The Brazilian economy, more than double the size of Mexico’s, grew at a 7.5% annual rate while Mexico puttered forward at close to 2%. What a difference two years makes. While the Brazilian economy is shambling along at an annualised rate of 1.9% so far in 2012, the Mexican economy is set to grow at 3.9%. If this trend continues, some reckon the Mexican economy will overtake Brazil’s as soon as 2022.

One believer is Benito Berber, Nomura’s Latin America strategist. In a recent report Mr Berber applies Solow growth accounting to a series of forecasts on Mexico and Brazil, with striking results:

Solow splits the contributing factors to economic growth into three categories: human capital (or worker skill levels), physical capital, and total factor productivy, which is essentially a residual that accounts for remaining, unexplained growth. Between 2000 and 2010 Mexico fell behind Brazil in human-capital terms thanks to competition from Chinese labour, lagging education, and incomplete labour-market reforms. This was amplified by steady emigration to America. By contrast, Brazil benefited from a “formalisation” of the labour market as 40m Brazilians entered the middle classes over the decade. A commodities boom led to big investments in Brazil, bringing up its investment-to-GDP figure from 15% to 19%. Mexico’s dependence on America's economy and a manufacturing sector heavily exposed to China led to disappointing gains from physical capital accumulation and total factor productivity.

Yet despite a slow start to the millennia, things are looking up for Mexico across all three of Robert Solow’s measures. Firstly, high manufacturing costs in China are improving the competitiveness and demand-environment for Mexican factories. Secondly, Brazil may have become too dependent on commodity-led growth. While moving resources to the commodity sector allowed Brazil to exploit a comparative advantage, many now see limited opportunity to improve total factor productivity, something which is usually limited to manufacturing. And although Brazil enjoyed a strong reforming government led by Fernando Henrique Cardoso in the 1990s, the last decade has been one of increasing welfare costs rather than additional reform. In Mexico by contrast, a newly reinstated PRI, a centre-right party, has promised to continue along the path of supply-side reform pursued by the previous government.

Mr Berber concludes that under a low growth estimate for Brazil and a high growth estimate for Mexico, the countries cross economic paths in 2022 (see chart). This is of course highly speculative; forecasting a decade ahead is notoriously difficult. Yet that such outcomes seem reasonable is remarkable given the conventional wisdom just a few years ago.

If the Mexican economy is to one day take over the Brazilian, it would be a boon for liberal economics in the face of Brazil’s more statist approach. Yet do not expect Brazil to give up the top spot easily. Indeed, a friendly rivalry may benefit both countries’ reform agendas.