Latin America is divided into two distinct economic blocs after the global recession, finds a survey released by the Inter-American Development Bank (BID) last week.
The commercial goods and services of Central America and the Caribbean are narrowly tied to Mexico, and are relatively dependent on the economies of advanced industrialized countries like United States and Japan which are still recovering from recession, according to the survey.
A second, much faster growing group of countries is led by Brazil and includes South American countries such as Chile, Bolivia, Paraguay, Uruguay, Argentina, Colombia and Venezuela. These countries are growing exporters of commodities to China and India, including copper, gold, soybeans, wheat, corn, oil and more.
The BID says that the economy of the Brazilian-led group could grow up to 4.4 percent in 2011, while the group led by Mexico will only grow 2.2 percent.
The global boom in commodity exports during the last decade have helped some in Latin America more than others. Agriculture accounts for 30 percent of Brazil’s gross national product, for example, while in Mexico it’s close to 5 percent. On the other hand, Brazil sees fewer than 6 million tourists a year, while Mexico saw 22 million in 2010.
One advantage Mexico has over Brazil, according to economists is that it has an open economy. “The policy of economic openness and macro-economic responsibility have helped Mexico over the years,” said Andrei Gromberg, a Professor of Economics at the Mexico Autonomous Institute of Technology in Mexico City.
In Brazil, on the other hand, entrepreneurs have complained about the high tax rate. The Federation of Industries of the state of São Paulo, the biggest industrial state of the country, has been especially vocal. Overall tax revenue as a percentage of GDP in Brazil is almost 40 percent, according to the Brazilian Institute of Tributary Policies and the country has one of the most complex tax codes in the world. In Mexico, overall tax revenue as a percentage of GDP is less than 9 percent.
“Brazil has to decrease taxes, solve the infrastructure problems and social security, which is a ticking bomb,” says economist Gustavo Grisa, a partner of regional development consultancy Agencia Futuro, which is based in Brasilia and Porto Alegre.
Brazil, meanwhile, has the edge in trade with China and emerging markets in Asia. “Brazil has a lot of space for Chinese products in South America, for example,” adds Grisa.
Grisa complains about Mercosur, the regional trading bloc modeled on the European Union that includes Brazil, Uruguay, Argentina, Paraguay and Venezuela. According to him, Brazil could be a bigger international player with a better free-trade agreement.
Despite their differences, economists agree that Brazil and Mexico share one problem: Both countries need to improve the quality of education and human resources.
Luís Henrique Vieira is a freelance writer in Brazil.