Gustavo Franco

Gustavo Henrique de Barroso Franco
Born	(1956-04-10) April 10, 1956 Rio de Janeiro, Brazil
Occupation(s)	Economist, professor, entrepreneur, consultant
Years active	1986–present
Known for	Head of the Brazilian Central Bank; principal designer of the Real Plan

Gustavo Henrique de Barroso Franco (born April 10, 1956, in Rio de Janeiro) is a distinguished Brazilian economist and former head of the Brazilian Central Bank. He played a pivotal role as one of the principal designers of the Real Plan, the 1994 monetary strategy that successfully curbed hyperinflation in Brazil. Since 1986, Franco has been a professor of economics at the Catholic University of Rio de Janeiro. In addition to his academic career, he is an entrepreneur and consultant, having established Rio Bravo Investimentos, where he holds the position of Senior Advisor. He has published numerous books and scholarly articles and frequently writes for various newspapers and magazines.

Early life and education

Born in Rio de Janeiro on April 10, 1956, Franco is the son of Maria Isabel Barbosa de Barroso Franco from Teófilo Otoni, Minas Gerais, and Guilherme Arinos Lima Verde de Barroso Franco from Itacoatiara, Amazonas. His father had an illustrious career at Banco do Brasil, was among the founding directors of the Brazilian National Development Bank (BNDES), and later held senior positions at Volkswagen do Brasil while also co-founding Banco Garantia.

Franco completed his secondary education at Colégio São Vicente de Paulo and Colégio Notre Dame de Sion in Rio de Janeiro. He obtained both his undergraduate degree (1975–1979) and master's degree (1983) in economics from the PUC-Rio, concentrating on economic history and macroeconomics. Early in his professional journey, he assisted Edmar Bacha as a teaching aide on a macroeconomics textbook that became influential in Brazil.

His master's thesis, supervised by Winston Fritsch, explored financial crises and monetary reform during Brazil’s early republican era. Awarded cum laude in 1982, it won the esteemed Prêmio BNDES de Economia in 1983 and was published under the title Monetary reform and instability during the republican transition, becoming a foundational work on the subject.

Franco pursued doctoral studies at Harvard University after also being accepted by Chicago and Yale. His Ph.D. work specialized in international economics under Jeffrey Sachs and economic history with Barry Eichengreen, with Lance Taylor serving on his committee. He completed his dissertation entitled Aspects of the Economics of Hyperinflations: Theoretical Issues and Historical Studies of Four European Hyperinflations of the 1920s in 1986. This research integrated theoretical frameworks on inflation dynamics with detailed case studies from Germany, Austria, Hungary, and Poland.

His dissertation was nominated for Harvard's David Wells Prize and earned the national Prêmio Haralambos Simionides in 1987 for best economics Ph.D. thesis or book, awarded by ANPEC (Associação Nacional de Centros de Pós Graduação em Economia).

Teaching and research

After returning to Brazil in 1986, Franco joined PUC-Rio's Economics Department as a faculty member, where he taught, conducted research, and provided consultancy services until 1993. That year, he entered public service alongside Fernando Henrique Cardoso, who had recently been appointed Finance Minister.

During these years, his academic inquiries concentrated on: (i) high inflation phenomena drawing from his doctoral research; (ii) Brazil’s economic history with emphasis on macroeconomic and monetary themes; and (iii) trade policy, multinational corporations, and economic development issues, collaborating closely with Winston Fritsch.

Hyperinflation

Two significant papers stemming from his dissertation achieved notable recognition and shaped his subsequent efforts to address Brazil's hyperinflation challenges:

The article titled "Fiscal Reforms and Stabilization: four hyperinflation cases examined," featured in The Economic Journal (vol. 100, no. 399, March 1990), contested Sargent's assertion that hyperinflation ceased solely due to a comprehensive fiscal "regime change." Franco brought attention to the often neglected influences of dollarization and currency restructuring.

