Economic Growth

Economic conditions

Apparently, Mexico is seen to be the second largest economy in Latin America due to the witnessed unprecedented growth in the recent years. To be more specific, this growth occurred in the last three months leading up to the fourth quarter of 2014. The Mexican economy expanded by a whole 2.6% year-on-years, and this has been gradually improving from the 1.6% recorded in the second quarter of the year. With the service sector accounting for 62% of its GDP, much of this growth has been attributed to the expansion of the service sector that grew from a 2.1% to a 2.9% rise over just two quarters. Further boosting this growth were increased retail sales and an expanding manufacturing and construction industry. (2) Unemployment rates are relatively low in Mexico (0.01) and with a core inflation rate of 2.3%; prices seem to be relatively stable. The country also recorded a medium level of Human Development Index of 0.756 according to the reports on human development by United Nations Development program. In fact the human development index has been steadily rising in Mexico since the 1980s (3). In addition, the mean years of schooling in Mexico are 8.47.

Brazils economic growth, however, has shown a slight decline in the recent past. The 0.20% contraction in the third quarter of 2014 has been attributed to increased government spending (1.9% up from a 0.9% raise the previous year) and a drop in investments. Gross fixed capital formation is also touted to have been falling for three consecutive period by 8.5%. Against this backdrop consumer spending rose only slightly (0.9%) from the previous year. 1.28 million Brazilians were unemployed as of January 2015(1). Compared to a total population of 203 million, unemployment rates in Brazil are relatively lower than that in Mexico. Brazil scores a 56.6 in economic freedom (c) and posts a human development index of 0.741 (medium level), according to UNDP reports with a mean years of schooling of 7.18.

Below is a graphical summary of the quarter-on-quarter annual GDP growth rates of both countries for the period 2012-2014

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Economic Growth theories and their implications

The simplistic neoclassical model of growth posits labor and capital as crucial factors of production in any economy. Robert Solow based his analysis on economic growth of this model to come up with what is today known as the Solow Growth Model. He showed that if one assumed a constant returns to scale, diminishing marginal productivity of labor and capital, a constant capital depreciation rate, a constant population growth rate, and savings that area constant function of income, then one could convert the general growth function to per capita terms and study the adjustment process that that leads the economy from some initial capital per worker over time to the steady state. The critical element in the transition process is the rate of savings and investment compared with the rate of depreciation and population growth. In light of his theory, the differences in per capita capital in Mexico and Brazil may have implications on their economic performance and could possibly explain the observed differences.

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The Harrod-Domar model may also help explain the differences in growth rates between the two countries. According to the model, the higher the savings rate and the lower the capital labor ratio, the higher the growth rate because the increased savings are invested for grater capital formation. The capital labor ratio measures the efficiency of capital. The lesser the capital needed to achieve a certain level of output, the smaller the ratio will be, implying more efficiency in capital utilization. Variations in either the savings rate or the efficiency of capital use between the two countries then could also contribute to differences in economic growth.

Growth Prospects and Policy Recommendations

The Mexican economy is positioned for positive future growth considering that in its Country Partnership Strategy, it has passed 11 structural reforms, six of which affect the areas of labor, education, competitive policy, financial sector, telecommunication, and energy. (4) However, it needs to overcome the hurdles of monopolistic and oligopolistic influences in number of its crucial sectors, the influence of special interest groups that often times sabotage positive change.

Brazil, on the contrary, is currently under recession due to a shrinking industrial sector and the government is currently undertaking austerity measures as economic experts forecast tougher times ahead. The main impediments to growth in Brazil in recent times seem to be a failing government policy of increased expenditure by hiking taxes against falling consumption expenditure, increased corruption, and erratic weather.

The government could focus on boosting local industries by reducing imports since this decline has partly been blamed on shocks in the global economy. This would reduce prices in the Brazilian economy and boost consumption expenditure. It could also focus more on tackling corruption and adopting market friendly policies that would encourage investment spending by local firms

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