Demonetisation Lessons from Brazil

An edited version of this article appeared in Financial Express today. Link:

Public policies are best when a lot of reason goes into their formulation and passion into their implementation.Those looking for an effective recipe for formulation could learn a lot from Brazil. It has demonetised its currency 8 times since 1942 and thrice simply knocked off the last 3 digits of its currency overnight i.e. like a 10,000 Cruzeiro (then Brazilian currency) will be 10 Cruzeiro from next day morning.

Lessons from 1830s to 1942.

Even before from 1830s it has been compelled to experiment with its currency due to evolving politics. The early experiments are to do with metallic convertible bases like silver and gold, metallic copper coins, birth of parallel paper money,  etc.

In early 1830s in order to stabilise the external value of Mil-Reis (then currency), the centre starved supply of currencies reducing the circulation of copper coins in the provinces. The provinces responded by issuing their own notes to neutralise demonetisation. Promissory Notes issued by Commercial banks valid for 15 days by law began to be accepted far beyond their due dates. (Source: Page 39-43,  Monetary Statecraft in Brazil: 1808–2014, Kurt Mettenheim)

Some other time commercial banks were allowed to issue bank notes (like in Hong Kong where currencies were issued by Standard Chartered and HSBC till accession). This led to loss of control of central authority and dilution of monetary policies.

Brazil through its history has clearly proved that no one can ‘starve’ the people of currency for far too long.


This period was mostly about high government expenditure, unbridled fiscal gaps and high inflation. Brazil demonetised 8 times before the last one in 1994.

It has had to change its currency, the ultimate form of demonetization for every conceivable reason – to tackle black money (Indian objective), to tackle hyper inflation, tackle daily cumulating interest rates of 3% (which is nearly 50,000% p.a.), base erosion, commodity price volatilities especially in Copper or just to avoid confusion (if Brazil had retained its currency same as in 1942, it would be 1 US $ =  2750 followed by 18 zeros, a nightmare for the accountants). They have been far deeper than t he Indian type demonetisation – the entire spectrum was replaced and the currency itself renamed.

The last in 1994.

The most recent in 1994 seemed Quixotic. It was aimed more at breaking the psychology of inflation. With 100% inflation consistently for 14 preceding  years (in 4 years over 1000%), shops had to revise prices 3 times everyday. That is when the government decided to use two currencies simultaneously – one virtual for counting the real value of currency and another for payments and settlement – and every shop having to display its prices in both and revise it 3 times a day.

But unexpectedly, people started anchoring their values against the real value (which was set near 1 Real Value unit = 1 US$).  Within a quarter or so, it was clear people were not rushing any longer to shops to avoid their currency buying less than when they started from home. Inflation abated and the real value became the Real the official unit. It was perhaps one of its most successful experiments that has lasted till date.

Lessons from Brazil

People will seek ways to settle transactions in the most cost and effort efficient ways. For many transactions in much of India, using currencies across the counter is still the most efficient option. In 1970s and 80s, when there was a coin shortage of sorts,  Chintamani co-operative superstore in Coimbatore used to issue their own tokens. These slowly gained acceptance with public so much so that even government owned busses and offices used them.

The parallel systems will start issuing notes and IOUs which will be strictly ‘enforced’ amongst its members through extra legal authorities.

One thing Brazil has always got right (between 1942-1994) is to have the 1,2,5,10,20,50,100 note sequence – considered the most friendly from transaction settlement point of view.

Currencies are as much about psychology and convenience as values for accounting and transaction, as the 1994 experiment so decisively proved.

The best way to demonetise is not to have one – avoid inflation, avoid unjustifiable or un-implementable tax systems, and not to issue too much of it anyway. Brazil has about 3% as currency/GDP whereas India’s is11-12%. Government should have incentivised and reduced it by 1% every year rather than force it in one lump.

A parade of demonetisations has not exactly curbed either parallel economy or corruption in Brazil. Corruption and black money is so rampant, their President was recently impeached for corruption, their biggest real estate tycoon is behind bars and may have to spend the rest of life there if not politically rescued.

Why black money or parallel economy, there is a near parallel administration being run by the mafia through drugs, extortion, violent thefts (one murder every 10 minutes i.e 140 a day, down of course from 600 a day not so long ago), etc. none of which will be happening through tax paid cheque money transfers.