Another influential work, "The Rentenmark Miracle," initially published in Rivista di Storia Economica (1987) and later included in Barry Eichengreen's Monetary Regime Transformations (1991), studied Germany’s emergency currencies with stable value provisions (Notgeld) culminating in the rentenmark. Franco maintained that the rentenmark was crucial for Germany’s economic stabilization—not merely superficial as Sargent implied—and played a significant role in shaping Brazil’s 1994 monetary reform, the "Real Plan," where the quasi-currency URV was instrumental in halting hyperinflation.

In 1995, Sargent revisited Brazil’s URV, drawing parallels with the rentenmark but argued that simply renaming variables could not resolve hyperinflation. He dismissed the URV as "a sideshow" that did not tackle inflation’s fundamental causes. Franco challenged this perspective in 2017 by underscoring the URV’s effective implementation and broad domestic acceptance as pivotal in overcoming Brazil’s inflation crisis.

Economic history

Building upon his initial research into monetary reforms during the early Republic era, Franco produced detailed studies on Brazil’s monetary conditions prior to the Great Depression. Most of these works are published in Portuguese, except for "Aspects of the Brazilian Experience with the Gold Standard," which appears in Pablo Matín Aceña and Jaime Reis (eds.) Monetary standards in the periphery: paper, silver and gold, 1854-1933 (London, Macmillan Press, 2000). His investigations into the Republic’s formative years also intersected with his analysis of Machado de Assis's journalistic writings, compiled under the title "O olhar obliquo do acionista" ("Shareholders oblique look").

Foreign trade and multinational companies

Franco partnered with Winston Fritsch on projects for the OECD Development Centre, resulting in important publications such as Foreign direct investment and industrial restructuring: issues and trends (OECD, Paris, 1991) and "Efficient Industrialization in a Technologically Dependent Economy: The Current Brazilian Debate," featured in Competition and Economic Development (OECD, 1991).

They also contributed to two UNU-WIDER initiatives led by Gerry Helleiner (1990–1991). The first examined how trade orientation influenced development strategies, culminating in "Foreign Direct investment and patterns of trade and industrialization in developing countries: notes with reference to the Brazilian experience," included in G. K. Helleiner (ed.) Trade Policy, Industrialization and Development: a reconsideration (Oxford, Clarendon Press for UNU-WIDER, 1992). The second project addressed trade and industrial policy issues, published as "Import repression, productivity slowdown, and manufactured export dynamism: Brazil, 1975-1990" within Helleiner’s Trade policy and industrialization in turbulent times (London: Routledge for UNU-WIDER, 1993).

Throughout the 1990s, Franco and Fritsch engaged with UNCTAD and ECLA on matters related to trade policy reforms, producing extensive analyses on Brazil’s industrial competitiveness and trade strategies. After 1995, Franco revisited these topics during his tenure as deputy governor of the Central Bank responsible for international affairs. In this capacity, he coordinated Brazil’s quinquennial Foreign Direct Investment Census—a vital tool for monitoring multinational enterprise investment patterns since 1995.

Public service

From 1993 until 1999, Franco occupied several prominent roles in public administration. His career in this period began in May 1993 as Deputy Secretary of Economic Policy at the Ministry of Finance. Shortly thereafter, he transitioned to the Central Bank of Brazil, serving as Deputy Governor responsible for International Affairs until 1997. Franco briefly assumed the position of Central Bank governor between December 1994 and January 1995, and was officially appointed governor on August 20, 1997. He held this office until January 9, 1999, returning briefly in March 1999 to oversee the transition to his successor, Arminio Fraga.

Economic Policy Secretary

Between May and October 1993, Franco served as Deputy Secretary of Economic Policy at the Ministry of Finance, a role offered by Minister Fernando Henrique Cardoso. During this time, the team confronted soaring inflation rates approaching 30% per month alongside significant political obstacles. Their initial major effort was the Plano de Ação Imediata (PAI), unveiled on June 13, 1993—a strategic medium-term framework targeting fiscal and monetary fundamentals that ultimately set the stage for the subsequent Real Plan stabilization program.

