BajaNomad

Mexico's Economy Goes Bust

Family Guy - 1-11-2004 at 12:33 AM

After Initial Boom, Mexico's Economy Goes Bust
Supporters say the free-trade zone has been a success, but critics point to the loss of jobs, factories and investment.
By Chris Kraul
Times Staff Writer

January 2, 2004

MEXICALI, Mexico

The heady early years of the North American Free Trade Agreement brought Oscar Garcia opportunities he had scarcely dreamed of.

An electrical engineer raised in Mexicali, he became manager of the biggest factory the city had ever seen ? a Mitsubishi plant the size of three football fields where workers assembled computer monitors. Garcia bought a new sport utility vehicle. He paid cash for a new home.

Then, it all came crashing down. Unable to compete with more sophisticated flat-screen monitors made in the Far East, Mitsubishi in August shut the $250-million plant it had opened in 1998, putting Garcia and 1,200 others out of work and leaving most of its machinery to rust in a junkyard. A cluster of high-tech companies that had come up around the factory also closed.

"I thought I would retire with Mitsubishi. It was such a good place to work," Garcia, 36, said. "But I don't see much chance of a new industry coming along to replace it."

Garcia's story mirrors the course of the Mexican economy since NAFTA opened up cross-border commerce and investment 10 years ago.

Rising exports to the United States fueled Mexico's growth in the first years of NAFTA. Foreign companies spent billions of dollars on factories that made everything from cars to vacuum cleaners. Engineers and skilled managers were in such demand that companies engaged in bidding wars for their services.

Then, in 2000, the U.S. economy slowed down, dragging Mexico's down with it. The U.S. has begun to recover ? but Mexico remains moribund, hobbled by serious problems that NAFTA had briefly masked.

Despite a history of U.S. domination, Mexicans viewed NAFTA as a steppingstone to the developed world's standards in wages, health and education, holding the promise that they would no longer have to migrate to the United States to find jobs. The treaty also was welcomed as a wedge that could open Mexico's protected economy to foreign competition, along with new consumer goods and ideas.

Government officials and many economists insist NAFTA has been a success, a catalyst for an era of economic reform and political change. In 2000, the Institutional Revolutionary Party's 71 years of continuous rule came to an end.

However, they now recognize that Mexico's 1990s boom was merely hiding profound flaws: a weak educational system that produces too few engineers and technocrats, high energy costs, low spending on research and development, and systemic corruption.

Citing these shortcomings, the Switzerland-based World Economic Forum recently ranked Mexico 47th in global competitiveness, behind such countries as Botswana, Tunisia and Chile.

Carlos Salinas de Gortari, who as president of Mexico in the early 1990s fought hard for NAFTA, says the country squandered many of the opportunities the treaty provided.

"Unfortunately, from 1995 on, reforms to make sure Mexico took advantage of NAFTA were left behind," Salinas said.

The advantages conferred by NAFTA have eroded. Mexico's proximity to the U.S., the world's largest consumer market, means less in a world of ever-faster air and ocean transportation. And trade barriers have fallen around the world, devaluing Mexico's special trade status.

Mexico has lost nearly half a million manufacturing jobs in the past three years to countries as far away as China and as near as Honduras. Last year, foreign investment ? an engine of job growth since NAFTA ? declined to its lowest level in 10 years.

Over the summer, China displaced Mexico as the No. 2 exporter to the U.S. (Canada is first.)

"NAFTA is stuck," said Federico Sada Gonzalez, chief executive of Vitro, a glass manufacturer in Monterrey whose post-NAFTA exports to the United States grew 62% before leveling off three years ago.

Others say the reality is more complicated.

"The issue is not whether Mexico is competitive. It is that other countries have become more competitive," said Alfredo Thorne, an economist at J.P. Morgan Chase & Co. in Mexico City. Competing in the world economy is like going up a down escalator, he said: "If you stop making progress, you lose ground."

Mexico, the U.S. and Canada signed the trade accord in November 1993 and it took effect Jan. 1, 1994. Its main objectives were to boost foreign investment and phase out nearly all tariffs on goods traded among the three countries.

NAFTA opened the door to $125 billion in foreign investment in hundreds of Mexican factories and offices. At the peak of its impact, economists estimate, NAFTA generated at least 2 million jobs in Mexico, as manufacturers sought to take advantage of low-cost Mexican labor and proximity to the U.S. market.

Arrivals included not just U.S. and Canadian firms, but companies from around the world that agreed to adhere to "local content" rules, meaning products had to be made mainly from components or raw materials originating within the free-trade zone.

