Until the beginning of the 20th century the Brazilian economy was characterised by a succession of cycles, each based on the exploitation of a single export commodity: timber (brazil wood) 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 until the last quarter of the 19th century. Parallel to these cycles, small-scale agriculture and cattle-raising were developed for local consumption. A first surge of industrialisation took place during World War I, but it was only from the 1930s onwards that Brazil reached a level of modern economic performance. In the 1940s, with US Eximbank financing, the country's first steel plant was built at Volta Redonda in the state of Rio de Janeiro.
The industrialisation process from the 1950s to the 1970s 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 growth in Gross National Product (GNP) was among the highest in the world, averaging 7.4% up to 1974. During the 1970s Brazil, like many other countries in Latin America, absorbed excessive liquidity from US, 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% per annum from 1970 to 1980, despite the impact of the world oil crisis. Per capita income rose fourfold during the decade, reaching US$ 2,200 in 1980.
In the early 1980s, however, the significant rise in US interest rates began to affect international capital markets, ending the relatively favourable conditions for foreign indebtedness which had existed 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 debt burden affected public finances and contributed to an acceleration of inflation. In the second half of the 1980s a series of stringent measures was adopted aimed at monetary stabilisation. 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 1980s continued to grow, providing enough surpluses in the trade balance to cover servicing of the debt.
The 1980s crisis signalled the exhaustion of Brazil's "import substitution" model (a policy that nurtured Brazilian industry by prohibiting the purchase of certain manufactures abroad), and also 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 and, in line with Brazil's obligations as member of the WTO, the reduction or elimination of subsidies and barriers to trade in goods and services.
In 1994, after several frustrated attempts to bring down inflation, the Brazilian government introduced the Real Plan, a stabilisation plan that replaced the currency then in use with the real and managed to achieve a sustained reduction in prices.
As well as maintaining its recent record of positive results with regard to the control of inflation, the Brazilian economy now displays clear signs of stability with regard to external accounts and public finances. Furthermore, since 2003 there has been increasing evidence of improved performance in production, sales, exports and employment. This scenario reveals a benign coexistence between stability and development, and favours the fulfilment of the Brazilian government's main objectives in its quest for social justice.
Brazil's current development trajectory requires public policies that increase productive efficiency, reduce external vulnerability and stimulate investment and savings as proportions of GDP. The government has adopted measures that have contributed to the recovery in demand, for example by stimulating credit and temporarily reducing tax rates. Inflation is falling as a result of sound fiscal policy, which has allowed the public debt to be significantly reduced, and a healthy balance of payments situation.