MexECON Blog

Is Mexico Really An Emerging Market?

Here at Terra Nova, we're proud of our track record providing capital to the Mexican agriculture sector and producing good returns for our investors.  Sometimes, however, it can be good to step back and look at Mexico as a whole.  What are the broader prospects for the Mexican economy?  Where does Mexico fit among those lesser-developed countries that are commonly referred to as "emerging markets"?  And perhaps most important, can we really expect Mexico or any of the other emerging markets to join the community of developed countries in the coming decades?  This analysis is an update to studies I published in the past while following international economics at A.G. Edwards & Sons, now a part of Wells Fargo Advisors.

Defining "Emerging Markets"

Despite the recent boom in emerging-market investing, no single definition of these markets has ever gained universal acceptance.  Generally, however, a country is considered an emerging market if it is simply not one of the world's few rich, industrialized nations.  For purposes of this study, I consider the emerging markets to be all those countries that are not currently listed as "advanced countries" in the latest World Economic Outlook published semiannually by the International Monetary Fund (IMF).

The IMF's advanced countries all have a relatively high level of per-capita gross domestic product (GDP), owing to their well-developed, competitive industries and highly productive workers.  According to the IMF, the richest advanced country is Luxembourg.  In 2010, its per-capita GDP stood at $81,400 (adjusted for the purchasing power of the currency).  The second-richest advanced country is Singapore, with per-capita GDP of $56,500, while the third-richest advanced country is Norway, with per-capita GDP of $52,000.  The United States is in fourth place, with per-capita GDP of $47,300.  The poorest of the current advanced countries is Estonia, a small state on the Baltic Sea that was a part of the Soviet Union but in recent years has joined the European Union (EU).  In 2010, Estonia had per-capita GDP of $18,500 (see Table 1).  In contrast, per-capita GDP in the emerging markets can be dramatically lower than these figures.

EM Study 0611 - Table 1

The question in this study was whether and when any of the so-called emerging markets might "catch up" with the per-capita GDP of the poorest of today's advanced countries.  To simplify the analysis, I focused on 50 large, less-developed countries that already have relatively high per-capita GDP or high GDP growth rates.  I excluded all countries with a population below 1 million and several countries, mostly in the Mideast, where high oil revenues irrevocably distort the reported level of per-capita GDP.  The 50 emerging markets in my sample included countries such as Russia (per-capita GDP of $15,800 in 2010), Brazil (per-capita GDP of $11,200), and China (per-capita GDP of $7,500).  Mexico's per-capita GDP, at $14,400, was slightly above the average for the sample.  Two of the emerging markets in the sample - Poland and Hungary - already had per-capita GDP slightly above the lowest advanced country in 2010 (see Table 2).

EM Study 0611 - Table 2

Few Emerging Markets Actually Emerge

To conduct the study, I projected the per-capita GDP of each advanced and emerging country over the next 20 years, using various growth assumptions.  Of course, there are various ways to come up with country-level growth assumptions.  For example, a researcher could survey a sample of economists for their long-term projections for each country.  A researcher could also develop individualized forecasting models for each country, based on inputs such as the country's level of investment or its openness to trade.  For the sake of simplicity and consistency, however, I relied primarily on each country's historical growth rates for various time periods in the past, based on the IMF's per-capita GDP data.

The most striking revelation from the study is just how few of the emerging markets seem likely to catch up with the advanced countries in the next two decades.  In a scenario where each country's per-capita GDP continues to increase by its average annual growth rate over the last 30 years (or over the longest period for which IMF data is available), only eight of the 50 emerging markets in the sample ever catch up with the lowest per-capita GDP of today's advanced countries.  Among the current advanced countries, per-capita GDP in Estonia, the Slovak Republic, and Portugal are projected to rise relatively rapidly in this scenario, soon overtaking slow-growing Malta and leaving that small island country with the lowest per-capita GDP in the group.  In this scenario, however, even plodding Malta is not overtaken by an emerging market until 2020, when its per-capita GDP is surpassed by Lithuania's.  Among the other emerging markets that catch up with Malta in this scenario, China does so in 2025, and Malaysia does so in 2028.  However, key emerging markets such as Mexico, Chile, Brazil, South Africa, Turkey, India, and Russia all fail to catch up before the end of the studied period (see Figure 1).

 EM Study 1106 - Figure 1

A similar picture emerges when each country's per-capita GDP is assumed to grow by the average annual growth rate of its own group over the last 30 years.  In this scenario, each advanced country's per-capita GDP is projected to rise by the advanced countries' average annual growth rate of 4.7% over the last 30 years, while each emerging market grows its per-capita GDP by the emerging-market average of 5.9% over the same period.  This scenario helps correct for those situations where a country might have a particularly high or low rate of GDP growth in the past but is expected to revert to something like the mean of its group in the coming years.  In this scenario, only ten of the 50 emerging markets in the sample have a per-capita GDP greater than the poorest advanced country's by 2030.  (Because all advanced countries are growing their per-capita GDP by the same rate in this scenario, Estonia remains the advanced-country laggard in all years.)  Several of those that catch up in this scenario are Eastern European countries, such as Croatia, Lithuania, and Russia, but the group also includes two Latin American countries:  Argentina would catch up with Estonia in 2024, and Chile would catch up in 2029.  However, Mexico would not catch up in the studied period.  Other high-profile emerging markets that would not catch up in this scenario include Brazil, South Africa, China, and India (see Figure 2).

