Mexico’s recent reforms should be the framework used by Dilma Rousseff for Brazil’s economy, or Mexico could soon become Latin America’s economic superstar

It’s tough being an emerging market today, especially one that depends on commodity exports for its economic growth. Every country with significant foreign direct investment watches every US Federal Reserve move with breath held, knowing that any day, a change in interest rate policy could hoover up all that cash, leaving their nation holding a bag full of worthless physical assets.

After the Asian crisis of 1998, a lot of countries learned their lesson. Countries like South Korea, Taiwan, and Singapore diversified their economies as a sort of door stop, to prevent a sudden and forceful blow when something out of their control, like a Federal Reserve interest rate hike, brings economic growth to a halt.

Mexico learned their lesson with the Tequila crisis of 1994, when the Mexican central bank attempted to intervene in response to capital flight by buying pesos. A US/IMF bailout package was coordinated, the peso was allowed to float, and the government spent the ensuing years making structural reforms to get back to a healthy level of economic growth. And Enrique Peña Nieto, Mexico’s president since 2012, has done well continuing these reforms – breaking up monopolistic industries, fighting the corrupt and too-powerful national teachers union, and, perhaps most importantly, reforming the state-owned energy sector to open it up to private investment.

How Dilma Rousseff and Brazil Ground To A Halt, and How Mexico Ran Forward

Now that Dilma Rousseff beat out Aécio Neves, the choice of Brazil’s economic elite, she’ll have to prove that Brazil can actually come out of its depressed growth environment, which is only becoming more of a challenge due to a soft commodities outlook, weak growth abroad, and an America with a healthy economy, that will invariably shuffle investment dollars back to that healthier economy.

Brazil has a huge set of problems to deal with. Growth trends have not proven healthy, with the economy entering recession in the first half of the year. And this comes after growth has slowed to around 2% during Dilma’s tenure.

Mexico, on the other hand, is expected to grow by 3.5% in 2015, compared to 1.4% for Brazil, according to the IMF. And this comes after 2.4% growth in Mexico in 2014, compared to a projected 0.1% growth for Brazil. As Martin Feldstein recently wrote, “Mexico is poised to become Latin America’s economic star in the coming decade.”

While there is a strong case for Feldstein’s optimism, Mexico may not be destined to become the economic miracle of Latin America, as there is still a lot to be done. According to McKinsey, productivity in small firms has fallen by 6.5%  a year since 1999, though it has grown by 5.8% a year for large firms in the same period.

Chart: McKinsey, "A Tale of Two Mexicos"

Chart: McKinsey, “A Tale of Two Mexicos”

Banking and finance reform is badly needed, so small companies can have access to capital. Better policies designed to help entrepreneurs start small businesses can help too – especially considering 42% of Mexico’s workers work for these unproductive small businesses. And this all doesn’t even mention the ongoing cartel violence in the country.

Mexico has transformed its economy to intertwine itself further with American production and manufacturing, a process which began after NAFTA passed in the 1990s. They have also helped form the Pacific Alliance, a Latin American free trade bloc. Rousseff, on the other hand, has shown no interest in making fundamental economic reforms – like building an actual regional trade block, rather than MERCOSUR, which acts as a trade bloc in name only.

How The BRICS Might Become The MRICS

Brazil passed Mexico for good in GDP (by one measure) around 2005, and continued its impressive level of growth since for the several years after that. Now, Mexico’s GDP is just over half of Brazil’s, so it isn’t exactly like Mexico is going to replace Brazil among the largest developing countries anytime soon (though on a PPP per capita basis, Mexicans are roughly 16% richer than Brazilians). Around that time, however, Mexico had suffered from below-potential growth, while Brazil was the beneficiary of the hottest commodity market in global history during the 2000s. Now, however, as the Economist notes, Brazilian inflation has been running at 6.7% a year, with no economic growth. It isn’t going to a much of a prolonged period of this trend for Brazil’s citizens to be significantly worse off than Mexico’s.

Brazil can no longer hide their structural problems behind the greatest global economic growth story in history. Enrique Pena Nieto’s model for Mexican reform – while far from complete – would be a good template for Dilma Rousseff to follow, or her Brazil could stall out enough to make Mexico the premier Latin American economy.