With the BRICS making up the largest block of nations having the best growth rates over the last few years, it makes some sense to create a bank that can be funded by these nations. Despite it being a basic idea at the moment, the BRICS.D.B. would help them and other BRICS candidates like Mexico and Turkey and anyone else who qualifies for funding. While development banks already exist in the regions where BRICS operate, their links to the US and Europe when those regions are in economic distress might make a strong point for a BRICS.D.B. To separate the BRICS funding from the US and Europe might be difficult. Currently China and Europe are discussing funding assistance from China to the EU, building ties between the two interdependent regions. It is questionable whether BRICS nations have enough in common to sustain a development bank or any common policy. The reality is that Brazil and India, China and Russia, and South Africa have different goals, different people, different policies and differing interests that often oppose each other or have very little in common. Brazil supported the idea of the BRICS.D.B. suggested by India, but with a number of failed associations in the Americas that Brazil had been supporting, it is hard to say whether or not economic growth in a set of collected and labelled nations is enough to share a development bank to fund other nations that have no ties to the BRICS. Perhaps the inclusion of at least one BRICS official with sympathy towards the BRICS would sink the idea of a BRICS.D.B. This could be a move to ensure this will happen.

Robert Zoellick, an American and current head of the World Bank announced he will step down this June from his position. The appointment of Christine Lagarde French national at the IMF over her rival Mexican Central Bank Governor Agustin Carstens last year re-confirmed the tradition of a European as the head of the IMF and an American as the head of World Bank. The current candidacy of the World Bank might woo Mr. Carstens if a push by BRICS nations to separate themselves from the current system encourages a head that straddles US interests and BRICS interests. Carstens has lead Mexico through the 2008 economic crisis and reduced trade with the US and drug violence in Mexico to give America’s NAFTA partner one of the largest reserves in Mexico’s history. As a possible future BRICS and close American ally, this move by India and Brazil’s support may not produce a BRICS.D.B, but it could help pro-BRICS interests into one of the top positions in the World Bank. Certainly a clever move by the BRICS if this is the case. Good luck Agustin?

With the EU in economic struggles and the BRICS becoming the source of a lot of investment between borders, France and Dassault has been able to capitalise on its position as one of the top technology producers in its field to challenge Boeing and their F/A-18E fighter series for contracts in two of the BRICS nations, India and Brazil. Much like the hard sell of the Mirage IIIs during the Cold War, Dassault has produced the Rafale fighter for export sale but have had little luck in selling it outside of France until recently. Brazil was seeking to update its air force over the last decade but was weary of the French jet as it did not sell outside of France to any nation. With competition from Boeing’s F/A-18E and Saab’s Gripen fighter, Dassault might have had to break even on the Rafale if it could not produce export sales outside of the Armee de L’Air. Interest in the Rafale took hold in India and that lead President Rousseff of Brazil to send officials to India to analyse the deal, as well as express its interest in the Rafale over its main rivals. The firm decision on the fighter has yet to be set in stone, but it looks like the Rafale will arm India and Brazil’s air forces for the next few years.

Export sales by Dassault has often established the firm over decades with the sale of Mirage IIIs, Mirage 2000s and now the Rafales. Success of Dassault fighters in the Falklands War over its British rivals always made French technology one of the most feared by any nation that had to challenge it and has produced a great deal of licensed French technology to be sold abroad, especially to China. China currently does not have Dassault fighters, but does produce variants of the French Dauphin helicopter; one that has also been purchased by the US navy, as well as one of China’s most numerous Anti-aircraft systems, the HQ-7 Crotale. Competition with giants like Boeing has been extremely difficult since companies like Dassault and Airbus are based in the EU and have to compete with American companies, often for American contracts or contracts from US allies. Aviation industry contracts can make or break a firm, or provide it with decades of support sales even after the production line has stopped on a model of a plane. Part of the decision to go with Dassault by Brazilian officials was linked to an issue a few years ago where Brazilian firm Embraer was blocked from selling its Tucano aircraft to Venezuela because it has US technology in its avionics and the US was able to block the sale. Airbus also has challenged American firms under competition regulators when they lost a contract to provide the US military with new refuelling aircraft based on its commercial airliner models. It was claimed by Airbus that there was not a fair assessment of the contact between firms, as political motivations to create American jobs became more of a factor than the quality of the product. While there have been several legal battles in the industry over competition issues, it makes a strong point that for Dassault and France to win any defence contract in a BRICS nation is extremely difficult. A detailed assessment needs to be made on how to approach large procurement contracts towards BRICS nations, please see the article here for more details.

