$Unique_ID{bob00131} $Pretitle{} $Title{Brazil Chapter 3A. The Economy} $Subtitle{} $Author{Darrel R. Eglin} $Affiliation{HQ, Department of the Army} $Subject{percent economic coffee development exports brazil government growth economy industry see pictures see figures } $Date{1982} $Log{See Tossing Coffee Beans*0013101.scf } Title: Brazil Book: Brazil, A Country Study Author: Darrel R. Eglin Affiliation: HQ, Department of the Army Date: 1982 Chapter 3A. The Economy [See Tossing Coffee Beans: Man tossing coffee beans to clean and dry them] Brazil is a large developing country, fifth largest in the world in area, sixth largest in population, and tenth largest in economic size. For nearly five centuries it has undergone development, and in this century economic growth has been rapid and sustained. Between 1932 and 1979 real gross national product increased an average of 6.3 percent a year and industrial output by about 9 percent a year. In 1981 the gross national product was the equivalent of US$250 billion, about US$2,000 on a per capita basis. Brazil could be classified a newly industrialized nation by some measures. In 1982 the country continued to have a huge agricultural sector that supplied produce for domestic consumption and raw and processed exports. Brazil was one of the world's larger exporters of agricultural products. At the same time, only four industrialized countries had as large a share of gross domestic product contributed by industry. Only eight developed nations exceeded the absolute value of Brazil's industrial production. The nation's steel industry ranked tenth in the world and the chemical industry seventh. Industry produced a wide range of consumer and producer goods. Manufactured exports included arms, airplanes, made-to-order capital equipment, and electronic gear. Nevertheless, vast portions of the country were scarcely inhabited. Huge deposits of minerals, large stands of timber, and many hydroelectric sites remained for exploitation. Modernization had been localized geographically and in terms of the population. Many people were extremely poor and lived in primitive conditions. Further development and improvement of the situation of the disadvantaged depended on prosperity in world markets and a flow of foreign capital, because the scale and number of projects in Brazil exceeded the country's own resources. In the early 1980s foreign help was difficult to obtain, and the country faced a period of austerity to meet payments on earlier loans. How the population would react to slowed economic growth after a half-century of rapid expansion remained to be seen. Growth and Structure of the Economy After the arrival of the Portuguese in 1500, economic development of Brazil became linked with the political and economic situation in the major nations of the world. Because of excessive reliance on one or two export commodities throughout most of its history, economic growth has been largely in fits and starts, reflecting changing market conditions abroad. After nearly five centuries of development, Brazil's economy has become more diversified and less dependent on just a few commodities. Nonetheless, even in 1982 the country's economic well-being was still closely related to international commodity and financial developments. The Portuguese who discovered and claimed the land that became Brazil did not know its extent. In fact, the present boundaries of Brazil were established only over the centuries. The country is larger than Western Europe or the 48 contiguous states of the United States. Exploration, colonization, and development progressed unevenly, often in terms of the five geographical regions: the Northeast (Nordeste); the North (Norte), which included most of the Amazon Basin; the South (Sul); the Southeast (Sudeste); and the Center-West (Centro-Oeste) (see Geography, ch. 2). The uneven regional development pattern remained a problem in the 1980s. Portugal's small population and limited resources restricted the development that could be attempted in its Brazilian colony, particularly because its Asian possessions appeared richer and at first received priority (see The Colonial Period, ch. 1). Economic development in the first years after discovery was largely confined to cutting brazilwood for export to Europe where the extract from the wood was used as a textile dye. This activity was confined to coastal areas and required few workers and little in the way of infrastructure. By the mid-sixteenth century more extensive development was under way, based on the cultivation of sugarcane and the export of sugar. The Portuguese mastered the techniques and became sugar exporters as a result of large-scale experiments on the Azores and Madeiras during the late fifteenth century. The experience proved highly profitable when applied in Brazil's Northeast region. Sugar became the dominant crop. By the late sixteenth century sugar was one of the main commodities in international trade, and Brazil had become the major source. When the Dutch occupied northeastern Brazil (1630-54), they learned the sugar business and created a competitive industry in the Caribbean. The enlarged supply forced down sugar prices during the latter half of the seventeenth century, and prices remained low for more than a century. After 1650 the volume of Brazil's sugar exports fell by about 50 percent at the same time that the price per ton dropped more than 50 percent. The sugar boom provided the stimulus for the initial development of colonial Brazil. The cultivation of sugarcane was most economical on large areas, such as plantations, and required a large supply of cheap labor. Although