruzeiro real” to “real”, the new currency. All prices, salaries and contracts began to be denominated in URV, which maintained its value stable in relation to the dollar. The mechanism worked as a reprogramming of the population’s defensive behavior, preparing them for price stability.

Inflation is an expression of distributive conflicts, in which wages and profits compete for space in the national income. If prices rise within a given period of time, workers ask for their wages to be replaced. When giving in to pressure, businesspeople readjust their prices to defend their profit margin.

When this conflict spreads throughout the economy, contracts begin to provide for automatic adjustments based on past inflation (indexation). Workers press for salary replacement and companies lose clarity about their costs, given the uncertainty regarding price adjustments by suppliers. When in doubt, everyone looks back and at least tries to defend their real income. Inflation rates multiply and readjustments become disorganized, making inflation autonomous. Under the effects of shocks, such as energy prices, adjustments occur at increasingly shorter intervals. Inflation accelerates and economic calculation is undermined.

To stop this process, the plan converted salaries into URV in March 1994 and kept them fixed in this index until July of that year. Calculated as an average over a period in which inflation was accelerating, the wage freeze occurred at a relatively low level in real terms.

Companies were now able to freely convert the prices of their products to the URV, accelerating inflation in that period. For four months, URV enabled negotiation within production chains and between suppliers and traders, mitigating inflationary tension in terms of profits.

The success of the URV depended, however, on the international context. By anchoring the URV (and later the real) to the dollar, the Real Plan conditioned price stability on the inflow of capital and, therefore, on the confidence of foreign investors. Without the negotiation of Brazilian external debt in 1992, which reinserted the country into the international financial market, the URV would hardly have had the success observed.

Stabilization was successful, but it imposed costs on society. One of them was external instability until the maximum exchange rate devaluation in January 1999, when the macroeconomic tripod, still in force, was established. During this period, the overvalued exchange rate failed to balance external accounts, producing persistent trade deficits, deindustrialization, unemployment and low growth. These costs limited the positive effects of stabilization on income distribution. I will return to these topics in the future.

The world has changed a lot since the 1990s, when price stability was the exclusive focus of economic policy. The 2008 global financial crisis, the pandemic, geopolitical conflicts and the climate crisis had significant impacts on employment, production and income. In response, governments around the world began to prioritize productive inclusion, combating inequalities and decarbonizing the economy.

Current challenges require reprogramming the economy for long-term development.

May the boldness embedded in the URV formulation inspire us to build economic sovereignty in this fragmented world. The Real Plan of the 21st century is neo-industrialization.

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