This year Mexico will elect a new President and Senate and the parties are slowly presenting their candidates for the upcoming six-year Presidential term. President Calderon has served his one and only legislated term in office of six years and it will remain to be seen whether his PAN party will be re-elected. With excellent economic numbers in a slow global economy, the PAN has a good chance of being re-elected. What might hurt the party is the open drug war in Mexico currently taking place that was a result of Mr. Calderon pressing for drug security in Mexico and the entrenched drug networks that have been established in Mexico over the last few decades. With former PAN President Vicente Fox pushing for a legalisation of the narcotics trade to reduce violence in Mexico, the PAN may have some soul searching to do before putting the Presidential campaign into full force.

A decent market measure for all economies can often been seen in the aviation industries response to different national economies. In Mexico, the now defunct Mexicana Airlines is showing some signs of re-emerging in Mexico after its financial collapse a few years ago. Emerging markets in general has seen some attention from the aviation industry in general as many companies seek customers in Asia, Latin America and the Middle East, a result of region market growth in general through to 2016. While the aviation industry is not being displaced in North America and Europe, it does show that BRICS and other emerging and frontier markets will produce trade expansion while the US and eventually the EU drag themselves out of economic paralysis. A conference on competitiveness and innovation addressing the aviation industry by GE named “GE American Competitiveness: What Works” will deal with issues of expansion to emerging markets and strategies in the current US market slowdown next week in Washington DC. Anyone who wishes to see how one industry is handling expansion to emerging markets and growth in the time of economic slowdown should seek information from the conference presenters and organizers. With the possible re-birth of Mexicana and troubles in Asia with the A380, it is certain to be an interesting week of presentations. Information on the conference can be found here.

Guillermo Ortiz

Latin America’s technocrats spent the second half of 2011 on mushy footing, unsure what effect the euro zone crisis might have on the region and afraid that China might experience a “hard landing.”

Now some of the region’s wonks are expressing more confidence. “Latin America has never been better equipped to move forward,” said Guillermo Ortiz, a former central banker of Mexico, at Davos. He went on: “This is really the decade for Latin America.”

Two points: First, now it is the Mexicans who are cooing over growth and international clout, not the Brazilians. Fair enough. Brazil’s economy braked fast last year, recording nil growth in the third quarter, while Mexico did an impressive head fake by experiencing a growth spurt just as the region below went into slow-mo.

Second, whatever confidence leaders have recovered since last summer is premature. In his remarks, Ortiz suggested that the region had moved beyond the headwind of Europe’s crisis, and structural adjustments over the past decade ensure that Latin America will be sitting pretty to 2020.

Maybe this will be case for Mexico, which relies more on US consumers rather than European ones. But while forecast growth of 3.5 percent for Latin America in 2012 surpasses Mexico’s trend rate, elsewhere it signals a dangerous slowdown. Inflation will be higher than economic growth across most of South America; in turn, slower growth will increase unemployment, feeding informal sectors that already threaten socioeconomic development. Lower commodity prices could metastasize the bad news.

By now, anyone who’s been watching Latin America is well aware of the red flags raised over the region’s reliance on commodities for economic growth, so I’ll review by way of hyperlink and move on.

What troubles me are recent signs of Latin America’s inability to harvest commodities. A week ago a UN report concluded that a drought in northern Argentina means the world’s second-largest corn exporter will ship about 1.6 million tons of corn less this year than in 2011. A clear-cut case of nature’s wrath no doubt, but it shouldn’t be dismissed given the context of underproduction elsewhere.

Brazil produces over half of the world’s ethanol; the country’s cane-based brew is to biofuel what the bikini is to fashion. Last year though, Brazil was forced to import 1.1 billion liters of ethanol. And Mexico, which counts oil as its second-largest source of tax revenue and sits atop the world’s fourth-largest shale reserves, is importing record levels of natural gas.

Here’s the kicker: the United States is taking up the slack. Despite Argentina’s weak harvest, corn prices are expected to decrease this year because of strong exports from the US. Nearly all of Brazil’s ethanol imports last year came from the USA, as did most of Mexico’s imported natural gas.

Brazil and Mexico are in this situation because of inept government policy. Mexico’s Pemex has said it plans to operate 175 shale gas sites by 2015; to date, it is drilling at one site in the northern state of Coahuila.