In summary Brazil offers 3 ground rules (perhaps not with successful examples as much as negative narratives):

  • the way to tame inflation is not periodic demonetisations but curb state populism,
  • the way to curb black money and illegal economy is not starving people of cash but well thought out tax policies and effective punishments, and
  • the way to protect free trade from causing domestic unemployment problems is to maintain the external value of the currency which in turn is achieved by restricting external capital inflows to just what is required for financing current account deficits. (Donald V Coes, Macro Economic Policies and Growth in Brazil, 1964-90)

One would definitely give credit to both the government and RBI for curbing state populism within FRBMs. But given the levels of corruption in tax collection systems itself, black money curbing through demonetisation seems an ill fitting solution. Unemployment is rampant and growing due perhaps to highly overvalued Rupee and extra terrestrial real interest rates.

The daily dose of RBI circulars does indicate that someone is extremely alert at the wheel but whether he knows the destination and if it will deliver enough gains for the pains people are experiencing, time alone will tell.

The writer is CFO and author of ‘Making Growth Happen in India’ (Sage Publications)



I had great hopes of doing what I like best –talk to people, during my recent trip to Brazil. When I asked the receptionist on the first day morning which way I should walk from the hotel and what I should hope to see, she (of Taiwanese origin) sternly told me that I may not come back with my purse, passport or even person intact. I turned towards a co-host who had also flown in from Europe but extremely familiar with the location about what she was saying. ‘If you don’t know Portuguese and the ways of Sap Paulo, better not to venture out’. The goons know to spot the victims all too easily. I had hopes to talk about the yo-yo economy, evolving political situation, boisterous people, onslaught from Olympics, Samba dancers, may be even a petty thief to understand what drives them. My spirits stood punctured by their cautionary and sagely advice.
What follows is based on conversations with the car drivers, guest house keepers, hosts, hotel assistants, tourist guide in Rio and a few others. Unverified and you may believe it at your own risk and peril.

1          The road discipline is great. The BRT bus lanes are not barricaded or divided with dividers like in Indian cities – just a white line marker. Taxis with passengers and Ambulances also use the lane. But no others – pedestrian or vehicles get into those lanes. When the cars are crawling at an inch a minute speed, these busses whizz past at 60-70 kms. They know the risk I guess – if you get into it, the bus driver will have no choice but to hit you. He has no way of turning left (he is on the leftmost lane already) nor against the wall of vehicles on the other side. He has to hit them and drag along till the next signal since stopping will mean he himself will get hit by the buses behind.
Even on highways where there is 3 mile long queues there is no horn honking and they stand in one file. Just no one slips into the overtaking lane or side kerb. Extraordinary discipline one should say.
2        Portuguese gave Brazil (its original native name is Pindorama) its name after a tree which has the red/saffron colour of burning charcoal. Red dyes for cloths used to be manufactured out of it. Red colored cloths were very expensive in the 1800s in Europe and had to be ultimately banned. Nowadays the finest violin base is made from that tree.

The world’s largest football stadium is Maracana in Rio which was the venue of the recent Olympics opening ceremony. It’s the name of a bird like parrot which makes sound like the percussion instrument. At the main entrance is the statue of Bellini the captain of their team in 1958 and 62.

3         Brazil is the largest exporter of Cocoa, Beef (there is one ox for every Brazilian I was told), Coffee (largest producer for 150 years), Leather, Chicken, Pork, Orange, Sugar, Tobacco, Cashews, Pulp, Bikinis and as my guide cheekily remarked Football players.

Cashews (Cajus) come from Brazil. They gave it to India via Goa and took Mango and Jack from India. Jack is under attack now since some environmentalists believe it’s in quarrel with local species. There is Caju tree (single) in North East which covers an area of 8 Ha. (Wiki confirms this).

Brazil gets 3 crops of mangoes per annum. When during the pre flowering period the mango crop needs water the most, I understand they starve it and the starved tree starts flowering faster. When it does, they water it copiously and get a good crop. (need to understand this better). This way they induce 3 crops per annum. Apparently Brazilian mangoes are a craze in Japan to whom they export by Air. A solitary piece can cost as much as $ 50 in Japan, I was told.

4        Brazilians believe it’s not Wright Brothers but Santos Dumont of brazil who invented Airplanes. He did not register the patent or publicise it. WB used a catapult to get it up and glided down whereas SD used the engine to propel it up is their version. He is also billed as the inventor of wrist watches.

5       The largest contingent of Japanese outside Japan lives in Brazil. They started coming from 1901 and is a sizable community is Sao Paulo. There are more Lebanese in Brazil than in Lebanon. There is no quintessential or typical Brazilian. They come in all shapes and sizes, colours and textures. Only their skin tones, bone structures and facial features all look great and is one of the most beautiful people … all easy going and boisterous, irrespective of what… as good as the Greeks, Cyprus, Lebanese, Syria and middle east races.