Deputy Governor for International Affairs at the Central Bank

Franco was appointed Deputy Governor for International Affairs on September 8, 1993. Collaborating closely with Governor Pedro Malan and other officials, he contributed to the development of the Real Plan. His responsibilities encompassed managing international relations such as external debt restructuring under the Brady Plan, reforming exchange controls, overseeing FOREX operations, and administering international reserves—crucial components in Brazil’s economic stabilization and deregulation initiatives.

External debt, Brady Plan and new bond issues

Upon commencing his partnership with Malan at the Central Bank, Franco engaged in debt negotiations focused on converting Brazilian currency deposits held by creditors under the MYDFAs (Multi Year Deposit Facility Agreement) into new bonds aligned with the Brady plan. He oversaw collateral guarantees backing these new bonds, which were structured as US Treasury Zero Coupon bonds with a face value near US$18 billion (market value approximately US$2.8 billion), financed through an IMF stand-by agreement.

Nevertheless, concerns from IMF officials regarding drafts of the Real Plan during stand-by loan negotiations led to suspension of funding. In response, Brazilian authorities procured US Treasury bonds on the secondary market utilizing international reserves—a contingency approach elaborated in Guilherme Fiuza's chapter Sorry, Mr. Fagenbaum.

In addition to finalizing Brazil’s Brady Plan implementation and the Real Plan, Franco tackled Paris Club debt challenges and negotiated with dissenting creditors such as the Dart family. Subsequently, Brazil re-entered international capital markets through a new bond issuance program coordinated by Franco. This program issued sixteen bonds denominated in ten different currencies between 1995 and 1998, totaling US$8.2 billion. Among these was the notable "BR-27," a landmark 30-year bond maturing in 2027, issued in exchange for cash and Brady bonds to reclaim collateral previously held as US Treasury bonds.

Forex deregulation and phasing out exchange controls

Deregulation of exchange controls represented a significant modernization initiative spearheaded by the International Affairs division of the Brazilian Central Bank. This effort was crucial in enabling exchange rates to be determined by market forces of supply and demand.

The liberalization strategy established a separate US Dollar market where exchange rates were driven by supply and demand dynamics, operating alongside the official market and directly competing with the “black market.” Initially, this liberalized market was restricted to tourist dollar transactions, but its scope gradually broadened. Over time, the opening of the official market and improvements in the balance of payments reduced the discrepancies between official and free-market rates, culminating in the integration of all legal currency markets by 2006.

Between 1988 and 2006, deregulation progressively widened the range of allowable free market transactions. These included activities such as gold arbitrage and remittances from non-resident local currency accounts, known as “CC5 accounts,” while ensuring full transparency regarding participant identities.

Following 1995, under Franco’s guidance, the Central Bank implemented regulations addressing leads and lags in foreign trade and portfolio investments. Additionally, the classification of foreign capital inflow registration shifted from an authorization requirement to a statistical reporting process. Importantly, while capital outflows were liberalized, selective constraints were applied to certain short-term capital inflows. Unlike Chile’s “quarantine” policy mandating minimum holding periods for incoming capital, Brazil opted for taxing foreign exchange inflows without imposing quarantine restrictions. This taxation tool was repeatedly employed during episodes of excessive capital inflows to mitigate currency appreciation pressures and encourage longer maturities on foreign liabilities.