Meanwhile, Brazil’s government has dis-incentivized ethanol production in recent years by capping domestic prices and by cutting taxes on oil–but not ethanol– production. The result? Brazil had some 150 million tons of spare mill capacity for ethanol production last year.

Just back from the Davos shindig, Moises Naim chided big talking officials from developing nations for their hubris. Poor management of hallmark commodities in Latin America leads me to agree.

Two incredible women that must be mentioned here is President Dilma Rousseff, who was once a victim of assaults by Brazil’s past military government to become the President of the country. Another astonishing person and the recently appointed head of Petrobras, Maria das Gracas Foster will be made the CEO of one of the largest oil companies in the world. Foster was announced as the next CEO of the company after running one of its most profitable divisions of the company over the last few years. Foster’s 34 years with the company and her recent leadership of her division during one of the most difficult and exciting economic and regulatory periods in Brazil’s economic history lead her to the position. Foster, who has worked with President Rousseff in the past, is delegated with expanding Petrobras’ output and profits, taking charge of access to new oil deposits founds in Brazilian waters and with growing the company during Brazil’s still viable economic boom.

Foster grew up in a working class suburb of Rio and ended up studying Chemical Engineering. She worked her way up in the company over her 34 year career and demonstrated her skills in dealing with company issues and government agencies, having a lead role in almost every division in the company since 1978. Past working relationships with the current President Dilma Rousseff lead President Rousseff to support the appointment of Foster to the head of Petrobras. It is likely that beyond Foster’s qualifications, the tenacity and symbol of a working class hero becoming the head of the 5th largest oil producer in the world will not be lost on those young women who are working hard to punch above their weight and their position in society to become the next CEO in Brazil and throughout Latin America and abroad. The number of inspirational leaders taking Brazil into the future is an example for every country in the world of what is possible for anyone to work for their best self in their career and personal lives. For more information on Foster please see FT.com as well as the article here.

Productivity: Brazil and Korea

In an article for the Economist’s “The World in 2012,” President Dilma Rousseff argues for “the Brazilian model” to be emulated by other developing countries. The essay rightly emphasizes Brazil’s record in poverty alleviation and environmental issues. At times though, Rousseff sounds off cue. For example, she writes:

We should all strive to raise wages in line with productivity, so that the recovery benefits the middle classes in rich economies and allows hundreds of millions of people to get out of poverty in developing ones. The market alone does not improve income distribution. Government action is needed.

But productivity in Brazil is woeful. Two weeks ago Greg Michener noted on his blog, Observing Brazil, that worker productivity increased 0.3 percent annually from 1995 to 2005. Despite the general wisdom that developing countries can grow faster than developed ones, Brazil’s productivity actually declined compared to America’s over this period.

Hopefully, worker productivity has increased since 2005 and the data just isn’t available. But if so, productivity is still likely to be trailing wages. Paulo Levy, a researcher at the Brazilian government’s applied economic research institute (IPEA), notes a planned minimum wage increase of 14 percent in 2012 in an article  on Project Syndicate.

Fact is, absent productivity gains, Brazil’s economic growth has been powered by massive commodity exports to China over the past decade. There are legitimate achievements on which Brazil can serve as a model to the world. But Rousseff’s advice on wages is inflated, and inflationary.

Graphic from UNCTAD.

Latin America’s two largest economies started 2011 on different notes. Mexico’s growth was set to ring up about 4 percent, with drug violence clipping about a point off growth, according to BBVA Bancomer, and reliance on a weakening U.S. economy wielding another discount. In April, auto production, a key industry in Mexico, experienced a sharp drop in the wake of the tsunami that hit Japan and resulting supply-chain kinks (.pdf, see page 8). By summer, as euro zone problems waxed anew, the US appeared to be headed toward a double-dip recession, with knock-on effects for Mexico: GDP projections dropped to two percent.

Brazil, on the other hand, started the year on high. Finance Minister Guido Mantega belted the opening lines when he announced that GDP expanded 7.5 percent in 2010. Beyond representing Brazil’s highest growth since 1986, the spurt made it the seventh-largest economy in the world. The forecast for 2011 was a palatable slowdown to 5-5.5 percent growth.

Turns out, while they started on different stanzas, the two economies were singing more or less the same song. When the official numbers ring out, Brazil will grow about 3.5 percent in 2011, and Mexico 4 percent.