"The figures speak for themselves. Before NAFTA, foreign investment was $5 to $6 billion per year, and now it averages twice that, all because those companies saw opportunities in investing in Mexico," said Mauricio Gonzalez, an economist at the North American Development Bank in San Antonio.

"NAFTA was the most important economic development for Mexico in 20, maybe 50 years," said Jose de Jesus Valdez, president of the largest industrial trade association in Monterrey, Mexico's chief industrial city.

In late 1994, the trade accord's first year, a peso devaluation sent Mexico's economy into a deep recession. The devaluation slashed consumers' purchasing power, but it made the country even more attractive to foreign investors because it cut labor costs in dollar terms by nearly two-thirds.

Companies ranging from frozen food processors to makers of hotel bedspreads opened or expanded in Mexico. Ford, General Motors and other car makers invested billions of dollars in new or existing plants, and auto production grew to 1.9 million vehicles in 2000, twice the 1995 figure.

The growth of Mexico's auto industry was a special source of pride. The industry produces up to six jobs in supplies, services and transportation for each job on the assembly line. And the domestic production made cars more affordable for Mexicans.

Mexico's non-oil exports rose to $146 billion in 2002 ? three times the pre-NAFTA level.

The trade pact also gave Mexicans access to a wider variety of goods, from banking services and beef cuts to cars and movies.

"The great surprise for Mexicans going shopping in Los Angeles is that supermarkets are the same as here," said Luis de la Calle, a former Mexican government official who is now a business consultant. "Ten years ago, the quality and variety of products on the shelves was less and prices were higher."

By opening the country to U.S. and Canadian imports, NAFTA also forced Mexican companies large and small to become more efficient and focused.

Sada Gonzalez slimmed down Vitro from a conglomerate with 29 different businesses to one with just four so it could compete globally. Cemex, the Monterrey-based cement giant, also shed extraneous units.

LJH Co., a bicycle parts manufacturer in Mexico City, cut its payroll by half, to 21 employees, reduced its product line from 150 to 40, and created a new market niche by providing overnight delivery anywhere in Mexico.

"Many of my Mexican competitors have closed," LJH President Luis Herrera said. "My prices are a little higher than foreign companies', but I have survived by delivering faster than they can, giving better service."

Electronics giants such as Panasonic, Sony and Sanyo invested billions in new or expanded Baja California plants, making Tijuana one of the world's largest centers of television manufacturing. Mexicali's status as a computer terminal production center seemed secure with the arrival of NEC and Mitsubishi from Japan and Acer and Mag from Taiwan.

Demand for managers and engineers like Garcia was so intense during the peak years of the late '90s that bidding wars erupted, with employers offering golf club memberships, housing allowances, free air travel and cars to job candidates.

"During 1998 and 1999, nine of every 10 hires involved that kind of thing," said Fernando Ortiz-Barbachano, vice president of Barbachano International, an executive search firm in Chula Vista, Calif.

NAFTA's limitations took longer to become apparent.

Although wealth and jobs increased along Mexico's border with the United States, chronically poor southern states such as Chiapas, Guerrero and Oaxaca have seen little benefit. A decade of free trade has done little to reduce poverty or narrow wage disparities.

But the biggest disappointment for some was that NAFTA did not shield Mexico from the broader forces of globalization.

One reason is that the special status conferred on Mexico by the treaty is no longer so special. Many other countries, including most Caribbean nations, now enjoy the same status. Textile and apparel companies have been moving from Mexico to lower-cost locales such as Honduras and Costa Rica for years.

A bigger blow to Mexican businesses was China's entry into the World Trade Organization in 2001, which meant Chinese products could easily enter North America. Although Chinese products are subject to duties, they still are often cheaper than Mexican goods.

At the same time, unions' wage demands combined with Mexico's gradually strengthening peso have made Mexican factories less competitive, said Jonathan Heath, an economist with LatinSource, a consulting firm in Mexico City.

"Within a relatively short period of time, Mexican labor costs have shot up without the nation being able to offer much else in terms of competitiveness to go the other way," Heath said. "The competitive edge that Mexico seemed to have coming out of the 1994 recession is lost.

"Five years ago, Mexico was the logical place for manufacturers to go. Now China is logical," he said.

Red tape and high transportation expenses now mean that it costs the same to ship a product to Houston from Shanghai as it does from Mexico City, said Eduardo Bailey, a Mexican legislator who is secretary of the Chamber of Deputies' Economy Commission.

The luster of the Mexican auto industry also may be dimming. Total production has been declining for three years.

In deciding where to invest, big auto firms look not only at a country's production costs but also at its potential as a retail market. Judged in those terms, prospects are brighter in places such as China and India than in Mexico, said Carlos Niezen, an auto analyst with AT Kearney consultants in Mexico City.