Plano Real

The Real Plan was centered on monetary reform implemented through three principal steps. The first step, introduced on February 28, 1994, established the Unidade Real de Valor (URV), a "unit of account" designed to recalibrate prices and synchronize them with the exchange rate in contractual agreements. The URV aimed to replace the then-current cruzeiros reais and ultimately become the national currency under the name real. This concept drew inspiration from earlier models like Germany’s Rentenmark and proposals by André Lara Rezende and Persio Arida. The second step, enacted on July 1, 1994, demonetized the cruzeiros reais and launched the real, accompanied by significant institutional reforms in monetary governance including modifications to the National Monetary Council and monetary policy frameworks. The third step, implemented one year later, introduced comprehensive regulations governing indexation practices.

During its four-month period as legal tender solely for accounting purposes, the URV was initially pegged at CR$647.50 per URV (approximately equivalent to one US dollar). By July 1, 1994—the date when cruzeiro real was withdrawn from circulation—the rate had risen to CR$2,750 per URV. Because of this fixed parity with the dollar, it was not feasible to overstamp old notes; instead, a completely new currency series was issued—a considerable logistical undertaking.

On the launch day of the new currency, the Central Bank permitted the real to float freely against the US dollar without intervention. This resulted in an appreciation of the real to below R$1.00 per dollar, which positively influenced market sentiment and marked an initial success in stabilization efforts.

The strategy combining stringent monetary control with floating exchange rates—later managed through a "target zone regime" or "exchange rate bands"—proved highly effective in eradicating hyperinflation but remained a subject of debate within Brazil’s broader stabilization approach.

Inflation metrics tracked by the national IPCA index reflected remarkable progress: before reform in early 1994, monthly inflation averaged 43.1% (equivalent to 7,260% annually). In July 1994 alone, prices rose by 6.8%, yet inflation over the subsequent twelve months dropped sharply to just 33%. Inflation continued its downward trend—falling below 20% annually by April 1996 (22 months post-introduction), dipping under 10% by December 1996 (30 months after implementation), reaching 5.2% in 1997, and hitting a historic low of 1.6% in 1998—the lowest level since the Central Bank’s establishment in 1964.

Institutional Dimensions and Core Principles

Prior to the implementation of the Real Plan, Brazil experienced five unsuccessful stabilization efforts between 1986 and 1991. These attempts involved measures such as price controls, currency introductions, and an asset freeze reminiscent of post-World War II monetary reforms in Europe. These so-called "heterodox shocks" failed largely because they overlooked essential fiscal discipline and sound monetary policy. In contrast, the Real Plan adopted a strategy focused on addressing the fundamental economic imbalances that were fueling hyperinflation.

On the institutional front, the National Monetary Council was restructured to include only three principal members—the Ministers of Finance and Planning, along with the Central Bank Governor—thereby strengthening its dedication to maintaining price stability. Subsequently, the establishment of the Monetary Policy Committee (COPOM) secured the Central Bank's autonomy in determining interest rates.

Federal financial institutions, particularly Banco do Brasil, acknowledged prior financial setbacks and underwent recapitalization processes. They also complied with Basel regulatory standards and lost unrestricted access to Central Bank funding. At the state level, banks faced rigorous reforms including liquidations and privatizations. Troubled private banks participated in restructuring programs financed by the Central Bank, which also facilitated changes in ownership control. This comprehensive overhaul significantly transformed governance within Brazil’s monetary system.

Fiscal reforms encompassed multiple phases of state debt restructuring between 1993 and 1998, during which federal assistance was contingent upon adherence to orthodox fiscal policies and imposed limits. These initiatives culminated in the 1999 Fiscal Responsibility Law, which set clear parameters for debt levels and public sector wage expenditures—critical factors for achieving fiscal sustainability.

The 1993 constitutional amendment creating the Social Emergency Fund curtailed budget earmarking and restored expenditure oversight to the National Treasury. Although primary fiscal balances remained weak after 1994, these reforms helped contain immediate risks until external shocks—the Asian financial crisis in 1997 and Russia’s crisis in 1998—necessitated an International Monetary Fund (IMF) agreement. Following this, Brazil consistently maintained primary surpluses averaging approximately 3% of GDP for a decade.