It’s been a decade since Mexico chalked a higher rate of growth than Brazil. What’s more, this is unlikely to be a blip. Both countries are expected to grow 3-3.5 percent in 2012. However, variation from these forecasts would probably come in the form of Brazil lagging its target and Mexico eclipsing it, for two reasons. One: Mexico, not Brazil, has proven more resilient to global economic headwinds in 2011. Two: Mexico’s growth has discounts baked in—mainly in the form of security concerns and reliance on US consumer demand. In Brazil’s case, major impediments to growth—reliance on commodity exports to China and inflationary consumption—haven’t been given due consideration.

Guido Mantega (Photographer: Renzo Gostoli / Bloomberg )

Brazil 2011-2012: Vamos Lá!

Summary of the past year: Well, in summary, from soaring to just plain growing. Economists surveyed by the Central Bank expect GDP to grow 3.0% in 2011 (adjusted real terms) versus 7.5% in 2010. As a recent Reuters report on Brazil puts it: “…corporate leaders, investors and government officials already express nostalgia for the boom years. They will have to scale down their expectations…” A continued Eurozone crisis could hamper exports such as soy, iron ore, and coffee. Domestic air traffic was up 18.5% in the first 9 months of 2011, versus a 27.4% increase in the same period of 2010. Still, domestic demand remains stronger in Brazil than in many developed economies.

Most unexpected event: For me, it’s got to be the Faxina (“housecleaning”) that President Rousseff has embarked upon to oust corrupt government ministers. As discussed in my previous post, 5 of Dilma’s ministers have exited disgracefully since June. Under-fire Labor Minister Carlos Lupi may be the sixth. Lupi may offer a test to Dilma’s mettle – he said he would only quit if he were shot, “and it would have to be a big bullet, because I’m a big guy.”[1]

However, analysts believe Dilma is only ousting Ministers whose guilt has been made public, without tackling the system in which ministry control and government jobs are political currency. Dilma’s challenge is that her party needs allies in the Chamber of Deputies, and as the price for friendship, other parties want their slices of bacon. One argument says that because Dilma’s legislative priorities (education, health care, infrastructure) do not require congressional aid, Dilma could crack down harder on corruption. Alberto Almeida of the Instituto Análise notes that the faxina has made bribery of government officials a lot tougher. This may prompt smaller political parties to merge with bigger ones, a positive result if this makes government coalitions smaller.

Person of the year: A tough call, but I’m going to go with Finance Minister Guido Mantega. A recent report in Bloomberg suggests Dilma will retain Mantega during the pre-election Cabinet reshuffle next year.[2] In a sense, this is not surprising given Mantega’s handling of the post-crisis economy. After the Lehman crisis, Mantega handled tax restructuring and state-lending initiatives that fostered 7.5% GDP growth in 2010. However, news of Dilma retaining a Cabinet official deviates from the norm these days. Mantega was never seen as close to Dilma; he was appointed Finance Minister in 2006 by Lula. Brazilian inflation around 7% and threats to demand for exports provide ample pretexts for Dilma to replace Mantega, but Dilma has kept faith with him. Mantega’s skill will be put to the test in the next 6 months. Brazil GDP contracted in the third quarter and inflation remains high compared to its target range. The jobs market, though, remains healthy.[3]

Prediction:  Hard to say where the economy will go, but economists expect real GDP growth of about 3% in 2012. This still beats the developing world. Investors in Brazil are hoping for a better year as well, and may well get it. The Ibovespa is currently down about 17% year-to-date (source: Cap IQ), though expected to appreciate next year. The real, on the other hand, may not be appreciating. As I type the real is at 1.87 versus the dollar, sky high compared to its post-Lehman low of 2.60. The real is seen by many as overvalued, especially given that Brazil’s trade balance is expected to decline.

On a sporting note, World Cup 2014 will also have a sharp effect on Brazil’s politics and economics. In the runup, Dilma’s government has disagreed with FIFA on issues such as cracking down on merchandise piracy, allowing beer sales inside venues, and ticket pricing. Hammering out these agreements along with completing infrastructure development could lead to a game of chicken between Dilma and FIFA. The risks are huge for both Brazilian taxpayers and anyone set to profit from the World Cup (players, sponsors, travel agencies). Also, I wouldn’t be surprised by the resignation of Ricardo Teixeira, President of the Brazil Football Confederation and 2014 World Cup Local Organizing Committee. Teixeira is facing money laundering and bribery allegations, and from what I understand, he and President Rousseff are not on speaking terms.