"China threatens all of us," said Jorge Verastequi, spokesman for Grupo Industrial Saltillo, a Mexican auto parts manufacturer in Saltillo.

Garcia, the former Mitsubishi plant manager, enjoyed the post-NAFTA boom and now is struggling through the bust. He grew up and attended college in Mexicali, and realized his dream of making it big in his hometown.

But Mitsubishi was blindsided by the popularity of space-saving flat-screen computer monitors made in Taiwan, South Korea and China.

Garcia worked furiously with his crew and his Mitsubishi bosses to cut costs and keep the plant open. Over two years, they reduced the wholesale price of a 17-inch monitor from $160 to $80. But Mitsubishi shuttered the factory anyway, choosing to close it rather than invest upward of $1 billion to start a new line of flat-screen monitors. Daewoo, Acer and NEC also closed or scaled back their factories.

Garcia was out of work for three months before finding a management job in Tijuana in November. Now he spends the workweek away from his wife and two infants in Mexicali. He fears it will take him years to regain his former status and income.

"I thought Mexicali would be a center of computer technology, but it's all disappeared. Not just Mitsubishi with its glass tubes, but the factories that made plastics, electronic guns and the cardboard cartons," Garcia said. "Our competition has gone to China."

It turned out to be a deal with the devil...

Stephanie Jackter - 1-11-2004 at 01:44 AM

And those deals always have the same endings.

Good article. What strikes me most is the last couple of paragraphs about the Plant Manager from Mexicali. The article didn't speak directly about the peons that made seven dollars a day all along to support that operation, but this man, in order to save his job, had to figure out how to pay the workers less and less in order to get his costs down in order to stay competetive. For a while he got the family membership at the country club. but eventually he got phased out exactly the same way.

The same thing is now happening in the United States. First the working stiffs get their you know whats squeezed to the point of breaking by managers and stockholders trying to coax every penny out of a business to stay competetive. But the second phase is now upon us, where those managers can also be phased out by cheaper workers in other countries.

Every time we pick up a cute little Chinese made blah blah at the dollar store, plunk our money down and walk out the door, we participate in a world economy that already has us by the short hairs. The "upper middles" in this country haven't felt the yank quite hard enough to realize it, but trust me, the pain of the pull is just ahead in much longer American unemployment lines. - Stephanie

Anonymous - 1-11-2004 at 08:14 AM

When the People take back the Control of their Goverment it will Change.
As long as the People "Let" the Govt. make all the decisions for them ,from Cradle to Grave there will only be the downward Spin.

That is demonstrated by the U.S. Govt.

"Vengence is mine said the Lord"
Bible St. James version

Anonymous - 1-11-2004 at 09:07 AM

So what's your solution Grover? How do US products remain competitive in a world economy per Grover?

* As a leftist, you claim the present media is biased. During the Klinton administration, the right wing claimed that the media was biased to the left. So just what should this media look like?

* Let's say that the media is no longer biased, right or left and the percieved straight scoop is hitting the masses, then what? Should there be mass demonstrations to force our government to make our goods competitive? Obviously, you can see how absurd that idea is.

** On the grocery strike. This is largely over health benefits for part time workers. The Grocery worker unions have their head in the sand over the extremely high cost of health care. Box boys working 14 hours per week do not need health coverage nearly as much as single parents with children. The Union needs to get real! The companies have very legitimate battle to keep costs competitive with the non-union stores such as Walmart. If they can't they will be doomed. Of course you can thank the Helath Care costs largely to the power of the Trial Lawyers Association whom are stellar finaciers of the every democratic puppetthey can pull strings upon.

** And you mention "the owners" of the US government as if coporate influence is the scourge of our society. Honestly, the only alternative is a government based on socialism or communism where the "owners" are an elite ruling class where zero assets funnel to the citizens. We all know that socialist and communist regimes with out a path of capitalism fail or imprison their citizens into a life of third world poverty.

** You also mention "layoffs". Unfortunately the present state of economic recovery does not fit your self serving, negative mantra. In fact, the jobleness rate is on the decline and the markets are on the mend. Jobs are being created in the tech sector again, quality jobs that provide high wages and career opportunities. Of course, these jobs are far from the entitlement based slots allocated by the archaic unions.

*** So.... What is your solution?


Quote:
Originally posted by grover
Nice insight, Stephanie. It really boils me to see the selfishness and ignorance of the average American worker, but I do not fault him.

Ironfisted control of all non-Internet media has completely neutered any doubt or dissent. I made an unfortunate comment of "pathetic" when Mike H. wondered "why do the terrorists hate us so?" I didn't mean to criticize Mike. After all, the paper wouldn't print lies, would it?

