Monday, March 31, 2014

JIM O'NEILL: Latin America can learn from Mexico’s efforts

emergingmarkets.org
29/03/2014
 
The man behind the Bric acronym has come up with a new one: Mint. Here Jim O’Neill explains why he has chosen M for Mexico

 
When the BRIC acronym I coined 13 years ago first started to receive comment, among the most vocal came from supporters of Mexico bemoaning the fact that they weren’t included. While there were others disappointed also such as Indonesia and Turkey, I often thought Mexico had the most reasonable grounds for gripe given their population size and geography. Despite this, I was for the first decade pretty pleased that I left them out because of course, despite a huge rise in oil prices from 2001-2010, Mexico only grew by a paltry 1.7%, less than half Brazil, and way below the growth rate of the other Bric countries.

In the past couple of years, I found myself starting to rethink the Mexico question and it was partly this that led me to the Mint idea, a name to describe the next set of countries, Mexico, Indonesia, Nigeria and Turkey, after the four Bric nations, to have an exciting future.

There used to be that great GE (General Electric) phrase, “Who needs Mexico, when you have got China?” In the past year or so, I started thinking to myself, actually “who needs China when you have got Mexico?” Because of China’s accession into the WTO, any benefits that Mexico in theory would accrue from its trade agreements with the US and Canada led to nought given the massive rise of China as the world’s cheap exporter. 

But events have changed this. The slow but persistent rise of the RMB since 2005 has meant that China is no longer the great factory for the world. On top of this, China’s external vulnerability as evidenced by the 2008 global credit crisis caused China to shift gear policy-wise. Going into the worst of that mess, China had as much as 12% of its GDP just in exports to the US, clearly unsustainable. This event made a huge contribution to Chinese policymakers deliberately deciding to boost Chinese wages in an attempt to help real incomes of their workers as part of an effort to redistribute growth towards consumption. 

For other countries, especially the likes of Mexico, close to large consumer markets, this was indirectly a present from heaven, as it helped give them back all that competitiveness they lost. When I made a documentary for BBC Radio about the Mint countries, it was striking to me how strong the evidence came over from interviews about Mexico’s increased competitiveness. Whether it was the likes of giants like Volkswagen, who now produce more cars in Mexico than anywhere in the world outside of its home town, or Carcal Plastics, a small family owned producer of basic plastic products such as dustpans and brushes, producing all these things is a lot more economical in Mexico than China these days. On OECD measures of comparable unit labour costs, Mexico is one of the cheapest in the world.

Of the winners and losers of the new China, Mexico is one of the bigger winners, which importantly is different than for some of Mexico’s Latin neighbours than might be among the bigger losers, possibly Brazil and Chile included.

But this is not all that is going in Mexico’s favour. They also have in power a set of young people whose eagerness for policy reforms to boost the supply side potential of the economy makes what Margaret Thatcher do in the UK seem like the efforts of a pussy cat. Whether it be energy, education or overall governance, I was quite blown away with my meetings with the President and several of his key team members. 

I was bothered ahead of my late 2013 visit that too many foreign macro hedge fund and international bond investors were in love with Mexico, and it might not be justified, and I still slightly worry about being “with the crowd”. But the commitment to getting rid of so many of the structural rigidities that have held Mexico back is highly impressive. As we can witness, implementation of many of these reforms is not straightforward and meets obvious resistance, but there are few signs that President Nieto is being put off. I believe that this gives Mexico the chance to double its growth rate to closer to 4% for the decade starting 2015, and allow a more reasonable chance for the nation’s impoverished to earn a better standard of living.

It also interests me that Mexico’s policymakers are quite keen to pursue areas of common interest with the other so called Mint countries, possibly even creating their own club inside the G20 Group the same way that the Bric nations have done.

What if anything can be learnt or relevant for the rest of Latin America from Mexico’s efforts? Well for the likes of Chile and Colombia, perhaps not much more than vindication that their own strong path of reforms have been noticed and mimicked. While many often say that this is Asia’s century, I actually think that if you take China out of the equation, which is such a special unique place, one could then have a more open debate as to whether it is Asia’s or Latin America’s.  With the important exceptions of Argentina and Venezuela, much of the continent is on a much stronger path than for most of my lifetime, and one day, both these countries will even find leaders who realise that there is no easy quick path to a better future and painful reforms to improve competitiveness are in fact the only way forward.

Jim O’Neill is Visiting Research Fellow to Breugel and Economic Advisor to the International Finance Corporation.

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