The Mints are falling apart: It’s time to reassess our view of emerging markets

 
John Hulsman
TO PARAPHRASE Antony in Julius Caesar, I come to bury the Mints idea, not to praise it. True, as with its Brics ancestor, former Goldman Sachs Asset Management head Jim O’Neill has hit upon something vitally important by identifying Mexico, Indonesia, Nigeria and Turkey as future economic giants. With the Brics, it was that the rise of emerging markets constituted a fundamental new game-changing feature of global geo-economics. With the Mints, it is that emerging markets are here to stay as a salient characteristic of our new era.

If we are really going to get anywhere, however, we must laud these broad-brush ideas, and then discard them as quickly as possible. Both groupings have far less in common than their acronyms hint at. For investors to truly understand today’s world, they must be disaggregated, for the countries’ economic and political trajectories are very different.

The Brics, of course, have not weathered the Great Recession in equal shape. Despite its many and real problems, China comes out of it relatively stronger, its overall growth rate holding up, particularly in comparison with sclerotic Europe and its emerging market competitors. Russia, still a corrupt, one-crop economy, wholly dependent on oil and natural gas, is certainly relatively weaker. The shine is also off both South Africa and Brazil, with the jury still out on India. In other words, the past few years have made an economic mockery of the notion of the uniform rise of this particular group; only disaggregation at the national level provides useful analysis for investors. To lump them together is to miss this central point.

The same holds true for the Mints. The decade-long lustre surrounding Turkey is now in peril, due to the political ructions caused by both a huge corruption scandal involving the ruling AK Party, and Prime Minister Recep Tayyib Erdogan’s drift toward authoritarianism. Indonesia is surely an attractive emerging market, but must cope with the desperate need to build an adequate infrastructure almost overnight. Nigeria, seemingly always about to make it, shows little sign of shaking off the endemic societal corruption that has hamstrung its past chances of sustained high rates of growth.

So if, in the end, the Brics amount to China-plus, the Mints are Mexico’s show. For once, the hype about an emerging market is, if anything, underdone.

Unlike in the other Mints, Mexican President Pena Nieto has accomplished a political miracle in bringing together the country’s three ideologically-disparate parties around a bold package of reforms. Somehow, this political consensus held for a year, during which time seemingly intractable reforms relating to education, telecoms, television and national elections actually took place.

The icing on the cake was the December 2013 energy reforms, commonly thought impossible; indeed the leftist PRD exited the agreed-upon Pact for Mexico over the measures. Going far beyond expectations, the reforms ended the monopoly of Pemex, the bloated state oil company. The powerful Oil Workers Union – a habitual enemy of reform – lost the right to its five seats on Pemex’s 15-member board of directors. Private foreign companies will be allowed to invest in Mexican oil projects.

While outside investment into the energy industry is unlikely to flow until 2015 at the earliest, an almost unheard-of dream is within America’s grasp. With its own shale revolution, the development of Canada’s oil sands, and Mexico now open for business regarding energy, highly-secure supplies of low-cost energy for the foreseeable future are in tantalising reach. Surely the cornerstone for Mexico’s economic take-off has been laid.

Further, the Mexican economy is, through the North American Free Trade Agreement (NAFTA), already indelibly tied to two first-world economies in Canada and the US, with America definitively on the economic mend. In 2011, America traded as much with Canada and Mexico as with the Brics, Japan, and South Korea combined. NAFTA has remade the place, improving Mexico’s manufacturing productivity; by 2012 it was estimated that Mexico’s labour costs were already the same as in China. Even more importantly, NAFTA membership has politically bolstered the country’s commitment to open markets across the board.

So don’t fall into the trap of lumping together things that are fundamentally different. Forget the Brics: it’s about China, and possibly India. Forget the Mints: it’s about Mexico. But there, in the words of the great Neil Diamond, “I’m a Believer”.

Dr. John C Hulsman is president and co-founder of John C. Hulsman Enterprises (www.john-hulsman.com), a global political risk consultancy. He is a life member of the Council on Foreign Relations, and author of Ethical Realism, The Godfather Doctrine, and most recently Lawrence of Arabia, To Begin the World Over Again.