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Until the beginning of the 20th century the Brazilian economy was characterized by a succession of cycles, each of them based on the exploitation of a single export commodity: timber (brazilwood) in the first years of colonization; sugarcane in the 16th and 17th centuries; precious metals (gold and silver) and gems (diamonds and emeralds) in the 18th century; and finally, coffee in the 19th. Slave labour was used for production, a situation that would continue until the last quarter of the l9th century. Paralleling these cycles, small scale agriculture and cattle raising were developed for local consumption. A first surge of industrialization took place during the years of World War I, but it was only from the 1930's onwards that Brazil reached a level of modern economic performance. In the 1940's, the first steel plant was built in the state of Rio de Janeiro at Volta Redonda with US Eximbank financing. The industrialisation process from the 1950's to the 1970's led to the expansion of important sectors of the economy such as the automobile industry, petrochemicals, and steel, as well as to the initiation and completion of large infrastructure projects. In the decades after World War II, the annual Gross National Product (GNP) growth rate for Brazil was among the highest in the world averaging, until 1974, 7.4 percent. During the 1970's Brazil, like many other countries in Latin America, absorbed excessive liquidity from U.S., European, and Japanese banks. Huge capital inflows were directed to infrastructure investments and state enterprises were formed in areas that were not attractive for private investment. The result of this capital infusion was impressive: Brazil's Gross Domestic Product (GDP) increased at an average rate of 8.5 percent per annum from 1970 to 1980 despite the impact of the 1970's world oil crisis. Per capita income rose fourfold during the decade, reaching US$ 2,200 in 1980. In the early 1980's, however, the significant rise in US interest rates began to affect international capital markets, ending the favourable conditions to foreign indebtedness that prevailed until then. A substantial increase in interest rates in the world economy forced Brazil, as well as other Latin American countries, to implement strict economic adjustments that led to negative growth rates. The suspension of capital inflows reduced Brazil's capacity to invest. The burden of its debt affected public finances and contributed to an acceleration of inflation. In the second half of the 1980's, a series of stringent measures was adopted aimed at monetary stabilization. These included ending indexation (a policy of adjusting wages and contracts according to inflation), and the freezing of all prices. In 1987, the government suspended interest payments on foreign commercial debt until a debt rescheduling agreement with creditors could be reached. Although such measures failed to bring about the desired results, Brazil's overall economic output by the end of the 1980's continued to grow, providing enough surpluses in the trade balance to cover servicing of the debt. On the one hand, the 1980's crisis signalled the exhaustion of Brazil's "import substitution" model (a policy that nurtured Brazilian industry by prohibiting the purchase of certain manufactures abroad); on the other hand it contributed to the opening up of the country's economy. In the early l990's Brazil was engaged in a series of far-reaching economic reforms. They encompassed trade liberalization, deregulation, privatisation, and the establishment of a legal and structural framework to promote foreign investment. Economic reforms continued through the 1990’s and included such measures as the abolition of state monopolies, reduction or elimination of trade barriers in goods and services as well as of subsidies, in line with Brazil’s obligations as member of the WTO. In 1994, after several frustrated attempts to bring down inflation, the Brazilian government introduced the Real Plan, a successful stabilisation plan that replaced the currency then in use by the Real. The Real Plan managed to achieve a sustained reduction in prices, ending thus three decades of chronic inflation in Brazil. Since that time, prices have been under control without a price freeze or any other artificial heterodox economic methods. One of the main consequences of ending inflation was an improvement in income distribution. The restoration of the value of the currency and the return to economic growth brought about an increase in the purchasing power of the lower layers of the population and a significant reduction in poverty. [Top]