EM Study 1106 - Figure 2

Different Results With More Recent Data

The other key finding of the study is that the picture changes dramatically if more recent data is used to project per-capita GDP.  In most of today's advanced countries, GDP not only dropped sharply during the "Great Recession" of 2008 and 2009, but it has also been unusually slow to recover.  In contrast, GDP in many of the emerging markets never declined or, if it did, it staged a quick and powerful rebound.  As a result, the growth of per-capita GDP in most advanced countries looks dramatically weaker if it is averaged over just the last 10 or 20 years, and vice versa for the emerging markets.

Projecting each country's future per-capita GDP by its own 20-year average growth rate, the study again indicates that only eight emerging markets would catch up with the poorest of today's advanced countries by the end of two decades, though the list is slightly different than in the scenario where projections are based on the 30-year average (see Figure 3).  However, projecting each country's per-capita GDP by the 20-year average of its group makes a big difference.  In this scenario, each advanced country's per-capita GDP would rise at an annual rate of just 3.7% (instead of 4.7% using the 30-year average), and each emerging market's per-capita GDP would rise at a rate of 5.5% (only modestly less than the 5.9% using the 30-year average).  Using these assumptions, 17 of the 50 emerging markets in the sample would catch up with the poorest of today's advanced countries in the next two decades.  In addition to Poland and Hungary, which already have per-capita GDP above Estonia's, Croatia would catch up as early as 2013, and Lithuania would catch up in 2015.  Russia and Argentina would catch up in 2019.  Latvia and Mexico would catch up in 2024, while Turkey would catch up in 2028.  Nevertheless, the key emerging markets of Brazil, South Africa, China, and India would all fail to catch up in the studied period (see Figure 4).

EM Study 1106 - Figure 3

EM Study 1106 - Figure 4

The impact of using more recent data is especially evident if per-capita GDP is projected based on the most recent 10-year averages.  If each country's per-capita GDP is projected using its own 10-year average growth rate, 20 emerging markets catch up with the projected advanced-country laggard in the next 20 years.  For example, all of the large, relatively advanced Eastern European countries discussed above would catch up, as would China and Lebanon.  Because of its recent slowdown in per-capita GDP growth, however, Mexico would not catch up.  Likewise, Turkey, Brazil, South Africa, and India would all fail to catch up (see Figure 5).

EM Study 1106 - Figure 5

If per-capita GDPs are projected using each country's 30-year group average, the result is even more dramatic.  In this case, each advanced country's per-capita GDP would rise at a rate of just 3.2%, while each emerging market's per-capita GDP would rise at a rate of 6.9%.  Here, fully 26 of the 50 emerging markets would catch up with Estonia within the next two decades.  Mexico, for example, would catch up as early as 2018, and Turkey would catch up in 2020.  Colombia would surpass the poorest of the current advanced countries in 2029, and Thailand would do so in 2030.  This is the only scenario tested where the majority of the emerging markets catch up with the poorest advanced country in the studied time frame.  In this scenario, China and India are the only prominent emerging markets that would not surpass Estonia in the studied period (see Figure 6).

EM Study 1106 - Figure 6

Conclusion

In all, this study examined more than a dozen scenarios.  The study showed relatively few of the so-called emerging markets are likely to catch up with the advanced countries in the next couple of decades, at least in terms of per-capita GDP.  This should not be surprising, given that so few emerging markets have graduated to advanced-country status in the recent past (the best example is probably South Korea).  As in previous versions of this study, those emerging markets that seem to have the best prospects are the Eastern European countries that already have a relatively high level of per-capita GDP.  These countries liberalized their economies aggressively after throwing off communism at the end of the 1980s, and most of them joined the European Union in 2004.  These countries are therefore in a good position to become a production base for their richer brethren in Western Europe.  Historically, entry into the EU has also encouraged strong investment and ensured reasonable, stable economic policies.  In contrast, even fast-growing, high-profile emerging markets such as China and India might fail to catch up to the per-capita GDP of today's advanced countries simply because they are starting out at such a low level.

Most important, the study shows many more emerging markets would catch up with the advanced countries if relative GDP growth rates remain more like the last ten years and less like the last 30 years.  In other words, the question is whether the recent experience of slow, painful growth in the advanced countries and fast, dynamic growth in the key emerging markets is the "new normal."  There is good reason to think it could be.  After all, much of the developed world is suffering from excess debt, financial systems riddled with bad loans, and excess housing supply that is preventing investment from performing its traditional role as a key engine of economic recovery.  In the meantime, the forces of globalization continue to favor the shift of production to lower-cost emerging markets, and many of those countries have the added benefit of relatively strong financial systems and clean fiscal positions.  If these factors really keep a lid on living standards in the advanced countries while they boost standards in the emerging markets, the world is likely to become a more egalitarian, homogenous place over the next generation.

Nevertheless, the study also highlights the challenges for countries such as Mexico.  Note that the only scenarios in which Mexico catches up with the poorest advanced country in the next 20 years is where its per-capita GDP grows at an annual rate of 5.5% or more.  That is a tall order for a country where per-capita GDP has only grown at a rate of 3.6% over the last 30 years, 3.4% over the last 20 years, and just 2.9% over the last 10 years.  In order to have some chance of joining the community of developed countries in the not-too-distant future, the Mexican government needs to enact fundamental economic reforms that will accelerate economic growth for a sustained period.  Those reforms probably need to include measures to break up monopolies and oligopolies, deregulate the labor market, and bring more workers into the formal economy.  The reforms also need to include strengthening the competitiveness and efficiency of the financial system and enhancing the rule of law.

Patrick Fearon, CFA
Vice President, Fund Management

1 comment(s) for “Is Mexico Really An Emerging Market?”

  1. Gravatar of Nick Pribus
    Nick Pribus says:
    Pretty much spot on, I used to have many of the same observations about Russia having spent most of the last 20 years studying that country and region.

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