As a recap, Dilma’s Cabinet has been turbulent to say the least. 6 officials of the administration have left since June, and 5 did so due to corruption allegations. All 6 were part of the government of Dilma’s mentor Luiz Inácio Lula da Silva. The timeline goes as follows[2]:

• June 7: Chief of Staff Antonio Palocci resigns over allegations that he used his government position to profit through a private consulting business.
• July 6: Transport Minister Alfredo Nascimento resigns due to allegations that kickbacks were collected on transportation and infrastructure contracts.
• August 4: Defense Minister Nelson Jobim resigns after insulting other ministers; no corruption this time.
• August 17: Agriculture Minister Wagner Rossi resigns after allegations of cash kickbacks throughout the ministry. This scandal featured “reports of a man who walked the halls of the Agriculture Ministry making payoffs from a wheeled suitcase.”[3]
• September 14: Tourism Minister Pedro Novais resigns after allegedly misusing public funds. These allegations include the claiming of costs at a sex motel as government expenses; it is not clear if this charge refers to Novais or someone else at the ministry.
  • October 26: Sports Minister Orlando Silva resigns due to reports of R$40 million (US$ 22.5 million) in kickbacks for himself and the Communist Party of Brazil. Silva allegedly took funds in the ministry parking garage.

Commentators have tried to diagnose the exodus; explanations I will discuss here include both competition for scarce government patronage resources and philosophical disagreement over the proper relationship between government and the governed.

In their piece “The Price of a Disproportional Cabinet: The Paloccigate in Brazil,” Carlos Pereira and Carlos Aramayo of the Brookings Institution identify a key challenge of Dilma’s Cabinet as under-representation of minority parties.[4] The relative size of Dilma’s Worker’s Party (PT) in the Chamber of Deputies demonstrates Dilma’s reliance on these minority parties. While Dilma’s multi-party Coalition holds about 64% of seats in the Chamber of Deputies (326 seats out of 513), the PT itself holds 88 seats (27% of the Coalition, and 17% of the entire Chamber). According to data from Pereira and Aramayo, PT members hold 17 out of 37 Cabinet posts, or 46% of the total. In analyzing Palocci’s resignation as Dilma’s Chief of Staff, Pereira and Aramayo note that Palocci had been forced to resign from Lula’s government due to prostitution allegations, but that he never lost support of his party. In the case of his recent resignation the Cabinet, and specifically its PT members, withdrew support. Pereira and Aramayo imply that PT members turned on Palocci because his recent misdeeds led to personal profit, while explaining rebellion in the rest of the Coalition “as the price Rousseff paid for allocating a disproportionate cabinet.” Pereira and Aramayo also note that Dilma missed an opportunity post-scandal to equitably realign the Cabinet. Further internal discord may ensue, particularly given another expected Cabinet realignment prior to mid-term elections next year. Analysts note that the key catalyst in Dilma’s drive has been the Brazilian press, who originated many allegations of wrongdoing, and will be eager to publish further allegations in the inter-Coalition struggle for government resources.[5]

The Economist posits that Dilma’s key challenge may be larger than a misaligned Cabinet; rather, she does not agree with her Coalition partners on how Brazilian government should be run. The Economist optimistically notes Dilma’s focus on government efficiency; she has left many government jobs unoccupied, and added independent technocrats to the government at the expense of party stalwarts. Combined with the firing of unclean Cabinet ministers, these actions have caused senior leaders within her Coalition to regard Dilma as “dangerously naïve.”[6] According to the report, senior politicians in the Coalition’s two largest parties are worried that in the anti-corruption campaign, Dilma “may have started something she cannot stop.” These parties are the PT and the Party of the Brazilian Democratic Movement (PMDB), a powerful partner who has the second-most Chamber seats in the Coalition and is the party of Vice President Michael Temer. The PMDB is known for utilizing government handouts, and is likely at odds with Dilma over the use of patronage in government. Current disagreement has hamstrung the government, taking up Dilma’s capacity and preventing any major reforms for now. A need for disciplined fiscal policy to check inflation (6.97% on a rolling 12-month basis, source: IBGE) and control government spending will not be preferred by those wanting a patronage system either. Dilma’s actions against the departed ministers have led to a shakeup of political foundations that is not favored by ostensible allies whom she relies on. It is therefore possible that a popular leader with a strong mandate could decapitate her own ability to govern.