some settlers arrived from Portugal, most of the labor in the sugar industry came from slaves-both indigenous Indians and blacks from Africa. Some of the Portuguese settlers relied on the capture and sale of Indian slaves to plantations for their livelihood. Other settlers raised livestock, which the plantations needed for draft power and meat. Other settlers took advantage of homesteading laws and became subsistence farmers or sold their small surplus produce to the plantations and emerging urban centers. Sugar processing required substantial amounts of wood for fuel. Although the sugar industry was largely confined to the Northeast (with a minor center near Rio de Janeiro), close to the sea for ease of transport, the settlers increasingly had to push inland to enslave Indians, to obtain wood, and to find grazing areas for the expanding cattle herds. The next surge of development, lasting through most of the eighteenth century, was based on mineral exports. The primary product was gold, but exports included diamonds and other gemstones. Gold mining was mainly alluvial panning, a labor-intensive activity. Mining was concentrated in the area that became the states of Minas Gerais, Goias, and Mato Grosso, shifting the economic center of colonial Brazil southward from the Northeast (see fig. 1). Gold attracted workers not only from the Northeast sugar areas, including slaves, but also substantial numbers from Portugal itself. Gold exports peaked during the 1750s; prosperity subsequently declined in the mining industry. The search for gold had revealed rich iron ores, however, which formed the basis for a small, emerging ironworking industry, fabricating tools and some machinery. Farming, cattle raising, and crafts expanded to meet the needs of the growing population and expanding economy. Transport was primarily by boat, so shipbuilding, repair, and supply (sails, rope, and so forth) became important. Mining stimulated a variety of activities, although they remained small scale and localized. After the mid-1700s the mining boom subsided, and the economy settled into nearly a century of stagnation. Production was largely for subsistence or on nearly self-sufficient units, although some exports of sugar, hides, cotton, cocoa, and a few other commodities continued. International price levels for these exports tended to remain low, however, greatly reducing the profitability and the stimulus provided to economic growth compared with earlier periods. Coffee was introduced into Brazil in the early 1700s, but cultivation was widespread and for local consumption. Coffee began to acquire commercial importance late in the eighteenth century as international prices rose because of disruption of supplies from other countries. By the 1830s coffee exports accounted for 18 percent of the value of Brazil's exports and ranked third after sugar and cotton. By the mid-1800s coffee was the country's leading export, amounting to more than 40 percent of total exports (see The Economy under the Later Empire, ch. 1). Initially, coffee for export was cultivated primarily in the hills behind Rio de Janeiro because of the ease of transport to ports and the availability of labor no longer employed in mining. Early development relied mainly on slaves working on large plantations. Contrary to the sugar industry, in which foreigners controlled the trade, transport, and financing, local entrepreneurs were involved in both the production and the commercial ends of the coffee business. They formed a new managerial class that exerted considerable influence on Brazil's future development. As soil fertility declined over the years, coffee production shifted to additional areas, mainly southward into Sao Paulo and later into Parana and Rio Grande do Sul. From the beginning the coffee boom increased foreign trade, transport, and incomes, adding to demand. Once the underemployed resources remaining from the mining boom were engaged in production, expansion of coffee exports required committing more resources. The need for additional workers became critical. Increasing antislavery efforts diminished and then in the 1850s abolished the import of slaves, and slavery itself became illegal in 1888 (see The Slavery Question, ch. 1). An expanding flow of immigrant wage labor from Europe, particularly Italy, provided additional workers for expanding coffee production. Various measures by the government and coffee growers, especially after 1850, facilitated emigration from Europe, which became quite large by the late 1800s. These European immigrants brought technical and entrepreneurial skills, which contributed substantially to Brazil's subsequent development (see Immigrants of the Nineteenth and Twentieth Centuries, ch. 2). The coffee boom accompanied other major changes in the country's economic situation. In 1785 a royal decree banned almost all manufacturing in the Brazilian colony. After the Portuguese court fled to Brazil in 1808, the prohibition was rescinded, and manufacturing and other development was encouraged. In 1844 the Portuguese trade treaty with Britain that had effectively stifled any industrialization in Brazil for nearly a century and a half expired. After the lapse of the treaty, emerging manufacturing industries received tariff protection (see Problems of Foreign Policy, ch. 1). In 1889 the country became a republic in which landowners and businessmen exerted strong influence on government policies. In the second half of the nineteenth century, considerable expansion and diversification of the economy occurred. Profits from coffee exports provided funds for expansion of coffee production and