Gustavo Franco departed from the Central Bank following the IMF accord and President Fernando Henrique Cardoso’s reelection in 1998. Franco was honored as Euromoney’s “Central Banker of the Year” in 1998 in recognition of his resolute leadership during financial instability and for pioneering capital control measures.

Subsequently, Brazil embraced a "tripod" economic framework consisting of floating exchange rates, a commitment to primary fiscal surpluses, and inflation targeting. This shift marked a move away from exchange rate pegs toward inflation-targeting monetary regimes. Franco extensively chronicled these policy discussions and reform initiatives, including publications aimed at English-speaking audiences.

Rio Bravo Investimentos

After taking a sabbatical to serve as a full-time professor at the Catholic University, Gustavo Franco founded Rio Bravo Investimentos in São Paulo. The firm focused on managing mutual funds, structured financial products, and private equity investments in collaboration with Swiss Re. In August 2001, Rio Bravo expanded by acquiring broker-dealer Mercurio DTVM, enabling entry into Real Estate Investment Trusts (REITs) and public securities distribution channels. Between 2003 and 2007, Rio Bravo developed its investment banking capabilities through acquiring Dresdner Kleinwort Benson’s local operations; these assets were later transferred to Lehman Brothers.

Rio Bravo’s private equity endeavors began with Rio Bravo Nordeste I FMIEE aimed at supporting small and medium enterprises (SMEs) in Brazil’s Northeast region. This was followed by Rio Bravo Nordeste II in 2007, recognized as Brazil's largest regional private equity fund at that time. In February 2006, Rio Bravo acquired MVP Mercatto Venture Partners Ltda., subsequently renamed Rio Bravo Venture Partners Ltda., a venture capital firm based in Rio de Janeiro. By October 2010, Rio Bravo launched its inaugural private equity fund concentrating on renewable energy projects.

In 2005, Rio Bravo created Rio Bravo Project Finance Ltd to provide advisory services for infrastructure ventures and introduced Rio Bravo Fundamental—a value-oriented mutual fund investing in publicly traded equities.

In May 2008, Rio Bravo separated its real estate securitization operations into RB Capital, an entity independent of Rio Bravo partners’ ownership. In 2016, RB Capital came under the control of Japan's Orix Group. That same year saw Fosun International, one of China’s largest private conglomerates, acquire controlling interest in Rio Bravo.

Gustavo Franco holds board positions at several institutions including Banco Daycoval and Seguradora Pottencial. Additionally, he chairs the Brazilian think tank Instituto Millenium.

Bibliography

• A Moeda e a Lei: Uma História Monetária Brasileira, 1933-2013 (2017)
• Antologia da Maldade (co-authored with Fabio Giambiagi) (2014)
• As Leis Secretas da Economia: Revisitando Roberto Campos e as Leis do Kafka (2012)
• Cartas a um Jovem Economista: Conselhos para seus Planos Econômicos (2010)
• Shakespeare e a Economia (2009)
• O Olhar Oblíquo do Acionista: A Economia em Machado de Assis (editor) (2007)
• A Economia em Pessoa: Verbetes Contemporâneos (editor) (2006)
• Crônicas da Convergência: Ensaios sobre Temas já não tão Polêmicos (2006)
• O Papel e a Baixa do Câmbio: Um Discurso Histórico de Rui Barbosa (editor) (2005)
• O Desafio Brasileiro: Ensaios sobre Desenvolvimento, Globalização e Moeda (1999)
• O Plano Real e outros Ensaios (1995)
• Foreign Direct Investment in Brazil: Its Impact on Industrial Restructuring (1991)
• A Década Republicana: o Brasil e a Economia Internacional - 1888/1900 (1991)
• Aspects of the Economics of Hyperinflations: Theoretical Issues and Historical Studies of Four European Hyperinflations of the 1920s (1986)
• Reforma Monetária e Instabilidade Durante a Transição Republicana (1983)