Economic growth: Two-speed Latin America

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Mexico’s energy reforms should kick-start growth in its lacklustre economy while Brazil appears to have no strategic planning in place.

Politics and economics have never been aligned in time. The former has always been driven by short-term considerations, expediency and populism; the latter has a slower-paced discipline, where changing fiscal and monetary strategies (among others) take time to seep into the national and global economies, and where cause and effect are often obliquely correlated through uncertain, time-lapsed-impacted evaluations.

Further reading
Mexican energy reforms:
The test for Pemex

Mexico is lucky in that its policymakers are focusing on economics. President Enrique Peña Nieto has diagnosed the economy’s lacklustre economic progress (average 2.4% growth in the last 20 years is below the EM average) as a lack of productivity (which has actually fallen by 0.4% a year during the same period).

To boost productivity the government is cutting input costs from telecoms, credit and energy. Increased competition across these industries will not only add benefits to consumers and businesses as a whole, but the opening of the energy sector will bring a windfall in investment and jobs. The consensus is that between 2018 and 2030 the energy reforms alone will add about 1.5 percentage points to GDP growth.

That’s the mid-to long-term sorted, then, but it has created short-term problems: Peña Nieto’s popularity has dived as the time needed to implement such big structural reforms has led to frustration about lack of short-term progress. Important mid-term elections loom. Peña Nieto clearly appreciates the short-term imperative to defend the longer-term plans and he has been pushing reforms such as energy through faster than scheduled, surprising domestic and international audiences alike.

Knee-jerk responses

Contrast Mexico’s short-term focus on accelerating its longer-term structural agenda with Brazil. There appears to be very little, if any, long-term economic strategy: the past four years have been characterized, or blighted, by tinkering with specific taxes to stimulate demand within favoured industries, price controls to artificially control inflation in others, and protectionist knee-jerk response to fluctuating international trade flows.

Structural reforms to taxes and regulation that are desperately needed to revive investment have been ignored. Monetary policy has been used to define short-term inflation and FX rates, as well as being lowered precipitously to achieve systemically low interest rates that the economy couldn’t sustain.

Fiscal policy has been loose – and short-term accounting tricks used to try (unsuccessfully) to obscure the laxity. The finance ministry has not implemented long-term policy goals that would create the space to protect these accomplishments.

The result is recession, inflation and a possible political defeat for the president in the forthcoming elections.

Mexico’s long-term path won’t be an easy one, nor will it necessarily provide its proponents with political success: the reforms are likely to improve the average Mexican’s wage only slowly.

Economists say the benefits could take a generation to feed through into the general population. In the meantime there are likely to be many businessmen getting rich exploiting opportunities arising from the politically sensitive issue of private entrants into the oil and gas industry, newly liberalized for the first time in 76 years.

The Greeks used to say that society can be defined as men today planting trees under whose shade they will never sit. Mexicans of 2014 can expect to benefit a little sooner, perhaps, but it is longer-term thinking that brings progress. Brazilians should contemplate their own planting.