industrial investments. The foreign exchange earnings from coffee instilled confidence so that foreigners invested in and developed railroads, electric power plants, and other essentials for economic development (see Economy under the Later Empire, ch. 1). The railroad from Santos to Sao Paulo and westward, for example, initially opened new areas to coffee production and subsequently to industrialization. The railroad was an important ingredient in the concentration of manufacturing in Sao Paulo. Celso Furtado, a well-known Brazilian economist and former economic minister, estimated the growth of real per capita income at about 1.5 percent a year over the last half of the nineteenth century, a rate probably above that for Europe or the United States. This substantial rate of economic growth was not shared equally by region. Development and growth were concentrated in the center and southern coastal states. Moreover, the influx of Europeans, the development of transportation and infrastructure, and the start on industrialization in the area of Sao Paulo-Rio de Janeiro ensured that the Southeast would have a long-lasting edge over other regions in growth and development. The South achieved considerable development based on coffee and other agricultural products. The Amazon Basin experienced a meteoric rise and fall of incomes from rubber exports. Amazonian Indians had long tapped rubber trees for their own use, and exports from Brazil began in the 1820s. Exports remained low (averaging less than 2,000 tons a year) until mid-century but then began to expand, particularly with development of the automobile, averaging 35,000 tons a year in the first decade of the twentieth century. By World War I rubber plantations in Asia, stocked with seedlings smuggled out of Brazil, were producing at lower costs and quickly took over most of Brazil's markets. The Northeast largely stagnated once the sugar boom subsided in the late 1600s. Agriculture remained the primary activity. Cattle, sugar, and cotton were the main products, each of which experienced short periods of prosperity when international conditions and prices turned favorable. Cotton exports, for example, became substantial when the American Civil War shut off supplies from the United States. For most of the time, however, the population lived close to the subsistence level. By the latter part of the 1800s, there were already signs of growing population pressure on the land when an extremely serious and protracted drought from 1877 to 1880 damaged crops and killed most of the livestock. Famine also killed a large number of the rural population, and many refugees flooded urban centers. Numerous inhabitants of the Northeast (Nordestinos) moved to the Amazon Basin to become rubber collectors in that area's development surge. When rubber exports fell after World War I, the Amazon population essentially reverted to subsistence activities. The coffee industry continued to expand up to the Great Depression of the 1930s. By the end of the 1880s Brazil was supplying about three-quarters of the coffee in international trade. Coffee production amounted to about 3.7 million 60-kilo bags in 1880, about 16.3 million bags in 1901, and about 28.9 million bags in 1929. A growing excess of supply began to push world coffee prices down, but by the early 1900s Brazilian growers were able to obtain a domestic support program that held part of the yield off world markets and kept export prices high (see The Economy under the First Republic, ch. 1). The high support prices encouraged greater production, however, which increased by nearly 100 percent between 1925 and 1929 alone because of the expansion of plantings. In the late 1920s coffee exports accounted for over 70 percent of export earnings. By the late 1940s coffee remained Brazil's major export, but coffee exports had dropped to 42 percent of the value of the country's total exports; the country's share of the world coffee trade had fallen to a little more than 50 percent. The coffee boom spurred industrialization late in the nineteenth century (see Manufacturing, this ch.). By the 1920s the industrial sector was well established. The sharp fall in international coffee prices in the world depression of the 1930s required severe contraction of imports, which prompted local manufacturers to produce substitutes for foreign goods no longer available. Government policies and investments also furthered industrialization (see Role of Government, this ch.). Although the Great Depression imposed major adjustments and a reduction of production, by 1934 the economy's output had regained the 1929 level. Expansion continued at a slow pace. Furtado estimated economic growth at a little above 2.5 percent a year between 1929 and 1947, only slightly above population growth. Brazil emerged from World War II with considerable pent-up demand and substantial foreign exchange reserves. Relaxation of trade and currency controls resulted in a high level of imports and exhaustion of these reserves by the early 1950s. A concerted, successful drive to attract foreign capital investment (especially in the automotive industry), restriction of imports, and government incentives stimulated industrialization, which contributed to a high level of economic growth. Between 1945 and 1962 industry grew at an average rate of 8 percent per year, and real gross domestic product (GDP) increased by 6.8 percent a year between 1950 and 1961. For the first time in Brazil's history, internal demand rather than external factors provided the stimulus for economic growth. The rapid expansion of manufacturing was primarily based on substitution