The former president of the Central Bank and one of the authors of the economic project said that political decisions were dangerous for the progress of the plan
Gustavo Franco68 years old, former president of central bank and one of the authors of the Real planstated to the Poder360 what political decisions at the implementation stage were “dangerous” and caused concern about the progress of the project. He said that the economic team responsible for the plan “slept with the enemy” when citing that government members insisted on changing the course of discussions on the new economy, mainly to maintain the price freeze.
According to the economist, the most difficult moment of the entire implementation process was on February 28, 1994. On this date, the government of Itamar Franco (then PMDB, today MDB) finalized the text of the provisional measure that created the URV (Real Value Unit), a fictitious currency that functioned as a reference unit during the transition process from the cruzeiro real to the real.
“The measure was torpedoed from several angles and even so we did not allow it to be misrepresented, that is, we were sleeping with the enemy and that was very dangerous”said Gustavo.
The economist was part of the team of experts responsible for creating the Plano Real. He was deputy secretary of the Ministry of Finance in 1993, during the government of Itamar Franco. From 1997 to 1999, he presided over the Central Bank during the administration of Fernando Henriqueue Cardoso (PSDB).
Together with Pedro Malan and Edmar Bacha, also authors of the Plano Real, Franco launched a book to commemorate the 30th anniversary of the new economic scenario. It is a collection of texts written by economists on almost all the anniversaries of the real (5, 10, 15, 20 and 25 years).
Here are some excerpts from the interview:
Poder360 – In this 30-year period, despite having gone through economic recessions, we have not had any other hyperinflation recorded, which shows that the plan worked, stabilized and is now able to balance the economic scenario. Why was it so successful that it was able to make inflation fall in the first month?
Gustavo Franco – It’s easy to reduce inflation the following month, but it’s hard to maintain it. Before the real, we had several attempts to reduce it by freezing prices, which had an immediate impact. Politicians were delighted, but it was a lie. Inflation soon returned and in a worse way. People learned that the freeze was a tool to deceive people, and then inflation got even worse after the threat of a freeze began to exist. In all these plans, there was little effort to treat the disease, if anyone even recognized that the country had a disease. You tried to treat the symptoms. [hiperinflação] with the freezing, which was a kind of cold bath to relieve the fever. It would temporarily resolve the problem, but if you didn’t give the antibiotic for the infection, it would come back down again. Everyone had this tone, no one wanted to face the real problems: the fiscal problem, the opening of the economy, the lack of competitiveness, stagnant productivity, obsolete labor laws, all of these things are difficult politically and in general politicians want the solution that generates the most short-term effect, even if it is bad. Which was the freezing. And this team that came together around the then Finance Minister, Fernando Henrique, promised that they would not commit any of these deceptions and there were several attempts to freeze prices, so the real worked because it did not repeat the main error of all previous plans, and did not treat inflation as if it were a police case.
High inflation, constantly changing prices and 6 tested plans. Economists have said that one of the reasons why the Real Plan was successful was the URV, but right at the beginning of the conversions there was a time when the real value of money was unknown. Banks granted special checks in URV that gave very high amounts. Did you ever fear that the URV would not work?
We were anxious and worried almost every day. We had many doubts about the exact wording of the provisional measure that established the URV. It was much discussed internally within the government and once it was put into effect on March 1, 1994, everyone had doubts about its understanding and the success of the entire construction. Every day was a different battle. We won, lost, but won more than we lost and we reached this 30-year anniversary with the same currency created that day.
There were many political disagreements at that time regarding the Real Plan. I would like to know from you, what was the biggest difficulty during its implementation?
There were no easy moments. I remember the meeting that took place on the eve of the beginning of the plan, on February 28, 1994, which was the day we decided on the text of the provisional measure that created the URV. That was decisive, because within the government the measure was torpedoed from several angles and even so we did not let it be distorted. In other words, we were sleeping with the enemy and that was very dangerous. Then the economic crises, difficulties with the population, the financial market. That is part of the game. There will always be surprises. But sleeping with the enemy is the most dangerous thing of all this.We had people within the government who wanted to do things differently, or the President of the Republic himself had ideas. On more than one occasion he insisted that we freeze prices, but he compromised and trusted us. I think the public’s distrust was also a major obstacle, because the population was traumatized by previous failures. And rightly so, because politicians continued with the same pro-freeze and inflationist ideas that are still present today. It seems like it won’t die, right? The idea that public spending is redemptive, is life, is what saves Brazil. No, excessive public spending was the cause of inflation. It was difficult for the political class to recognize these concepts.
Brazil has several fiscal rules that are constantly being violated. The Fiscal Responsibility Law, the golden rule and, previously, the spending cap. The latter was replaced by the fiscal framework. And the macroeconomic tripod created with the real depends on a fiscal target. How can the plan survive these constant deviations from the fiscal target? Is the real at risk?
Of course, there is a risk of messing things up again. I think the analogy that is always mentioned in this regard is the following: Brazil had an addiction to inflation, it was a kind of drug that created a trance, a feeling of illusory prosperity. Addiction never heals; we entered a process of withdrawal, and now if we start doing everything wrong again, trying the same thing, the addiction will return. Vulnerable fiscal rules like the ones we have today pose a risk to the stability of the currency. But it is a good thing that we have other institutions and we have the Central Bank – which today has the capacity to safeguard and protect the currency, even when the fiscal situation is more vulnerable. Therefore, I do not see it as likely that the same mess as before will return. But it is better not to provoke addiction.
In the book celebrating the 30th anniversary of the Real Plan, you, Edmar Bacha and Pedro Malan mention the need for administrative and social security reforms. If this had happened before the Real Plan or a few years later, would our economic scenario be different from the current one?
Yes, and much better. It took us years, for example, to implement pension reform. And we thought we could do it in the constitutional review, in 1993. So look at the time we wasted. But then, we were able to open up the oil industry and telecommunications. The opening up of telecommunications, for example, means that everyone in Brazil now has a cell phone. Look at the impact this has now. We were unable to privatize sanitation, and how many people got sick? How many people have cell phones but don’t have sewage systems in their homes because we didn’t implement this reform? So, we did some, we didn’t do others, but we would have liked to have done so. We could have moved the clock forward, but unfortunately we set it back.
Would you do anything differently?
I speak without any false modesty, [o Plano Real] It worked very well. I don’t know how it could have been done better. But it wasn’t supposed to solve everything, because solving everything is too much too much. Let’s take it easy. We would have liked to have implemented many more things, but it’s as if the political windows were limited and we took advantage of what was possible. The stabilization plan can never anticipate everything that will happen. There is no crystal ball. It is always a game with an uncertain outcome and risks. There are horrible days when you lose everything, there are days when you win everything, and there are days when it is 0-0. It is a long championship. There are no ideal conditions. So, we operate in less than ideal conditions as far as possible. I think we did a good job. We are observing the history of Brazil after the real. The child grows up, then becomes a teenager, causing trouble as teenagers usually do, and then, once older, continues to cause a certain amount of trouble.
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