Latin America’s broad social advances, a rapidly expanding middle class, and the stability of democratic politics have been accomplished amid different and sometimes opposite economic models. These distinct views can well be represented by the two largest economies in the region: Mexico and Brazil.
Politics in the region has been characterized by a spread of populism, and the economy has largely relied on commodity exports. While many countries have differed in their statist approach, it has all been variations of the same policy framework with a much-needed emphasis on social services and income distribution, sometimes coupled with a more closed economy. This has been especially true in Brazil.
In turn, Mexico’s economic policy has been characterized by a neo-liberal approach and by pro-market liberalization, which makes it one of the most open economies with more trade agreements than any other Latin American country. In contrast, Brazil’s economic policy is rather heterodox and combines a capitalist view with a higher participation of the state.
Despite ambitious reforms in the late 1980s, Mexico’s economy performed poorly during the last two sexenios, lagging Brazil and most of its Latin American peers. However, this neo-liberal economic model seems to be finally paying off. The country is becoming more competitive with China, among others, due to improvements in productivity, cheaper labor costs, and its proximity to the US market. This situation is making its manufacturing sector more competitive, and is attracting back some business into the country, and boosting its exports.
As a result, the economy grew by 4.0 percent in 2011, and, according to the IMF, it’s expected to grow by 3.6 percent in 2012 and by 3.5 percent in 2013, while Brazil’s economic outlook presents corresponding rates of 2.7 percent and 3.0 percent.
There are reasons to be skeptical about the ability of the Mexican government to achieve enduring economic growth, however. Trends of economic expansion have been abruptly interrupted in recent decades: in the early 1980s, when the oil boom burst, and in the mid-1990s, when the peso crisis plunged the economy into a deep recession and financial crisis.
This time, as opposed to previous periods of economic expansion, there are some relevant indicators that could allow us to infer that growth has the potential to become sustainable. The ratio of bank debt to GDP in Mexico is barely a third what it is in Brazil and the US. Five to six consecutive years of loan growth, coupled with macroeconomic stability, would increase Mexico’s annual growth rate by half a percentage point, the central bank, Banxico, estimates.
International reserves now stand at record highs of US$161bn compared with less than half that three years ago, while total public debt is equivalent to about 38 percent of GDP, a small number compared with that of industrialized nations. An analysis of the deterioration of the balance of payments as an obstacle to Latin America’s long-term economic growth contained in Raul Prebisch’s seminal work indicates that to be in a long-term growth path, the economy must ensure that it is not accumulating external debt at an unsustainable pace. This gives Mexico a powerful opportunity to grow and to develop consumer demand without creating risky imbalances.
In terms of demography, Mexico is about to begin a couple of decades where the ratio of workers to dependents is especially favorable. Despite a fall in the fertility rate, the country is maintaining fairly strong population growth. The UN expects Mexico’s population in 2050 to be 65% of Brazil’s, up from 57% in 2000. This would also make the economy bigger. Granted, this demographic advantage has to be capitalized through improvements in human capital and education.
Unemployment rate fell in September to its lowest level in almost four years. The seasonally adjusted jobless rate last month fell to just 4.7 percent of the working population, which is below the number for August and below most analysts’ forecasts.
As explained above, the manufacturing sector continues to grow and play a key role in Mexico’s economy. As opposed to the services sector and commodities –which represents a higher percentage f GDP in Brazil– this industry is capital intensive and requires labor productivity and significant investment in technology
All of the above is creating a renewed enthusiasm for the Mexican economy. Nomura Equity Research, a financial services firm, predicted that Mexico would overtake Brazil as Latin America’s largest economy within the next decade, despite the fact that Brazil’s economy is currently twice as large. Meanwhile, in a report on investing in Mexico, the Financial Times asserted that its macroeconomic fundamentals are “virtually bulletproof”, and in a special report on Mexico, The Economist assured that after years of underachievement and rising violence, Mexico is at last beginning to realize its potential.
However, when comparing longer periods of economic expansion since the late 19th century, Brazil has achieved sustained periods of economic growth, while Mexico’s cycles of expansion have abruptly been stopped by financial crises, especially over the last decades.
