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| World Marketplace |
Labor Pains
Elsie Echeverri-Carroll
10/01/2005
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In 1982,
declining oil prices and skyrocketing interest rates sent Mexico into its most
serious economic crisis since World War II. In reaction, the government
implemented a trade liberalization policy and undertook a major devaluation of
the peso. The devaluation made the hourly labor costs of production workers in
Mexico’s manufacturing sector lower, for the first time, than those of workers
in the emerging economies of Taiwan, Korea, Singapore and Hong Kong. As a
result, large textile companies such as Levi Strauss, electronics companies such
as Zenith and automobile companies opened large assembly facilities known as
maquiladoras along the U.S.-Mexico border. Companies such as General Motors,
which already had manufacturing plants in Mexico, now opened large new factories
near the border. Unlike their old plants, which sold only in the Mexican market,
their new operations were state-of-the-art facilities assembling parts and
components for the highly competitive U.S. and international markets.
As mexico faces
the new reality of
low-wage global
competition, its
own domestic political
climate could
contribute to further erosion of
the country’s
competitive edge. |
The number of maquiladoras grew from 620 in 1980 to more than 3,000 in 2000,
the peak of the industry’s growth. Cheap labor, spatial proximity to the U.S.
market and a climate of political stability fueled the extraordinary growth of
this sector. Proximity allowed managers to work in Mexico but live in the United
States and send their children to U.S. schools. It also allowed both the
transportation of heavy products that would be too expensive to ship from Asia
and the implementation of the just-in-time inventory systems that became popular
in the 1980s.
In 1994, the United States, Canada and Mexico signed NAFTA.
Contrary to popular belief, NAFTA did not radically transform the Mexican
economy—most of the dismantling of tariff and nontariff barriers to trade had
already occurred in the 1980s. Rather, the benefits of the treaty are, for
Mexico, more intangible. First, NAFTA continues a policy change in favor of
foreign investors that started with Mexico’s 1989 Foreign Investment Law that
guaranteed increasing legal certainty and established simpler and quicker
procedures for new foreign investors. Second, NAFTA assures foreign investors
that Mexico’s free market policies and commitment to privatization are here to
stay—radical policies such as the 1982 nationalization of the banking system are
a thing of the past. As if to underscore this point, Mexico has signed more free
trade agreements than any other country in the world.
This nearly two-decade
long trend of economic modernization has also encouraged much-needed political
reform. For many Mexicans, the election of Vicente Fox as president on July 2,
2000, was comparable to the fall of the Berlin Wall. For the first time in 71
years, an opposition presidential candidate defeated Mexico’s ruling
Institutional Revolutionary Party. Fox, the candidate of Mexico’s center-right
National Action Party, is a former Coca-Cola executive who was perceived as
being supportive of the private sector. Ultimately, owners of small and
medium-size businesses were crucial to Fox’s victory. U.S. companies also
responded to the business-friendly environment Fox fostered, and foreign
investment in the maquiladoras continued to grow. Fox eliminated import quotas
for NAFTA partners, but maintained them for other countries under the
Multi-Fiber Arrangement that diverted textile investments from other countries
to Mexican factories.
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