Because Brazil’s political establishment knows that the Cabinet will change again in 2012, an incentive for jockeying remains. According to Pereira and Aramayo, Dilma has exacerbated this by not using chances to bring members of smaller Coalition parties into the Cabinet during the shakeup. Perhaps Dilma has felt pressure to keep Lula’s allies around, or perhaps she believes her own party to be more popular than suggested by the composition of the Chamber of Deputies. Over the next year, we should examine Brazil to see if the political cleanup continues, and if it tragically causes Dilma’s Coalition to shatter.

Brazil is seen as having two different personalities as the new kid on the world stage. In a negative light, many criticise Brazil as losing international clout before reaching its full state of international influence by pushing certain policies that do not have the fuel to be carried into fruition. A possible result of alienating certain powers in the Middle East, or promoting policies that may be seen as being in direct confrontation with some of the other BRICS might do more to rupture ties between the BRICS and Brazil’s traditional economic partners than to promote future gains when Brazil will be at the pinnacle of its strength. Tying itself with countries like Turkey, that is in a process of moving away from the EU and American initiatives in the Middle East, may put Brazil in a situation where other countries actions could pull it into a situation and a region that gives Brazil little benefit, with great costs.

Choices and benefits are not solely positive for the US or EU, as many of their choices could be criticised as being as poor or as those taken by Brazil or any other country. Economic decisions during economic crisis and political decisions the US and EU have taken during the Arab Spring are often hotly debated, decisions where Brazil have made positive contributions and have grown because of their proactive approach to global politics. In a positive light, Brazil as a new financial and cultural power with the funds and clout to make moves into regions outside of its own might earn Brazil the respect it has accrued within Latin America and place it on the world stage. Brazil has been able to maintain its position as a powerful middle of the road negotiator between the two political forces within Latin America, and would do well to hold this position outside of the region. While helping the EU or creating a more balanced trade relationship may be in the best interests of Brazil, a careful approach in the Middle East might be best in order to not alienate itself from the Europeans or Americans, or from new leaders coming out of the Arab spring that are often in violent opposition to current leaders from Algeria to Iran. Brazil, like all nations, have the right to work towards their best interests, but the discussion on how to approach the international community should be discussed seriously within Brazil amongst all Brazilians of all political stripes. Mistakes will surely be made, but Brazil will never intentionally place itself in a losing position or maintain a negative posture, as the risks are not worth the loss of a powerful future Brazil.

"See, it's a win-win"

In November 2010 the presidents of Latin America’s two largest economies pledged to hash out a free trade agreement. Per logic, Mexico has a consumer class of 100-plus million, Brazil twice that: each country stands to benefit. Yet free trade by numbers went out of vogue in the 1990s. Still, each country had implicit motives.

Brazil sought regional domination. Since 2002 President Lula da Silva had set about establishing Brazil’s sphere of influence—first over the Southern Cone, then all of South America—but Mexico wasn’t brought to heel. Mexico’s interests appeared more earnest: credit-happy Brazilians ripe for Mexican made cars, dishwashers, and the like. As a secondary boon Mexico’s state-owned oil company, Pemex, could benefit from closer collaboration with Petrobras, Brazil’s cutting-edge energy giant, which is known for its work in offshore exploration and green technology.

But only one country is advancing toward its goals.

Brazil is cooling toward the idea of a bilateral trade agreement. Last week Mexico’s Foreign Minister Patricia Espinosa acknowledged that Brazil was dragging its feet. A Mexican undersecretary told Bloomberg that Brazil’s “tariff barriers” have held up progress.

This shouldn’t come as a surprise. Talk of the bilateral agreement quickly went mum after the meeting between Lula and Calderon in Brazil. And all technocratic hands are on-deck to rein in Brazil’s strong currency, the real, so devoting eyes toward such a far-sighted issue as a trade agreement is a bit of luxury that Brasilia can’t afford. But free trade—that dastardly law of economics that entails systematically cutting tariffs on domestically produced goods for the mutual benefit of all societies involved—simply hasn’t been in the marrow of a Brazilian president since Cardoso. In fact, Brazil’s average tariff rate has marked time in the twenty-first century.

While Brazil dithers, Mexico’s trade surplus is growing: in the first seven months of 2010 Mexico exported $19 million more goods to Brazil than it imported; this year the surplus is $478 million, a 25-fold increase.

Mexico may benefit in the short-term, but it still wants formal trade ties with Brazil. This, too, shouldn’t come as a surprise. Free trade is as central to Mexican democracy as mole is to Mexican cuisine. In fact, Mexico, along with the likes of Chile and Israel, is among the world’s biggest free traders: over 90 percent of the country’s trade comes through formal trade agreements. Free trade, as much as any other factor, has made Mexico a middle-class country. Mexican policy hands know this. They also know that relying on trade with one country, the United States, is no longer enough.

