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Mexico Is Catching Up to Brazil

11:05 AM, Sep 17, 2012 • By JAIME DAREMBLUM
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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 a metaphor for the recent performance of the Mexican and Brazilian economies.

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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.

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