Global Policy Forum

By David Shields

Some 10 to 15 years ago, when the assembly-plant (maquiladora) industry began to grow in earnest, many Mexicans used to say this was not what the country really needed. The nation needed well-paid jobs, not badly-paid ones. However, as population and unemployment bulged, most observers came to view the assembly-plant industry as a blessing. Better to have badly-paid jobs for millions of Mexicans, than none at all, people would say.

Today, opinions, at least in government, are turning against assembly plants once more. Suddenly, after almost two decades of steady growth, the nation's assembly-plant industry is suffering a severe slump.

Official figures show employment at assembly plants was down 17.3 percent in Dec. 2001 and the figure is, in fact, over 40 percent in key assembly-plant cities, such as Tijuana and Ciudad Juarez.

The reason for the slump is, partly, the recession in the U.S. economy, which translates into lower demand for Mexican goods, given that the United States buys about 85 percent of all Mexican exports. However, domestic economic distortions are also a key factor in the decisions of many assembly plants to leave the country.

The Mexican peso has become overvalued against the dollar, while wages have risen fast. Average wages had risen 8.5 percent in real terms in Dec. 2001 from a year earlier, according to official figures.

The assembly plants, therefore, are losing their competitive edge and are deciding to relocate in Central America or Asia. Is the government concerned about this? Apparently, not very much.

Officials seem to think the peso has only just found a sustainable market value and should stay at that level as part of "convergence" with the U.S. economy. The convergence theory also implies the nation cannot run a low-wage economy forever, authorities say.

President Vicente Fox recently said the nation's export model, supported until now by major investments in assembly plants, is "to some degree, is worn out" and he proposed the nation should now seek a new era of economic growth emphasizing technology and products Mexicans themselves have developed, in order to compete in international markets.

"Mexico should offer products based on its own research and design, in order to be competitive," Fox said.

Fox's ideas are little short of astounding. Mexican industry has never invested in its own research and development, nor have its products ever been world leaders. Why should they be now? How can things suddenly be so different?

It would seem the government is being complacent about the apparent demise of the assembly industries, rather than showing concern and taking action to stop them from leaving the country.

The government's message seems to be that the collapse of the assembly-type manufacturers may be inevitable and is no big problem anyway, as long as the rest of the economy is stable and foreign direct investment keeps flowing into telecoms, banking and service industries. Market analysts, who continue to give thumbs up to Fox, say the peso's current level can be maintained and put Mexico's country risk at its lowest level in recent history.

It is hoped that, in line with convergence theory, Mexico's economy will now turn around and follow the U.S. economy upwards. However, after so many years in which Mexico fought so hard to attract assembly plants and compete with Asian companies in textiles and electronics to be exported to the U.S. market, it is hard to understand that the Fox government can be so indifferent as these industries flee the nation, leaving many cities with fast-growing unemployment. Could it just be it does not want to acknowledge its failure on this issue?

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