for imports. Exports increased slowly, and manufactured exports (excluding food) were less than 7 percent of total exports by 1962; coffee accounted for 53 percent of total exports. Although imports also increased slowly, large-scale foreign borrowing was necessary to balance international payments. Other major imbalances appeared. Government policies discriminated against the agricultural sector (except coffee and sugar where the producers retained considerable influence), while contributing to inefficiencies in industry. Growing budget deficits and accompanying monetary expansion accelerated the rate of inflation, which exceeded 100 percent at times in 1964. Social unrest spread in the early 1960s (see The Crisis of 1961, ch. 1). In 1963 economic growth was only 1.6 percent, which meant a decline in per capita terms. The economy was plagued by shortages and dislocations, and the country fell behind in meeting foreign debt payments. In 1964 the military took over the government to restore order. An economic stabilization program was instituted, but changes were gradual rather than drastic in order to avoid a major recession. The foreign debt was again rescheduled. Government expenditures were curtailed, and budget deficits were reduced. Price and wage controls were imposed along with other measures. The effects reduced the rate of growth of GDP to an average 3.6 percent a year and industrial output to 3.6 percent a year between 1964 and 1967. The rate of inflation was reduced to 27 percent by 1967. The program effectively adjusted the economy for a return to high rates of growth. The period between 1968 and 1974 has often been called Brazil's economic miracle. GDP increased at the impressive average rate of 11.5 percent a year: manufacturing at 13.9 percent a year and agriculture at 5 percent a year. These high rates of growth resulted in part from expansionary government policies and a return to production of the considerable idle manufacturing capacity that existed in 1967. In addition, a substantial expansion of world trade and a high level of capital movements created a favorable international environment. Brazil's exports increased an average of 27 percent a year while exports of manufactured goods rose 38 percent a year. Moreover, the rapid economic growth was accompanied by declining inflation and a modest rise in the external debt. Some economists argued that it was not a miracle but merely a return to sensible policies that allowed the economy to catch up with its long-run potential after being diverted by poor economic management. Brazil has a high income elasticity of import demand-meaning that imports grow substantially with each increment in GDP. This reflects the economy's need for sophisticated capital equipment and many primary and intermediate goods produced domestically in insufficient quantities or not at all. World inflation in the 1970s, particularly the quadrupling of crude oil prices in 1974, caused Brazil immediate difficulties in paying the higher value of imports, even though export growth had been considerable. In addition to the sudden deterioration in terms of trade, agricultural production-particularly food for domestic consumption-began to falter, and aggregate demand became excessive. After 1973 the balance of payments imposed constraints on growth while inflation accelerated. Officials attempted to sustain as high a rate of growth as possible. Between 1973 and 1978 GDP increased an average of 7 percent a year even though there was substantial variation from year to year. Imports were restrained through a variety of measures, and import substitution was encouraged. Crude oil imports were reduced, for example, and a noteworthy, but long-term, program of fuel production from sugarcane was begun (see Energy, this ch.). The other major recourse to sustained growth was to borrow abroad. Brazil's foreign indebtedness increased sharply in the 1970s, expanding nearly fourfold between 1973 and 1978. In 1979 the economy suffered serious setbacks. Substantial crop losses, because of drought in the southern states and flooding in other parts, increased domestic prices and caused a loss of about US$1.8 billion in the balance of payments. Subsidies and other public expenditures proved difficult to control, adding to fiscal deficits, while the money supply increased more than expected. Inflation mounted to 77 percent for the year. Oil exporters again drastically increased prices. In 1979 the prices of oil to Brazil nearly doubled, and the increases were about the same in 1980. The country depends on imports for about 75 percent of its petroleum supplies, and the oil import bill was about US$10 billion in 1980. The setbacks slowed economic expansion to 6.4 percent in 1979, but real GDP increased 8 percent in 1980 because of good agricultural harvests and increased industrial production-both sectors boosting exports. A series of expansionary measures begun in 1979 stimulated an already overheated economy and was reversed by early 1981. Contraction brought on the most severe recession in more than 30 years. In 1981 real GDP declined by 3.5 percent and by 5.8 percent on a per capita basis. The industrial production index fell 9.6 percent and that for just manufacturing by almost 10 percent. Automobile and truck production was the most seriously affected, dropping by 33 percent. In contrast, the agricultural sector grew by 6.8 percent. Declining industrial activity caused unemployment to rise, and real wages fell. Contraction of the economy reduced inflation less than hoped. The price index (December to December) was up 95 percent compared with 110 percent in 