The history of the Brazilian economy before World War II was characterized by six principal cycles, each centered on one export particular commodity: brazilwood, livestock, sugar, gold, rubber, and coffee. At the height of each cycle, Brazil led the world in production of that commodity. Even during the postwar era, variations in price and market conditions for coffee largely determined the degree of national prosperity.
Attempts to diversify the economy through rapid industrialization made Brazil one of the two leading industrial nations of South America, but spiraling inflation thwarted many of the economic advances. The rising inflationary trend of the mid-1960s was due mainly to public budgetary deficits resulting from losses incurred by the government-owned railroads and shipping lines and by official subsidy expenses for imports, such as wheat and petroleum. At the same time, wages increased at a higher rate than productivity; expansion of credit to private enterprises also lagged. The pace of further industrial expansion was determined largely by the availability of foreign exchange, derived chiefly from the sale of coffee, to buy the necessary equipment and raw materials, especially wheat and crude oil.
After the period of what some called an economic miracle (1968–73), during which GDP growth averaged more than 11% annually; the economy cooled to an annual growth rate of 6% between 1974 and 1980, mainly because of increased costs of imported oil. Throughout this period, industrial growth rates outstripped those for the economy as a whole, and industrial products claimed an increasingly large share of GDP.
Inflation was so chronic that in the late 1960s, the government instigated monetary correction, whereby fixed payments were indexed to past inflation. Thus, interest rates, pension payments, mortgage payments, and so forth, kept pace with rising prices, but inflation fed on itself. Even as economic growth surged in the mid-1980s, triple-digit inflation persisted. In February 1986, as the projected inflation rate for the year approached 500%, the government imposed a package of sweeping economic reforms, the Cruzado Plan, which created a new currency (the cruzado), eliminated monetary correction, and froze wages and prices. While inflation plunged to near-zero initially, by mid-1987, it had surged beyond 100%, fueled by increased customer spending due to the price freeze. The government then imposed an austerity program and began negotiations with the IMF for a rescheduling of the staggering foreign debt.
The Brazilian economy was hit by a deep recession and record inflation in 1990. The GDP fell by an unprecedented 4%, while inflation hit an all-time high of 2,938%. In March 1990, upon assuming office, President Collor announced sweeping economic reforms designed to stop inflation and integrate Brazil into the developed world economy. In addition, the Collor Plan imposed a price freeze, as well as a freeze on bank deposits, resulting in a precipitated capital flight. Trade barriers were significantly reduced but the attempt to reduce Brazil's large fiscal deficit resulted in the continual resurgence of inflation and a lack of confidence in the government's economic policies.
The Collor government introduced on 31 January 1991 another package, Collor II, attempting to reduce inflation. The package included wage and price controls and eliminated the overnight market. The economy experienced a lackluster recovery with GDP growth of 1.2%. However, the failure to reduce the structural fiscal deficit, inconsistent monetary policy, the unfreezing of prices and wages by the third quarter, and the unfreezing of remaining blocked accounts undermined the efforts to reduce inflation.
Under IMF guidance, monetary policy continued to tighten liquidity in 1992. The failure of the government's stabilization efforts produced a new inflationary spiral with monthly inflation rates in the mid-20% range. High real interest rates combined with the acceleration of inflation and the political uncertainty over the outcome of the impeachment proceedings produced another recession with GDP decline of 1.5% for 1992.
Inflation continued to rage in the early 1990s. In 1994 it peaked at 2,700%. That year, the finance minister, Fernando Henrique Cardoso (later president), introduced a new currency, the real, and a new economic plan called the Real Plan. The plan featured privatization of state-owned industries, lowering of tariffs, and the abolition of Brazil's unique and counterproductive wage-inflation indexing, which had sent prices on a seemingly endless upward spiral. By ending the hyperinflation of the past decades, the government greatly increased the standard of living of millions of Brazilians, allowed businesses to plan for the medium term in an environment of stability, and created a class of economically stable consumers. Inflation had dropped to only6.9% by 1997, and has since remained in single digits.
From 1988 to 1998, GDP growth averaged 2.4%. The Real Plan had to be abandoned in early 1999, however, as the Brazilian economy became engulfed in the aftermath of the Asian financial crisis of 1997 and the Russian financial crisis of 1998. Brazil lost an estimated $50 billion in foreign reserves in the resulting capital flight. Steps were taken by the Group of Seven and the international financial institutions to try to reassure foreign investors. On 2 December 1998, a two-and-three-quarter-year standby agreement with the IMF went into effect, buttressed by credit line of about $18.2. billion, as well as a one-year standby under the Supplementary Reserve Facility (SRF) with a $12.6-billion credit line, both part of an international support package totalling $41.5 billion. The support package had been designed as a precaution against Brazil catching the "Asian flu," as it were, but it did not prevent Brazilian currency crisis of 1999. On 13 January 1999 the Central Bank devalued the real by 8%; on 15 January 1999, the Cardoso government announced that the real would no longer be pegged to the US dollar, ending the Real Plan. Immediately, the real lost more than 30% of its value, and subsequent devaluation made the real lose a total of 45% of its value. Despite the devaluation; however, the economy showed positive, if weak, growth in both 1998 (0.2%) and 1999 (0.8%), and inflation remained under control, at 3.2% in 1998 and 4.9% in 1999. However, Brazil's debt service ratio soared to an untenable 113.1% of export earnings in 1999, up from 62.7% in 1997 and 76.2% in 1998. To some extent, the problem was self-correcting, as the devalued real made Brazilian exports more competitive, which increased export earnings in 2000, and helped reduce the debt service ratio to 90.8% by 2000 and to 78.5% by 2001. GDP grew 4.5% in 2000, led by exports, while inflation picked up to 7%. Growth then fell to 1.4% in 2001 as the US recession and the global slowdown dampened export demand.
At the expiration of the 1998 IMF standby agreement in September 2001, two other one-year standbys were put in place with credit lines totaling about $30 billion. In 2002, debt service payments were running at over 80% of exports (a debt service ratio of 80.3%) as export markets continued slow after the 11 September 2001 terrorist attacks on the United States, and, as investors became increasingly anxious about the economic consequences of a Lula victory in the October presidential election. There were also questions about whether the US government's Bush administration would support another standby arrangement with the IMF for Brazil. On 6 September 2002 the expiring 2001 arrangements were replaced by two more one-year standby arrangements with a $30 billion line of credit just as the currency exchange rate and the Brazilian stock market index—the Bovespa index—were reaching historic lows. Both the exchange rate and the Bovespa index improved after the election and into the first quarter 2003; the improvements were in part because the sell-off had preceded the election and in part because the Lula government was proving less radical that had been feared. In February 2003, the government announced its target for a primary fiscal surplus (that is, the surplus before interest payments are made to service debts) at 4.25%, higher than the3.75% agreed to with the IMF. Overall, real GDP is estimated to have grown 1.5% in 2002, while inflation increased to 8.4%, up from 6.8% in 2001.