6 Brazil
a.      In many prisons there are stationery bi-cycles which the inmates can cycle for health. They are connected to electrical generators and the electricity is sold and the proceeds are shared with the cyclers.

b.      Many (the guide said most) companies/offices in Brazil have made Yoga compulsory for 5-10 minutes at the start. They believe that it reduces work place tensions, stress and to lesser conflicts. Brazil has had to change its currency 10 times since 1942. Due to high inflation. Twice they had to knock off the last 3 digits of their currency. Looks like their inflation is as high spirited as their outlook towards life.

c.      It produces nearly 70% of its electricity from hydro sources and most of these are from dams in the plains.

d.      Divorce was legalised only in 1972. And the current rate as people felt would be 20-30%. But even middle class people are shying away from marriage due to financial reasons. They live as friends but feel raising children as very expensive and unaffordable due to rentals and costs of education etc. Sad to see even people in 40s say it.

e.      Sao Paulo can easily be rated the Graffiti capital of the world. Most of them are elaborate, colourful and cover the entire wall in a single theme. Must be taking 2-3 people a week to do them.

f.      Voting is compulsory is Brazil. Between 16-18 it is optional but from 18 its compulsory. If you don’t vote you can’t get your passport renewed or apply for any Visa or get social security. But i believe the fines are a paltry $ 5 (=ent). But you have to run from pillar to post in the Registrar’s office and waste the better part of the day besides the traffic time in reaching their office… that in itself seems to be a deterrent.
g. Earth’s magnetic potency is solely waning in Brazil, i was told. (this seems to be confirmed by Internet).

7      Rio De Janeiro (River of January) is one of the finest urban living places. It has 49 km of fine white sand beaches, a forest (botanical garden of 38 sq km) right in the middle of the city, rocky hills, and a beautiful lagoon. The small strip of land between the lagoon and sea is one of the costliest places on earth to own your residence.
Ipanema, Copacabana, and Prainha are some of the most crowded sun bathing spaces. Fine white sand but not as wide as the Marina or Elliots in Chennai – just may be 1/10th to 1/5th the width and goes into the seas fairly steeply except in small stretches in Copacabana and at one end of Ipanema. But that does not deflate the spirits of the revellers, who play beach volleyball, and other sports with gay abandon. It seems as crowded as the VT station (some exaggeration there).
The city airport is a risky affair. (see the photo taken while approaching it – I am at right angles at a distance of 3-4 kms from landing). It’s in a narrow triangle of sorts jutting out into the sea. Not even space for fencing at either end. At one end is the Sugar Loaf rock some 750 meters tall with the seas hardly 3-4 km separating it from the take off point. And at the other end are hills and the 14 km long bridge over the sea running right across – again hardly 4-5 kms away. The aircrafts can only approach it at right angles and take a steep turn at such a short distance and land knowing full well that there is very little margin for error. On takeoff he is turning almost at right angles even before vertically out of airstrip.
Even the other airports don’t seem to be fenced like in India. There is a football ground very close to the main runway in their Guarulhos International airport. A good kicker can easily kick it over the 4-5 ft high fence right into the main runway. The city airport in Sao is on a raised table and if one misses take off can straight plunge into the thick residential colony. But then their Pilots seem as confident as their football forwards.

8      Crime
A gram (or whatever) of cocaine costs $ 265 in Australia i was told but just $ 9 in Sao Paulo. Most crimes are drug related or young people trying to finance their habits. In my trip to Rio raised the topic re crime with the Guide. He outright dismissed it blaming it on the media. Crime is always there in cities. He did take us out for the first time on the base of Christ Statue, Maracana and then again in Copacabana where we took some pictures. We had earlier been advised… ‘if you want to get out at the beach make sure you don’t wear watches, don’t carry your camera or cell phone. They hunt in packs … one to engage you, another to distract your attention and they are experts in identifying their victims and quickly sizing them’. We did nothing of these when we got down 3-4 times but lucky the Guides words weren’t belied.
My driver from Sao Paulo city centre on the way back opined that the crime is largely prevalent in poorer sections and areas and controlled by mafia. In business and office areas the influence is less to non-existent but 30-40% of the area is under their control. But in Rio it is they who rule. They just don’t carry knives, pistols or revolvers but Rifles. Bullet proof cars are no protection.
People under 18 can’t be put in prison in Brazil. The drug mafia uses delinquent children as fronts and establish their control. He opined unless this is changed, controlling crime may be a pipe dream.

It was nice to see everyone from the door keeper to the driver, car driver to the chairman, flight and hotel attendants, exhibit self dignity and more importantly respect others for whatever function others were performing.