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Mexico Is Catching Up to Brazil

Jaime Daremblum

Last month in London, Mexico’s Olympic soccer team won gold by defeating its Brazilian counterpart, 2-1. The victory gave Mexico its first-ever trophy in a major international soccer tournament (apart from the 1999 Confederations Cup), and it proved that the soccer gap between Latin America’s two largest countries is shrinking, with Mexico catching up on the region’s traditional powerhouse. The Olympic final also became ametaphor for the recent performance of the Mexican and Brazilian economies.

After growing by 7.5 percent in 2010, Brazil ran into a series of headwinds last year, including a slowdown in China (its largest trading partner), a sharp rise in its national currency (which depressed exports), and a worsening of the European debt crisis. The country grew by 2.7 percent in 2011 and by a measly 0.1 percent in the first quarter of 2012. On August 31, the Brazilian government announced that second-quarter growth was only 0.4 percent, prompting Reuters to note that “Brazil may struggle to reach the market’s average expectations for 1.7 percent GDP growth for 2012.”

Mexico, meanwhile, grew by 3.9 percent last year, and analysts expect it to grow by around 3.75 percent this year, according to the latest monthly survey by the Mexican central bank. (Barclays is more bullish, predicting that the country’s 2012 growth rate will reach 4 percent.) Mexico’s car industry has been thriving, and its rapidly expanding middle class now represents a majority of the national population.

Not only is Mexico outpacing Brazil in short-term growth, its long-term economic trajectory is looking better, as well. Last month, economists at the Japanese bank Nomura projected that Mexico would grow at an average rate of 4.25 percent to 4.75 percent during the next ten years, while Brazilian growth would average 2.75 percent to 3.25 percent. If the Nomura forecast proved accurate, and if the coming decade brought high growth in Mexico and low growth in Brazil, then Mexico (current population: 114 million) would have a bigger economy than Brazil (194 million) by 2022.

Just a few years ago, things seemed quite different. Mexico was mired in sluggish growth, and Brazil was the undisputed superstar of Latin America. (It officially surpassed Mexico in terms of GDP size back in 2005.) The biggest explanation for their divergent fortunes was China: Brazilian growth was being boosted by Chinese commodity demand, and Mexican growth was being hampered by Chinese labor competition. Indeed, the world’s largest country was ravenously consuming Brazilian exports, and its domestic labor costs were much lower than Mexico’s.

But now Chinese labor costs are rising, and Mexico’s manufacturing sector is far more competitive. In 2002, the Chinese-Mexican manufacturing wage gap was 237 percent. In 2010, it was only 13.8 percent. During the next several years, the gap may disappear altogether.

Yes, the drug war remains a huge problem for Mexico, but the country’s total number of homicidesincluding its total number of drug-related homicides declined significantly in the first half of 2012 compared with the first half of 2011. There has been an especially large decline in onetime murder capital Ciudad Juárez, which boasted 215,000 export-sector jobs as of June, versus only 166,000 three years earlier. One could also argue that persistence of serious drug violence makes Mexico’s recent economic growth all the more impressive: According to the New York Times, the Mexican finance ministry “has estimated that the violence shaves at least 1 percentage point from GDP growth.”

While the drug warfare has undoubtedly hurt Mexico’s global reputation, Brazil actually has a higher national murder rate. In July, Brazilian sociologist Julio Jacobo Waiselfisz published a study showing that Brazil’s youth murder rate had increased by an astounding 346 percent between 1980 and 2010. “The numbers in Waiselfisz’s study rank Brazil as the fourth-worst among 91 countries when it comes to youth homicides, behind El Salvador, Venezuela and Trinidad and Tobago,” noted the Associated Press. More recently, on September 3, the Rio-based newspaper O Globo reported that Brazil had witnessed 22 homicides over the previous two months that were linked to its October 2012 municipal elections, and that, in response, more than 400 Brazilian towns had requested federal police assistance.

Clearly, both countries are struggling to combat violent crime, and both countries need better legal institutions. Both countries also suffer from structural economic weaknesses that call for bold political leadership. There have been encouraging signs that Brazilian president Dilma Rousseff and Mexican president-elect Enrique Peña Nieto (who takes office in December) are willing to provide that leadership. But making the necessary reforms will be difficult.

It is important to remember that the challenges facing economic reformers in Brazil and steeper than those facing reformers in Mexico. Indeed, when it comes to promoting economic freedom and a good business climate, Mexico is way ahead of the South American giant. In the Heritage Foundation’s 2012 Index of Economic Freedom, Mexico ranks 54th and Brazil 99th. In the World Bank’s 2012 Ease of Doing Business Index, Mexico ranks 53rd and Brazil 126th.

As for education, both countries have achieved success with conditional cash-transfer programs that incentivize parents to keep their children in school, and yet both are still plagued by low test scores and high dropout rates. That said, in the OECD’s 2009 Program for International Student Assessment test, Mexican students outscored their Brazilian peers by significant margins in all three test categories (reading, math, and science). And in the World Economic Forum’s newly released 2012-13 Global Competitiveness Report, Mexico ranks ahead of Brazil for the quality of primary education, the quality of math and science education, and overall educational quality.

There has been no shortage of euphoric commentary about the rise of Brazil. Perhaps journalists should spend more time exploring the rise of Mexico.

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