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.
In the period from 1997 to 1999, a series of financial crises that culminated in the Russian moratorium led capital to exit from emerging markets, resulting in significant reserve losses to Brazil and other emerging economies. In January 1999, the government was then forced to let the currency (then pegged to the US dollar) float. The transition to a floating exchange rate regime and the monetary policy followed by the Brazilian Government was a remarkable success. The recession was short-lived, the Real quickly stabilized and inflation subdued. The success owed to a great extent to Brazil’s strong commitment to structural fiscal equilibrium and economic reforms. These policies have restored market confidence in the country’s economy.
The successful transition in early 1999 to a floating exchange rate regime was due mainly to a rigorous fiscal adjustment program conceived to ensure long term stability of fiscal accounts. The program included such measures as the Fiscal Responsibility Law, which was approved by Congress in 1999. This comprehensive piece of legislation consolidates Brazilian fiscal management directives and establishes limits for personnel expenditures at the federal, state and municipal level.
Despite significant depreciation of the Real the annual inflation rate of 1999 was contained at 8.9 percent. This was mainly a result of the introduction of a new framework for monetary policy, based on inflation targeting, that consolidated the efforts of attaining sustained reduction in inflation.
The strength shown by the Brazilian economy derived not only from the firm implementation of macroeconomic policies mentioned above, but also from the substantial structural reforms introduced earlier since the launching of the Real Plan in 1994. In particular, the restructuring of the banking sector and the strengthening of prudential regulation and supervision of the financial sector undertaken since 1995 were important elements for the economy to withstand external shocks. This reform agenda will continue to be pursued in areas such as public finance, social security, and deregulation, which are essential to increase domestic savings, improve competitiveness, and economic welfare, and will provide a suitable environment for the continued recovery of domestic demand and for the achievement of a higher growth rate with low inflation in 2000 and beyond.
It should be noted that, in spite of the economic crisis of 1999, Brazil continued to follow the trade liberalization path that has been a characteristic of the country’s economy in recent years. In fact, as a result of trade reforms, Brazil has become an open economy, with low tariffs and no quantitative restrictions to imports. The average tariff came down from 32 percent in 1990 to 14 percent as of 1999. One of the consequences of trade liberalization was a surge of imports that submitted the industry to strong competitive pressures and brought about continuous trade deficits.
Nevertheless, in 2000, Brazil expects its first trade balance surplus since 1995. As of June 2000, the accumulated surplus reaches US$ 856 million and a total of US$ 5 billion is expected for the whole year. Even though a part of this improvement in the trade balance is due to the realignment of the exchange rate, it is not wrong to say that productivity gains and increasing competitiveness of the Brazilian industry also played a role on it. Exports are growing steadily especially in value added sectors such as aircraft and telecommunications. Destinations are diversified: the European Union absorbs 27%, North America 23% (the U.S. is the largest individual trading partner), Mercosul 14%, Asia 10%, and the remaining exports are distributed over a variety of smaller markets.
With a GDP of US$ 650 billion in 1999, the Brazilian economy is dynamic and diversified. Industry accounts for 20% of national production, agriculture for another 20% and the services sector for 60%. The dynamism of the economy could be assessed through the volume of foreign direct investment (FDI) that flew into the country in recent years. FDI, that was very low in the beginning of the 1990’s, has increased to US$ 5,5 billion in 1995, US$ 10,5 billion in 1996, US$ 18,7 billion in 1997, US$ 28.5 billion in 1998, reaching a historical level of US$ 30 billion in 1999, the fourth in the world and the highest among developing countries except for China. An important fraction of this FDI was directed to the massive privatisation program implemented by the Brazilian government, which ended long lasting state monopolies and moved into private hands important sectors of the Brazilian economy such as steel, telecommunications and electricity.