Gustavo Franco - Plano Real

Plano Real

In 1993, (future President of the Republic) Fernando Henrique Cardoso was empowered as Minister of Finances in Brazil, his main task being to control the imminent hyperinflation, which was then nearing 30% per month. To compose his team, Mr. Cardoso invited some economists from PUC-Rio all with education in American universities, including Pedro Malan, Pérsio Arida, André Lara Resende, Winston Fritsh and Gustavo Franco. With political support from Cardoso, the team devised and implemented the Plano Real, which brought the inflation down to much lower levels, and helped Cardoso win the elections for President in 1994. Gustavo Franco had a key role in this team, not only for his contributions in the economics side, but also because he realized that such a Plan would need strong judicial support, and took for himself the task of drafting the legal pieces which would assure the validity of the Plan.

After winning the election, Cardoso invited Gustavo Franco to occupy positions in Government. Franco was first Economics Advisor in the Minister of Finances, then Director for International Affairs in the Central Bank of Brazil, and eventually President of the Central Bank.

Gustavo Franco saw the exchange rate as a key factor in the Plano Real: first, because by having the Real pegged to the dollar, the inflation in Reais and in dollars would be at similar levels. Also, by keeping the Real overvalued and by lessening restrictions to foreign trade, Franco affirmed that Brazilian businesses would have no other way to survive than increasing their productivity. Later, surveys would show Brazilian productivity indeed had a remarkable growth after the Real Plan. This politics was contested by the industries and attacked by speculators. The industries asked for subsidies and demanded protection against 'unfair' foreign competition; little was conceded.

The speculators attempted to bet against the Real, forcing a devaluation by the Central Bank. While Franco was in the Bank, however, the currency followed a linear devaluation of about 6% per year, even during periods of international turbulence, such as the Asian financial crisis in 1997 and the Russian financial crisis in 1998. In a few occasions, Franco himself took control of the currency bidding operations. Using his knowledge and the legal authority of the Central Bank, Franco imposed heavy losses on the speculators.

Besides his key role in monetary politics, Franco was also important in another area: fiscal politics. Pedro Malan, Gustavo Franco and their team thought that the Government spent too much and too badly, and looked for ways to improve the situation. Several measures were adopted, including privatization of large State owned companies, closing of State banks, and limitations to States expenditures. This culminated with the issuing of the Law of Fiscal Responsibility in 2000.

In 1999, Fernando Henrique was starting his second term in presidency, and the criticisms against the fixed currency rate were piling up. In January 1999, still in the aftermath of the Russian crisis, a new attack against the Real started. Fernando Henrique decided to let the Real float against the dollar. Franco remained against the measure and the quit the Government.