These crises coincide with a period of economic liberalization in Mexico, a situation that has led many analysts to conclude the reforms undertaken by the government since the 1980s, the so called “neo-liberalism”, has produced economic and social deterioration rather than growth. Meanwhile, Brazil also carried out important economic reforms before the end of the 20th century, but with a more positive impact on development thanks to social spending
Indeed, social policy in Brazil has seen far-reaching advances. Cardoso made important gains in education, health, and social security that served as a basis for Lula’s initiatives. His social programs, especially the Bolsa Familia, contributed to the reduction in inequality. The Gini index steadily fell from 0.602 in 1997 to 0.572 in 2004. As a result, Brazil’s conditional cash transfer program became an international model that other developing countries imitate.
The negative side of the greater role of the State in Brazil, however, is that as public expenditure has increased –partly due to greater amounts of the elderly incorporated in the social security net– larger deficits are emerging. Future projections suggest this imbalance will only get worse over the next generation.
Further, the investment rate over the last decade has been mediocre at between 18 and 20 percent of GDP, compared to rates of 30 percent in many Asian countries. The biggest investment lag was in the infrastructure sector, where the lack of adequate roads and the low rate of investment in power generation and distribution is threatening future growth.
Brazil has largely relied on exports of commodities such as soy and iron ore to fuel economic growth, which peaked at 7.5 percent in 2010. However, this growth has started to slow down, revealing an industry environment that has become globally uncompetitive despite a series of stimulus measures. As a result, policy makers are now debating on whether to further embrace a state-led economic model.
Indeed, the next few years will be critical for the direction of the world economy as each of the BRIC nations – Brazil, Russia, India and China – is tempted to revert to statist habits to protect jobs and markets. In light of the decline of the European economies, the average Brazilian is still more likely to opt for a state-led model, such as China, than pure US-style, free-market capitalism, such as Mexico.
Investors aren’t taking any fresh positions in the Brazilian currency, the real, on concerns about rising inflation and central bank intervention. This will exacerbate if Brazil fails to undertake key structural reforms to improve its productivity and infrastructure.
The extent to which Mexico’s current economic growth will not be followed by a significant downturn or a crisis, will depend on the lasting impact of structural changes, coupled with a more stable balance of payments and available funds, both domestic and international, to invest. As Moreno-Brid and Ros pointed out in their historical assessment of the Mexican economy, the explanation for the country’s failure to achieve sustained growth lies in the fact that an overall upturn in investment simply did not accompany the liberalizing reforms and the new macroeconomic environment.
Mexican Congress already approved the labor, education, and telecommunications reform, while the financial one is under discussion. Moreover, Peña Nieto’s administration is expected to announce ambitious energy and fiscal reforms later this year. Indeed, the government pledges to increase investment in key areas, especially in infrastructure, to lift the economy to its full potential.
Further, thanks to the creation of democratic institutions since the late 1990s and a more solid middle-class, Mexico has relatively more policy and political stability than previous years. As seen above, the new administration seems willing and able to generate cooperation with the main actors in society.
 “2012 Annual Report”, International Monetary Fund, October 4, 2012.
 Juan Carlos Moreno-Brid and Jaime Ros, Development and Growth in the Mexican Economy (Oxford University Press, 2009), p. 253
 “The Mexican economy in difficult times”, Manuel Sanchez, Member of the Governing Board of the Bank of Mexico, at the JP Morgan 7th Annual Mexico CEO Conference, Mexico City, July 31, 2012.
 Raul Prebisch, The Economic Development of Latin America and Its Principal Problems (New York: United Nations, 1950)
 “Special Report on Mexico – Demography: The Gain Before the Pain”, The Economist, November 22, 2012
 “Mexico: the Undiscovered Country”, Nomura Holdings, September 13, 2012
 “Investing in Mexico 2011”, Financial Times, June 23, 2011
 “A Special Report on Mexico: Going Up in the World”, The Economist, November 22, 2012.
 IpeaData, February 15, 2006.
 Albert Fishlow, Starting Over. Brazil Since 1985 (Brookings Institution Press, 2011), p. 190
 Werner Baer, The Brazilian Economy. Growth and Development (Lynne Rienner Publishers, 2008), p. 402