Brazil and Mexico: Back and Forth but Still the Same

Brazil and Mexico have traded places over the years as the main topic of interest and dynamism in Latin America.  As recently as 2001, Mexico’s economy had passed Brazil’s in terms of overall economic production (GDP).  Brazil regained its leadership again in 2005.  But recent reports state that Mexico will overtake Brazil again by 2022 or in less than a decade.

Mexico’s advance over the next years is supposedly due to its close association with the USA through NAFTA (North American Free Trade Agreement) and because of favorable developments in Mexico’s manufacturing and service sectors.  Industry in Mexico stands to benefit as production, shipping and labor costs rise in China and certain types of manufacturing move to Mexico as it offers more efficient use of the factors of production.  Brazil’s secondary sector, on the other hand, is seen as slipping in the absence of a coherent industrial strategy.  Protectionism in Brazil only favors certain cosseted companies and not manufacturing as a whole. A closed nature of the economy inhibits competition, further dragging down industries that cannot penetrate international markets and wind up making goods of secondary quality for the domestic market.  State interventionism, mainly through selective tax incentives and the picking of so called “champions” by the national development bank (BNDES), has not delivered as overall industrial production is shrinking in its contribution to national wealth.

Brazil is now hosting the World Soccer Cup and the Olympics two years later. These events have drawn severe criticism both inside Brazil and abroad for the associated cost overruns and perceived corruption.   However, they are driving major investments and give the country a new visibility.

Mexico, with President Pena Nieto, has passed major reforms in the energy sector which are also expected to attract major domestic and foreign investment.  Brazil, in turn, has reversed its opening of the energy sector making it less attractive to foreign investors.  As the US becomes a net exporter of energy (oil and gas), it is feared that Brazil may have lost it best opportunity to take advantage of the much publicized pre-salt oil discoveries off the coast of Rio de Janeiro.

Brazil and Mexico are a generation past free trade agreements.  NAFTA (Canada, Mexico and the USA) is just completing 20 years while Mercosul is approaching its 24th anniversary.  While the benefits of free trade have been lauded mainly by multinational corporations and their allies in government, as the agreements have been successful in advancing trade and investments – NAFTA much more so than Mercosul.  But it is clear after 20 years, that trade policy is just trade policy and does solve the larger institutional problems related to underdevelopment. The promises by some in the 90’s that trade would solve many of these problems have not been fulfilled.  Job creation in Mexico and Brazil remains a problem and migration continues to be a major issue for Mexico and the USA.

My conclusion is that economic growth alone is important, it is insufficient.  The big problem of Mexico and Brazil is the precarious nature of basic institutions; i.e. the educational system, the justice system, the political system.  Without predictability and institutional confidence, economic growth is stunted.  A gradual reordering of societal priorities is taking place but until people are better educated, better informed and more capable of holding their local, state and national institutions accountable, change will take place only slowly and in an incremental fashion.

Brazil, Mexico, California

Brazil and Mexico are the leading economies in Latin America.  Usually, Brazil has been number one but Mexico has moved ahead of Brazil several times only to fall back again.  Such was the case in the half of the previous decade.  Now, many predict that as Brazil’s economy flounders, Mexico again will forge ahead and overtake Brazil in the next few years.  A major part of Mexico’s growth has been driven by its free trade pacts and, mainly its participation in the North American Free Trade Agreement (NAFTA).  Today Mexico’s foreign trade is almost 3/4 of a trillion dollars.  Brazil, on the other hand, did 465 billion in foreign commerce in 2012.  Now, close to 80 percent of Mexico’s trade is within NAFTA, in spite of the fact that Mexico has over 40 free trade agreements in place.  Brazil’s trade is more spread out with China having surpassed the US as its largest trading partner.  Argentina is in third place.

California exported over 26 billion dollars of goods to Mexico in 2012 and only some 2 billion dollars to Brazil.  Of course, geography plays a major role but it should be clear that the potential for trade between Brazil and California is great.  Between Mexico and Brazil, there was only 10 billion dollars of exchange in 2012.  The auto industry and its supplier represent some 65 percent of the total in trade between Brazil and Mexico.