1980. The country's large foreign debt was a major concern to officials and international bankers. Substantial foreign loans were needed annually to meet existing debt obligations. In 1981 world bankers were closely watching the economic management of Brazilian officials. In 1982 several countries, such as Mexico, Argentina, and Poland, experienced difficulties in making debt service payments; some required rescheduling of their debt. As a result the international banking community was examining the risks in additional loans to developing countries. By late 1982 Brazil reportedly found it difficult to borrow the final sums necessary to meet its debt service. Although the economy was much more diversified than in its earlier history, the country's economic health still depended significantly on developments in the world's commodity and financial markets. The changing structure of the economy has been quite remarkable since World War II. The most profound change has been the decline of agricultural activities and the expansion of industry. In 1947 agriculture (then the most important sector) contributed about 28 percent of GDP compared with 10 percent in 1980. In contrast, industry, including energy, mining, and manufacturing, increased from 22 percent of GDP in 1947 to thirty-eight percent in 1980. Various services accounted for 50 percent of GDP in 1947 compared with 53 percent in 1980. The change in employment was also considerable. In the 1950 census 64 percent of the work force was employed in agriculture, compared with 13 percent in industry. In 1979 about 32 percent of the economically active population worked in agriculture and 24 percent in industry, including construction. The contrasting growth patterns of industry and agriculture reflected what some economists called Brazil's dual economy. Industry used modern techniques and attained high productivity. Associated with industry in the modern sector were trade, transportation, and finance. In 1970 this modern sector was estimated to account for about 85 percent of GDP and to employ about 45 percent of the nonagricultural labor force, although two-thirds of these workers were in low-skilled jobs. The importance of the modern sector increased during the 1970s. Agriculture used largely traditional practices having low productivity. Few farmers used modern techniques and inputs to lift yields. Before the 1980s agricultural output had been raised primarily by extension of the cultivated area. Opinions differed on the suitability for cultivation of the remaining new lands, which were primarily located in the Amazon basin. Some argued that Amazon soils could sustain continual production with care. Opponents claimed the opposite and pointed to significant ecological damage once the forest cover was cut. Officials recognized that agricultural output needed to grow more rapidly and that much could be done to raise yields from lands already cultivated. The need was becoming most acute in basic food supplies, the imports of which were increasing (see Crops, this ch.). It was a long-term problem, however, because considerable institutional development and infrastructure building would be necessary to distribute inputs and move the resulting produce to markets. Although the transportation system was adequate for the current needs of the economy, new economic development usually required major investments in ancillary transportation services. Before the 1930s roads and railroads primarily linked production centers to seaports, and there were some connections between major urban centers. By the 1980s a start had been made on a national road system connecting the various parts of the country. Construction costs were high, and maintenance had proved costly, however, slowing extensions to the system as well as the addition of feeder roads off the system. In a country as large as Brazil with its difficult terrain, a developed transportation system, such as exists in the United States or Europe, remained many years off (see fig. 7). Housing and services such as water and sewage were underdeveloped portions of the economy. By the 1980s the rural to urban migration had overwhelmed the available facilities. All Brazilian cities had large shantytowns (favelas), constructed by migrants from scraps and other available materials (see Forces of Change, ch 2). The national and lower levels of government were improving the supply of adequate housing, potable water, and sewage systems, but it would take years to eliminate the deficiencies. Role of Government Historically, government has exerted or attempted to exert considerable influence in Brazilian economic affairs while leaving actual economic activity to private initiative. In the colonial period the government in Portugal primarily wanted revenue, especially gold, from its Brazilian colony. Local manufacturing was suppressed to maintain a profitable market for imports. During the imperial period (1808-89) economic development was promoted through policy measures requiring little direct government participation. Governments under the First Republic (1894-1930) were dominated by large landowners. Government policy continued to influence the direction and pace of economic activity, largely for the benefit of the agricultural crops of the landed elite; direct government participation was mostly limited to managing surplus stocks of coffee beans. After the 1920s direct government involvement increased, but its role remained primarily one of influencing and managing the activities of the private sector. Social goals, such as equity of income distribution and minimum standards of housing, education, nutrition, and