Monday, June 23, 2008

Maquila Industry Symptom of Mexico’s Dependent Development

There’s nothing wrong with seeking to spur national development through increased integration with the global economy. More than most developing countries, Mexico has had plenty of time to develop a strategy to take advantage of the opportunities of globalization. More than four decades after the maquila sector started in Mexico – with the Twin Plant program in Juárez-El Paso in 1965 – maquilas remain mostly an enclave industry with few productive ties to the national economy. Rather than shaping the maquila sector with forward-looking development policy that would increase industry inputs and use maquila as a base for a less dependent industrial sector, Mexico has been satisfied with the low-wage employment provided by the maquilas. Downturns in U.S. consumption reverberate directly through the country’s maquilas, which started 2008 employing 2.4 million workers. César Castro, president of the National Maquila Industry Council, now predicts zero growth in maquila exports in 2008. But that’s an optimistic projection. In January 2008 Castro was predicting that the 5-6% growth rate in 2007 would hold in 2008, despite a stagnating U.S. economy. It’s likely that by year’s end, however, the maquila sector will be severely shaken by the deepening U.S. recession. Going Back Home As the U.S. economy stagnates and the automobile industry nosedives, the maquila sector is suffering. In Juárez, 18,443 workers have lost their jobs already this year as maquilas shut down or pull back. Tens of thousands of other maquila workers in this border city with El Paso have agreed to cutbacks so as to maintain their jobs. While maquila exports to the EU are increasing – up 15-20% in the last year – because of the attractive peso-Euro exchange rate, the recessionary market in the U.S. is taking its toll throughout Mexico. Hardest hit thus far are the automobile parts assembly plants, especially those that export parts for gas-guzzling brands produced by Ford and GM. Pharmaceuticals, electronics, and airplane parts are expected to weather the U.S. downturn, but most other sectors, such as homebuilding supplies, will be feeling the pain. In the past, maquila workers would often leave their jobs to migrate to the United States. But the immigration crackdown and hard times in the U.S. – particularly in hard-hit industries like construction that employ immigrants – have dissuaded Mexicans from making the trip north. Alan Tello, director of the Center for Economic and Social Information (CIES), said that 80% of the laid-off maquila workers in Juárez are heading back to their home communities. Indicative of reduced incentives to emigrate, Jesús José Díaz Monarrez, secretary general of the CTM’s Northern Workers Federation, pointed to only three options for laid-off maquila workers: “enter the subterranean economy [informal sector], return to you place of origin, or aggravate the public safety problem.” Rather than admitting its time to leave behind its dependent development strategy, the Mexican government has collaborated with the maquila sector in extending the export industry into the country’s interior – selling poverty-stricken rural areas as a “mini-China.” After the last U.S. recession in 2001-2002 when maquila employment dropped 21% with many plants relocating in China, Mexico increased its promotion of rural Mexico as an attractive option for businesses looking for wage levels lower than found in the border cities. Some maquila owners agreed. “You do not even need to go to South Mexico to get to ‘little China,’” said Doug Donahue, a partner in a San Antonio-based maquila investment firm, which owns a maquila in Durango. “Durango, San Luis Potosi, and Zacatecas are all within eight hours of the border and all have very competitive labor rates that can compete with China.” Mexico has also given special tax exemptions and tax breaks to the maquila sector. The government has temporarily exempted (until 2012) most of the industry from the recent IETU tax with the so-called “maquila decree.” Even so the maquila sector representatives are warning that maquilas will leave the country in mass if maquilas are not permanently exempt from the tax. The PAN government under Vicente Fox also agreed to the liberalization of NAFTA “rules of origin,” allowing an even higher percentage of maquila inputs to come from outside North America. The maquila sector is a dependency runs through the country’s economic core – accounting for 84% of the country’s manufactured exports and 49% of the country’s imports (as inputs for the assembled exports). Already, before the worst has hit, forecasts of Mexico’s economic growth are being calculated downward – dropping from 3.3% in 2007 to 1.9% in 2008. Perfect Storm There’s the oft-quoted saying about Mexico catching a cold when the U.S. sneezes. But Mexico faces more than a bad cold. What’s more worrisome is that a perfect storm may be forming: declining growth, sharp decreases in remittances, looming credit card crisis, frightening state of the country’s petroleum sector, highly vulnerable maquila sector, and the spreading drug violence. Certainly, the U.S. economy can be rightly blamed for the recent drop in immigrant remittances and rise in maquila unemployment. And drug consumption patterns and illegal arms trade fuel the drug wars. But Mexico’s own development model – or lack thereof –should be a focus of reflection about its economic ills. Mexico has had more than four decades to build an export sector that fosters endogenous industry, but industry in Mexico has become increasingly an extension of foreign, mainly U.S., companies that are only indirectly integrated in the national economy. The maquila industry, initially designed to employ the migrant population accumulating on the northern border (many of whom were returned from the U.S. after the end of the Bracero program), was in its early years an aberration from Mexico’s import-substitution, state-directed economy. But over the last couple of decades it has become the embodiment of Mexico’s dependent, heartless, and ruthless economic policy. Across Mexico, but especially along the border, government officials and business associations are downplaying the maquila layoffs. But as a June 23 editorial in the Juárez’s El Diario warns the government: “If you don’t provide a community with employment, and rather you began to lose jobs, any crisis – like the [drug] violence that confronts the state – is likely to worsen, since the affected areas become yet more vulnerable when besides other social problems unemployment surges.”

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