For decades, Brazilians said and believed they were living in the country of the future: “o pais do futuro.”
But after nearly seven years of a commodity led economic boom, BRAZIL has moved into the future, however Brazil is not the country it once was. Indeed nowadays, “o pais do futuro” is giving way to “el pais del futuro”, MEXICO.
Most investors don’t look too far into the future. But there are plenty of mutual funds and corporate investors who need to have a vision of what the world will look like in 10 years. Getting the future right is how company’s and investors succeed.
These days, investors are in love with Mexico. Nevertheless over the last years, Brazil is considered as the most powerful and largest economy south of Texas, seen as safer than Mexico, more mature, more diverse economically, and a benefactor of the China boom. That might change. In some respects, it already is changing.
Tony Volpon, managing director of Nomura Securities and Benito Berber, have been considering this for some time. Volpon’s from Brazil and he knows the country intimately. Mexico’s economy might even be bigger than Brazil’s within 10 years.
BRAZIL / MEXICO
Brazil and Mexico grew similarly throughout the (1990s – 2004). After that, the Brazilian economy boomed. Looking back, the real game changer for Brazil was the coming of CHINA into the world economy. The massive commodity demand that came from China was a blessing to BRAZIL, the world’s leading exporter of iron ore, sugar, coffee, orange juice and a major exporter of soybeans after the U.S.
The election of LULA da Silva in 2003 nearly killed the Brazilian real, pushing the forex to about four to one at the start of the commodity bull cycle. It was nearly impossible to compete with Brazil on price and the country captured that market quickly. To this day, Brazil is a haven for all types of agricultural investment. Brazil had, and still has, a natural competitive advantage and attracted billions in foreign direct investment. Plus, Brazil had very low credit demand in the early 2000s. It was under 30 % of GDP and rose to 50 % of GDP as the country got richer, labor markets improved and investment capital poured in.
On the MEXICAN side meanwhile, China’s accession to the WTO put Mexico in 3rd place in terms of % of U.S. imports. China became No.1. Canada was No.2. That’s changing… says Berber. Mexico is now producing more cars for the U.S. market than Canada.
“Mexico is producing more cars for the U.S. and China share of U.S. imports is stabilizing while Mexico’s share is rising gradually. On the investment side, a lot of investment into Mexico was interrupted by the 2008 crisis, but that is also recovering.”
What will influence growth in these countries over the next 10 years?
From a total factor productivity standpoint, BRAZIL grew 1.2 % over the last 8 years ending 2010, while MEXICO grew just 0.1 %. MEXICO was reforming at the time, basically privatizing the banking sector and floating the exchange rate. Moreover, growth in the U.S. real estate market took a lot of labor out of Mexico and moved it into the U.S. That is expected to reverse, helping Mexico’s human capital, keeping wages stable to low as supply improves.
The 2 sectors that are growing in BRAZIL are commodities and services, but they don’t require a lot of technology like manufacturing does. Commodities, with the exception of petroleum, do not incorporate technological change as rapidly (< investment and could mean < employment growth)
Brazil is also becoming more of a service economy, so productivity overall will fall because services and raw commodities are not areas requiring massive investment and productivity, especially in the services sector. As a result, Brazilian economic growth should oscillate around 3 % for the next decade.
In MEXICO, there are 2 sets of things that will support growth.
1) The first has to do with external factors.
As labor costs ↑ in China, more countries are moving to Mexico in manufacturing (labor intensive and capital intensive). Also, the type of manufacturing Mexico is attracting is the “value-added type”; high end, like aerospace for example, which of course is very high cost and human capital intensive.
2) “In terms of labor, the construction sector and services sector in the U.S. are not doing well, so that implies that a lot of migrant workers are coming back to Mexico. And those that would like to go to the U.S. are staying in Mexico,” Berber says, adding that the country is still dependent on structural reforms of the new government if it is to make their call correct.
So the Mexican economy could overtake Brazil as early as 2022 to 2030!
“Our call is predicated on the approval of labor reform by the Mexican congress,” Berber says. ”It is very difficult to fire people in Mexico, so that makes it harder to hire people.
Labor, fiscal and energy REFORM are all important. Energy is dominated by the state, but the new government has been very adamant about the private sector being involved in the energy sector. If that happens, that could boost total production in the Mexican economy.”
Well, Mexico overtaking Brazil?
At least it’s not Argentina… but that could ultimately lead to a rethinking of economic policy in a Brazil that will unlikely take falling to No. 2 without a fight.
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