health care, increasingly became government goals. Public ownership remained small, however, although influential in key activities. After World War II, officials opted to continue rapid industrialization of the economy as the means to achieve high growth rates and the social objectives being expressed through the political process. In times past when external events stimulated local industry, official policies returned to guiding the economy as an exporter of primary products, almost completely agricultural, as the stimulus subsided. The policy change in the late 1940s was supported by recommendations made by foreign economic missions in the 1930s and 1940s. The experience of the collapse of coffee prices in the 1930s depression and the subsequent growth of industry reinforced the experts' recommendations. Moreover, many in the population sensed the country's large economic potential. National security considerations further motivated the policy switch to greater industrialization. The policy change was marked by the creation of a planning agency in the late 1940s and the first of a series of multi-year plans to guide the economy. Planning subsequently was conducted by a ministry, and in 1974 the Planning Secretariat of the Presidency was created. The first plan became effective in 1950 and was largely a public works list that focused on easing bottlenecks in transportation and energy, particularly electric power. A shortage of funds restrained full implementation. Over the years the planning staff gained experience and competence, and the multi-year plans became more sophisticated and comprehensive. The plans provided a guide for development and helped avert bottlenecks. At times, however, the plans were thrown off by external events and domestic developments over which the planners had no control. The bulk of economic activity in Brazil is conducted by individuals. State governments have organizations influencing economic development in their areas, including some state plans and state-owned businesses. At the federal level a bewildering, overlapping array of economic organizations and funds was created, over which the federal government often exerted little control or even had timely knowledge of their activities until the 1980s. Planning and coordination in such a milieu was difficult at best. In the late 1970s some 500 federal decentralized agencies existed in addition to the economic ministries and interministerial bodies. The proliferation of economic organizations was a pragmatic response to specific conditions rather than an evolution under an organizational plan. The responsibilities and importance of individual agencies varied tremendously as did their autonomy. In perhaps an oversimplification, a group of autonomous or semiautonomous organizations called autarquia (often containing the words institute or superintendency in the English translation of their name) were similar to some regulatory agencies of the United States government. One of the most important of these autonomous entities was the Central Bank of Brazil, formed in 1964. One of the earliest was the Brazilian Coffee Institute, created shortly after the turn of the century. The Superintendency for Development of the Northeast (Superintendencia do Desenvolvimento do Nordeste-SUDENE), established in 1959, and the Superintendency for the Development of the Amazon (Superintendencia do Desenvolvimento da Amazonia-SUDAM), formed in 1966, were responsible for development of their respective areas. For some activities, wholly government-owned corporations were established. The National Steel Company (Companhia Siderurgica Nacional) was formed in the 1940s to own and operate the Volta Redonda steel mill. One of the most important was the National Economic Development Bank (Banco Nacional do Desenvolvimento Economico-BNDE) formed in 1952 to finance public and private industrialization. In June 1982 the name was changed to National Economic and Social Development Bank (Banco Nacional do Desenvolvimento Economico e Social-BNDES). Other corporations were established as mixed companies formed under the general corporation law but authorized by specific legislation. The federal government held at least a majority of shares, but other investors could participate. The Brazilian Petroleum Corporation (Petroleo Brasileiro-Petrobras), formed in 1953, was a mixed company and Brazil's largest corporation. There were many companies, owned wholly or partly by the federal government, that were important in the economy; for no apparent reason some had private investors. States also formed companies, particularly banks, to aid and influence development in their areas. In general, government ownership in companies, as a whole or in part, was intended to stimulate development. In the case of electric power, private companies were limited in financial and physical resources to expand to meet rapidly increasing demand. A mixed government company was formed gradually to take over local companies, develop hydroelectric sites, and interconnect, by a grid, generating and distribution facilities (see Energy, this ch.). In some instances, steel and petrochemicals, for example, the initial stages were too costly or risky for private investors. The government financed and built plants to process the raw materials, leaving upstream and downstream operations to private investors, domestic and foreign, who often had federal or state help in financing mines or fabrication plants. Governments at various levels also took over and frequently subsidized portions of the transportation system to provide essential services at low cost.