Calderon still wants to sign a trade deal before his term is up next year. That seems unlikely with Brazil. Peru, on the other hand…a trade deal with that country is likely to pass Mexico’s Senate this year.

Rossi and Rousseff

Sandwiched between pages 78 and 79 of the current volume of Foreign Affairs is a sponsored essay on Brazilian President Dilma Rousseff. At the bottom of the article are pics of two business leaders and one high-profile minister, Wagner Rossi. Mr. Rossi was Brazil’s minister of agriculture, at least until last month. He became the fourth minister to be dismissed in 72 days. Shortly after her inauguration Dilma vowed to “clean up.” Evidently that was no idle threat: below the level of cabinet chief, over 100 senior and mid-level bureaucrats from the ministries of tourism, defense, and agriculture have been either fired by Rousseff or arrested on corruption-related charges. For the good ol’ boys of Brazilian politics it has been the summer of discontent.

Three weeks ago the Republic Party left Rousseff’s coalition after its all star Alfredo Nascimento, the transportation minister, was sent packing. That’s no big loss, but the PMDB–the biggest partner to Rousseff’s Worker’s Party government–is threatening to follow suit if the dismissals continue.

With the PMDB in uproar and analysts forecasting deadly attacks from the “wasp’s nest” that the president hit, Rousseff backpedaled. On August 24 she said that no more ministers would be fired.

Despite the obvious benefits of cleaner government, I believe Rousseff has made a major political mistake. In January she inherited a government ready to rein in inflation, champion Palestinian independence, and effectively triangulate relations between Beijing and Washington. Her first three months in office advanced on these fronts. Since then, however, her honeymoon has come to an end and her agenda is being tattered by the corruption scandals.

Ego has to play some role. Since being tapped by Lula as his successor, Dilma has been dogged by comparisons with him, and at times chided for living in his shadow. Obviously she wants her own success, but to strike out in a new direction like this is more of a risk than it is worth: opponents doubting her experience are becoming stronger as her approval ratings ebb, and fair-minded voters are unlikely to see Rousseff as a reformer when newspapers publish details of graft within her inner circle. President Rousseff should swallow the humility that goes with being a political novice, try to recover her footing and advance major initiatives with broad political support.

Mexico’s technocrats have been seething at comparisons with Brazil for years. Who could blame them? From 2004-2009 Brazil’s growth rate doubled that of Mexico’s, just one of many indicators (foreign direct investment, exports, poverty reduction) that spelled Mexico’s—long self-anointed as Latin America’s vocero—comeuppance. Now a clutch of indicators suggests Brazil’s economy is overheating, and Mexico stands to benefit from the contrast. Perhaps Mexico should lay claim to being the un-Brazil.

1. Inflation:
Mexico has 3.3 percent inflation, as of June 2011, giving the central bank freedom to set interest rates as necessary without fear of unleashing high inflation, or luring a glut of portfolio investment into the country. Brazil is in a tighter spot: Brazil’s inflation in 2011 is 6.3 percent.
This is a problem for two reasons. One, it touches the two percent band Brazil’s central bank uses to control inflation, so breaching this band compels the bank to design a response. And two: the fix breeds another problem, because when Brazil’s central bank increases interest rates to stymie inflation it draws in hot money. Hence, the Brazilian real is among the world’s “most overvalued” currencies, according to Goldman Sachs. As Rachir Sharma points out, when a middle-income country has such a strong currency it is “a symptom of a seriously imbalanced economy.”

2. Infrastructure:
Spending on infrastructure will prove a lasting legacy of the Calderón presidency. Despite a serious recession, sustained drug violence, and other distractions like the outbreak of H1N1, Calderón has increased infrastructure spending to 5 percent of GDP.
Infrastructure spending in Brazil has consistently declined over the past four decades; it now stands at about 2 percent of GDP. Morgan Stanley asserts that figure must double if Brazil is to enjoy economic growth of 5 percent in the years ahead.

3. Exports:
Mexico is the largest exporter in Latin America, $27.9 billion in April. As of June, Brazil’s exports were $23.7 billion. Of course, the devil is in the details for both nations. Brazil’s exports skew toward a few commodity exports to China: soybeans, iron ore, and grain. In fact, when you look at exports to China, Brazil’s largest trading partner since 2009, you see a $5.4 billion trade surplus. When you strip away soy products and iron ore, Brazil runs a trade deficit with China. God forbid a collapse in commodity prices.
Meanwhile, Mexico is technically among the most free-trading countries in the world, with some 22 free trade agreements in effect. But everyone knows which one really counts. So Brazil is too reliant on just a few products; Mexico is too reliant on NAFTA.

