Gustavo Henrique de Barroso Franco (born April 10, 1956, in Rio de Janeiro) is a Brazilian economist. A former Governor of the Brazilian Central Bank, he is best known for being one of the "fathers" of the Real Plan, the 1994 monetary reform that ended hyperinflation in Brazil. He teaches economics at the Catholic University in Rio de Janeiro since 1986. He is also a businessman, consultant and has served on many boards. He founded Rio Bravo Investimentos where he works as Senior Advisor. He has written several books, academic papers and contributes regularly to newspapers and magazines.
Early life and studies Franco was born in Rio de Janeiro on April 10, 1956. His mother Maria Isabel Barbosa de Barroso Franco, was from Teófilo Otoni, state of Minas Gerais, and his father, Guilherme Arinos Lima Verde de Barroso Franco, was born in Itacoatiara, at the backlands of the state of Amazonas. Guilherme Arinos made a career at Banco do Brasil and during the war started a lifelong friendship and association to President Getúlio Vargas. Arinos was a member of the first board of directors of the Brazilian National Development Bank, BNDES, and later, at the private sector, was a high ranked executive of Volkswagen do Brasil and one of the founders of Banco Garantia.
Gustavo Franco attended Colégio São Vicente de Paulo in Rio de Janeiro and Colégio Notre Dame de Sion in 1960/1974. He obtained a bachelor's (1975–1979) and master's (1983) degree in economics at the Pontifícia Universidade Católica do Rio de Janeiro (PUC-Rio), where he developed interests in economic history and macroeconomics. At PUC-Rio he had his first job as teaching assistant working with Edmar Bacha, then preparing a macroeconomic textbook, self-defined as of a neo-structuralist approach, and later to become very popular in Brazil, with several editionsEdmar Lisboa Bacha Introdução à macroeconomia: uma perspectiva brasileira. Rio de Janeiro, Editora Campus, 1982,
Winston Fritsch was his advisor in his M. A. thesis on the topic of financial euphoria and crash in the early years of the Brazilian Republic (1889-1890) and the attempts at monetary reform in connection either adhering to the gold standard or, alternatively to experience with fiat currency models, as proposed by Ruy Barbosa. His M. A. thesis was approved cum landae in 1982 and in 1983 won the prestigious "Prêmio BNDES de Economia" for the M. A. thesis in Brazil. This work was published as a book titled Monetary reform and instability during the republican transition ("Reforma monetária e instabilidade durante a transição republicana"") and became a reference to the period it covers.
In sequence, Franco was accepted in Ph.D programs in the universities of Chicago, Yale and Harvard, for which he headed. There he chose as fields of specialization, international economics under Jeffrey Sachs and economic history under Barry Eichengreen. He had brief fellowships at the CFIA (Center for International Affairs), CES (Centre for European Studies) and National Bureau of Economic Research (NBER).
Sachs and Eichengreen were his supervisors, and along with MIT professor Lance Taylor, formed his thesis committee. Franco earned his Ph.D Degree at Harvard in 1986, with a dissertation titled Aspects of the Economics of Hyperinflations: Theoretical Issues and Historical Studies of Four European Hyperinflations of the 1920s.A revised version of the dissertation is available at http://gustavofranco.com.br/temas/9. His original thesis had four theoretical chapters on topics as the adoption of indexation in contracts, inflation (stabilization) as public good problem, plagued by free rider issues, the inflation tax as motivation to the process and the dynamics of dollarization, distributive tensions and external balance. The applied chapters were case studies for Germany, Austria, Hungary, and Poland, also including some common themes like the relation between external imbalances, dollarization and fiscal reforms in the context of specific stabilization experiences.
This work was nominated to the David Wells Prize in Harvard and was awarded a national prize ("Prêmio Haralambos Simionides") in 1987, for the best Ph.D. thesis or book in economics, given by the National Association of Graduate Studies in Economics (ANPEC, Associação Nacional de Centros de Pós Graduação em Economia).
Teaching and research
Returning to Brazil in 1986, as a faculty member at the Economics Department at PUC-Rio, Franco worked as teacher, researcher and consultant from 1986 to 1993 when he was called to work with Fernando Henrique Cardoso, the newly nominated Finance Minister then starting his tenure.
He had an intense academic activity during these years; his research interests had three key themes: (i) on high inflation and on the basis of topics and issues raised in his doctoral dissertation; (ii) on Brazil's economic history, mostly in connection with macroeconomic and monetary issues; and (iii) on trade policies, multinational enterprises and economic development, in collaboration with Winston Fritsch.
Hyperinflation Two papers out of specific chapters of his doctoral dissertation were published in peer reviewed journals and had some relevant repercussion on his later work of fighting hyperinflation in Brazil:
"Fiscal Reforms and Stabilization: four hyperinflation cases examined" was published in The Economic Journal (vol. 100, no. 399, March 1990) disputed Thomas Sargent's popular explanation to the sudden end of hyperinflation as result of a wide-ranging fiscal "regime change". The role of dollarization and of currency reforms were wrongly downplayed by Sargent, as argued by Franco.
