Economic history from below the tropics.

# Guest post | Brazil v Mexico, July 2

## July 26, 2018 by Gabriel Mathy

Mexicans and Brazilians generally hate any comparisons of one another, and indeed, they’re very different in many ways: different colonizers, different histories, and they’re thousands of miles apart on different continents. Also, Brazil has a large share of government spending/transfers in GDP, while Mexico has a small share: Brazil barely under 40%, like a developed Western European/OECD country. On the other hand Mexico’s share is much lower at about ¼. This is lower even than the USA’s ~36-7%. and yet… Mexico and Brazil have similar incomes per person: Mexico has a PPP income per capita of approximately $18k and Brazil has an income per capita of approximately$15.5k. Their growth experiences in the latter half of the 20th century were similar too: booming growth under industrial policies from the 30s-70s and then the 70s laid the foundation for the 80s lost decade (see here and here). Both countries had authoritarian governments that corresponded to the period of industrial policy.
As a brief aside: many overlook the links between liberalism and neoliberalism, but most successful instances of industrial policy, such as Brazil or South Korea, were under violent illiberal dictatorships. Neoliberalism usually came afterwards with the move to democracy. Note that these similar paths occurred even though Brazil and Mexico found themselves on opposite ends of the oil market. Brazil was still an oil importer (the big offshore discoveries would come later) and so the dictatorship spent massively on large public works (obras faraônicas) to keep growth strong as the regime was losing legitimacy. Mexico was an oil exporter and borrowed to invest in their oil sector, and so when oil prices collapsed in the 1980s Mexico ended up overextended and overreliant on oil.

Then things fell apart in the 1980s with a disastrous decade, which led to neoliberal reforms in the 1990s: NAFTA in Mexico and the Real plan in Brazil. While the industrial policies in both countries had created some imbalances, growth slowed down significantly in both countries during this period in both countries relative to the industrial policy period. Addressing causality is well beyond the scope of this post, but it is clear that the neoliberal reforms did not live up to their promise. A side-effect of the slowdown in industrialization in Brazil has been an increased specialization in primary products while China industrializes. This is somewhat perverse and speaks to the success of Chinese industrial policy, and the failure of Brazilian industrial policy.

One silver lining was a reversal of rising inequality that had prevailed under the industrial policy period. I would attribute to policies which shifted the economy to more labor intensive sectors which each country had a comparative advantage and away from capital intensive sectors like heavy industry, as well as some redistributive policies like conditional cash transfer programs (PROGRESA in Mexico and Bolsa Familia and its progenitors in Brazil). Mexico went from Gini indexes in the lower 50s in the late 1980s to the mid 40s today, while Brazil went from a Gini of over 63 in 1989 to about 51 in 2015 (data here).

Lula had a been a prominent union leader under the Brazilian dictatorship. His election in Brazil in 2003 caused a panic by the Brazilian establishment that he would govern as a populist and derail growth. This didn’t happen and Lula combined orthodoxy and continued neoliberalism with expanded redistributive policies in Bolsa Familia and minimum wage hikes. Bolsa Familia, a conditional cash transfer targeted to the very poorest Brazilians, was initially opposed by elements of the PT (Worker’s Party, Lula’s party) as being too neoliberal, but quickly became a centerpiece of their program. This program had made an immense difference in the lives of the poorest Brazilians and played a role in Brazil elimination of extreme poverty and its success in reaching the Millennium Development Goals. A series of minimum wage hikes also helped increase income for poor Brazilians, and these policies combined to start to address Brazil extreme inequality.

The PT remained popular, though mistakes were made under Dilma that worsened the economic crisis that followed after the plunge in commodity prices in the mid-2010s. However, the right couldn’t win at the ballot box and had to use nondemocratic means to beat the PT. Opponents of Dilma combed through her actions for anything to impeach on. The only charges that could be found were the delay of payments from state-owned banks which made the debt situation in the country look less serious. Compared to the scale of corruption in Brazil (or compared to the corruption in the Trump administration in the United States), this is clearly a minor charge even if it could be proved conclusively (which of course, it was not). Recently Lula has been implicated in the ongoing corruption scandals with the PT, and Temer, the current President, has his own involvement with corruption much more serious than the allegations used to remove Dilma.

Mexico also had a major turn toward neoliberalism in the 1980s and 1990s which culminated in the signing of the NAFTA free trade agreement with the United States and Canada. Mexico has a very different situation industrially than Brazil. Brazil has a population size that is larger than Mexico and is much more remote from large markets like the United States, and so vertical integration within Brazil or with neighboring countries makes sense. Mexico’s path is intertwined with that of the United States, for better or worse, and it’s industrial structure should reflect that. And indeed, Mexico has increasingly become a part of the US industrial value chain, though the admission of China into the WTO in 2000 set back this process, in a similar fashion as happened with Brazil.

We will see if AMLO can replicate Lula’s success in Mexico or if AMLO will live up to the fears of his critics and his populist experiment is brief. Oil prices are up and this will help Mexico like it helped Lula. Also, neoliberal policies will not bear much fruit while the Trump administration is in control north of the Rio Grande, so this timing may be ideal for AMLO to try something different. What exactly that will entail remains to be seen.

Gabriel Mathy is an assistant professor of economics at American University.

Tom Westland and Emiliano Travieso are PhD students in economic history at the University of Cambridge.