4. Debt:
Mexico reduced debt to GDP in the past twenty years. As of 2009, debt stood at 22 percent of GDP. As of January 2011, Brazil’s public debt is 40 percent of GDP.
Debt is manageable in both countries, Brazil has less room to maneuver because it is nearer the golden threshold of sustainable debt load—60% of debt to GDP—for a developing country and its current growth is propped up by commodity exports, which could rapidly lose value.

None of this adds up to Mexico becoming the high-growth story of the decade. Rather, Brazil’s economy increasingly involves growth with little margin for slowdown or macroeconomic surprises. Mexico’s economy can grow more easily.

The yield on Mexican futures contracts sank 13 basis points to 4.72% last week, suggesting traders think central bank Governor Agustin Carstens will cut the country’s benchmark lending rate, already at a record low 4.5%. Unlike the region’s other major economies, Mexico hasn’t changed its rate in the past year.

In its most recent statement on August 10, Mexico’s central bank lowered the estimate for 2011 GDP growth from 5.0% to 4.8%. Projections for 2012 growth also got whittled, from 4.8% to 4.5%.
Given current pitfalls in the global economy, this is a stout outlook. The looming threat for Mexico is that the United States, which draws in 80 percent of Mexican exports, will putter along at two percent growth for the next several years.

Speculation is also growing that Brazil will need to cut its main lending rate—currently 12.5%—before the year’s end. Should it come to pass, it would mark one sharp volte-face; barely a month ago Goldman Sachs forecast that the lending rate would steadily increase to 13.5% by late 2011.

After heady 7.5% GDP growth in 2010, Brazil’s economy is now expanding at the same clip as Mexico’s. This isn’t necessarily a bad thing, but adjusting to a global economy that’s stuck in first gear may create problems. Inflation in Brazil is the highest of any major economy; lowering the benchmark rate could add to inflationary pressures. A flabby budget is another problem. And any slowdown in demand for Brazil’s commodities could spell serious trouble.

Brazil’s technocrats will have to thread the monetary needle.

During this week’s global economic turmoil, Canadian Prime Minister Stephen Harper went to Brazil to re-initiate ties with its lost southern neighbor in the Americas. Years ago trade competition between Canada and Brazil via its fight for the mid sized civil aircraft market created a rift between the two nations. Past Canadian leaders sought to put Canadian companies in the forefront of the market but went as far as offending Brazil to the point of discouraging trade relations between the two countries. With the old Canadian governing party being penalized by the Canadian electorate, Canada’s newer government went to Brazil to diversify its trade relations beyond the United States and create strong permanent bonds between Canada and Brazil. Beyond the United States and its current economic difficulties, Canada, Brazil and Mexico are three large and relatively healthy economies, which surround and share interests and a neighborhood with the United States. PM Harper will also visited Colombia in his trip to Latin America, another country that has performed well in the slow global economy.

Much of the success of Canada and its Latin American neighbors can be attributed to the high commodity prices these “American” economies have benefited from, due to high demand. However, this is not the only way Canada has been able to avoid instability and Brazil and Colombia have learned from past economic crisis. These countries know that investment instability and paranoia can create a dangerous combination that can push relatively healthy economies like France, Germany, and yes, the United States into economic problems based on rumors and media fueled paranoia that leads investors into a panic and creates a week such as the one we are having currently. This combination can have such a great effect that a downgrade of the US economy based on a few selfish political leaders or a suspected secret meeting between a French bank and its nation’s President can turn us towards a longer recession.

Canada and its successful Latin American partners know that long term trade relations and growth have a stabilizing effect on their economies. This week’s meeting between Canada, Brazil and Colombia seeks to open greater trade with Brazil and to conclude the Canada-Colombia Free Trade Agreement that has already been established. Stability also comes with consistent regulations and effective laws that are not only written on paper, but are applied to their economic systems so that investors have stability and confidence in an economy. The lack of confidence in US and European leaders to follow proper regulations and to work for the benefit of their own countries are the beginning and end of investment troubles worldwide this week, an experience well known in the past in Latin America and one that Canada is working hard to avoid in its own economy, in the short term and long term simultaneously.