"The Rentenmark Miracle" published by Rivista di Storia Economica (Second Series, Volume 4, 1987), then republished in Barry Eichengreen (ed.) Monetary Regime Transformations London, Edward Elgar Publishing Ltd, 1991, was an account of the unique experience in Germany of Wertbestandiges Notgeld - that is, emergency monies of private issuance and with "stable value" as they had indexation clauses -, and the way this led to the rentenmark experience. As argued by Franco the rentenmark was a crucial step in the German stabilization, and not a "cosmetic measure", as put by Thomas Sargent.Thomas J. Sargent "The Ends of Four Big Inflations”, in Robert E. Hall (org.), Inflation: Causes and Effects. Chicago, The University of Chicago Press. In fact, the rentenmark model was very relevant for the design of the Brazilian 1994 monetary reform, known as "Real Plan", in which a similar quasi-currency, under the name o URV (acronym for Unidade Real de Valor) played a vital role for the ending of Brazilian hyperinflation.A summary of the Brazilian high inflation experience written by Franco can be found in "The political economy of the Brazilian hyperinflation" in Maria D'Alva G. Kinzo (org.) Brazil: challenges for the 1990s. London, Institute of Latin American Studies & British Academic Press,1993.
Much later, in 1995, Thomas Sargent wrote an article on the Brazilian URV, evoking the German experience with the rentenmark and arguing, as per the mathematician David Hilbert, that one could not solve the hyperinflation problem by "changing the name of the independent variable".Thomas J. Sargent, "Reasonable doubt about the Real Plan" reproduced in Rational expectations and inflation, Third Edition, Princeton, Princeton University Press, p. 241, . The URV, argued Sargent, would have been "a sideshow that hasn't touched the fundamental causes of inflation",Ibidem, p. 242. and again Franco took issue with that, writing in 2017, but this time on the back of the successful adoption of the URV mechanism. According to Franco: "Understandably", Brazilians "did not take these observations seriously" as "the country was enchanted by the URV mechanism in view of practical problems it solved elegantly, efficiently and voluntarily, so that they received with blunt indifference a thesis from an outside observer claiming that the mechanism had no utility".Gustavo H. B. Franco. A moeda e a lei: uma história monetária brasileira, 1933-2013. Rio de Janeiro, Zahar, 2017, , p. 648.
Economic history In sequence to the work on monetary reforms in the early years of the Republic, Franco published several pieces on the Brazilian monetary experience in the years prior to the Great Depression. All this work is in Portuguese except "Aspects of the Brazilian Experience with the Gold Standard", in Pablo Matín Aceña and Jaime Reis (orgs.) Monetary standards in the periphery: paper, silver and gold, 1854-1933 (London, Macmillan Press. 2000). Later, his research on the early years of the Republic would communicate well with his work of Machado de Assis newspapers articles as per his selection of chronicles under the title "O olhar obliquo do acionista" ( "Shareholders oblique look", as literal translation).
Foreign trade and multinational companies Franco worked in collaboration with Winston Fritsch in a series of projects supported by the OECD Development Center. One publication was Foreign direct investment and industrial restructuring: issues and trends (Development Centre Studies, OECD Development Centre, OECD, Paris, 1991), another was "Efficient Industrialization in a Technologically Dependent Economy: The Current Brazilian Debate" in Competition and Economic Development Committee of Competition Law and Policy, OECD, 1991.
In sequence, Franco and Fritsch worked in two projects directed by Gerry Helleiner for WIDER (World Institute for Development Economics Research) of the United Nations University during 1990 and 1991. The first was on the influence of trade orientation on development models and was published as "Foreign Direct investment and patterns of trade and industrialization in developing countries: notes with reference to the Brazilian experience" in G. K. Helleiner (org.) Trade Policy, Industrialization and Development: a reconsideration. (Oxford, Clarendon Press for UNU-Wider, 1992 ). The second, on the same issues but focused on trade and industrial policies was published as "Import repression, productivity slowdown, and manufactured export dynamism: Brazil,1975-1990" in Gerry Helleiner (org.) Trade policy and industrialization in turbulent times (London: Routledge for UNU-Wider, 1993, ).
Franco and Fritsch also worked in projects for UNCTADTrade policy issues in Brazil in the 1990s. Report prepared for UNCTAD. Departamento de Economia PUC-RJ Texto para Discussão nº 268, October 1991. and ECLA,"The Political Economy of Trade and Industrial Policy Reform in the 1990s", ECLAC (CEPAL) Serie Reformas de Política Pública 6, Santiago, 1993. and published in the academic circuit on these same issues."Política Industrial, Competitividade e Industrialização: aspectos da experiência brasileira recente in Planejamento e Políticas Públicas 3, 1990; "Inversión extranjera directa y pautas de la industrialización y el comercio exterior en los países en desarollo; Notas con referencia a la experiencia brasileña" Desarollo Económico 130, enero-marzo 1991 e "Política Comercial no Brasil: passado e presente Pensamiento Iberoamericano 2, 1992. Franco would return to these themes only after 1995 when, as deputy governor of the Central Bank responsible for international affairs organized a Census on foreign direct investment into Brazil that has been conducted and published each five years since 1995.
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