I was so disheartened to realize most everybody has no idea all the stuff our government has done worldwide on behalf of owners only. The truly scary part as you point out is that the global race to the bottom is running out of victims to exploit. You're next.

The inherent selfishness encouraged by our media and "leadership" is everywhere. Look at the grocery strike. For a week or two, most pretended. Then we got annoyed. Now we're getting ticked off at the strikers and wish they would stop.

Nobody gives a hoot as long as it's the other guy's ox being gored. What we refuse to acknowledge is that the laid-off workers won't be buying much from our businesses for a while. Who can we blame for that?

Solutions

Ski Baja - 1-11-2004 at 10:02 AM

How about actually educating those american kids in school rather than just shuffling them through to make "taxpayers" out of them.

NAFTA

Phil S - 1-11-2004 at 10:10 AM

Stephnie: Did you happen to "log in" the reference to 1,000,000 Mexicans that were hired? I read that to mean that possibly 1mil out of work, Mexicans were hired. That wouldn't see the need to "cross over" into the USofA. Now I wonder without the NAFTA plan, what would the 1 mil workers be doing today? What is "our" problem in the states? Hmmmmmm. Stephnie. Any chance you and Grover might be driving "foreign cars, watching t.v. on foreign sets, etc, etc. etc."???????

TMW - 1-11-2004 at 11:30 AM

Providing a good education to our kids is an excellent start. When the average CA college freshman can only read and do math at a 5th grade level we have big problems. I can only imagine the problems in educating the Mexicans

I wish I could answer more thoroughly,

Stephanie Jackter - 1-11-2004 at 11:42 AM

but I have to be brief on this and go spend some time with the kids....

Phil, Yes. We all are guilty of buying all those foreign products, but I tend to take a defeatist attitude at this point on that issue. If I were to decide to only buy things that were made on this continent, do you think I could pull it off? How do you figure out where your car was made? If I buy a Chevrolet, do you think I have any way of knowing where its parts originated. It's become damn near impossible for an individual to have any control on the market forces.

As far as the machilas offering jobs to Mexicans, the promise went bust, Phil. 500,000 of those jobs have already disappeared and the other 500,000 could easily go over the next 5 years. The bust has happened in a very short period of time.

Anonymous:

1- What should this media talk about? How about some of the issues I read about in the Utne Reader? - or interviews with farmers in Guatemala who are losing everything because they can no longer compete in world markets? - or with women at the bottom of the food chain in America who work seven days a week to try to raise their children and get no help from the govt., even health care. How about daily news of the disparity between what we invest in the military industrial complex and what we spend on education, foreign aid and other social good. Instead what headlines every news format is how much stockholders are making.

2-The economy of the world is so out of control that frankly, I'm not sure any answer is satisfactory, but if there is one, it would have to be protectionism mandated by the government. We have to incentivise businesses to keep employees, produce actual goods and services for our own use and get a handle on big businesses to act with responsiblility toward not only their stockholders, but their employees as well. There has got to be a happy middle somewhere outside the bounds of Orwell and Ayn Rand. But it's gonna take work to find that road.

3- You mention huge disparities in wages between the elite and the rest of the workers as if they are not already a fact. I've documented this in earlier posts you might have missed, but the US has an even higher percentage of the economic gain in the hands of a small group of elites than Mexico does! And when you look at the economy of the world, we are absolutely ridiculous in the amount of money and resources we command. On the one hand, you want to see the US as a world player, but then when we compare unfavorably with the wages of the rest of the world in what we make, it's time to seperate into the bubble and decide that somehow we deserve it more than they do. There's a real disconnect there that's gonna wind up biting us in the butt either way.

4- Who are you to say that a worker putting in a days labor, whether he be a bag boy or a street sweeper, doesn't deserve to make a living wage commensurate with the work put in? That's very persumptuous of you. Marital status and responsiblilties, and even age of the individual are not germaine to the issue of how much a job should pay at all.

5- Last but not least, if you watched carefully, the 100 some point dip in the market the other day reflected the fact that job growth is stagnant. Only a few thousand jobs were added to the roles and that doesn't account, as usual, for the tens to hundreds of thousands of people who have dropped off the register completely because their benefits have run out and they have been so unsuccessful at finding work that they've given up searching.

All for today. I gotta go. - Stephanie

Anonymous - 1-11-2004 at 01:06 PM

You cannot bring prosperity by discouraging thrift.You cannot help small men by tearing down big men.You cannot strengthen the weak by weakening the strong.You cannot lift the wage-earner by pulling down the wage-payer.You cannot help the poor man by destroying the rich. You cannot keep out of trouble by spending more than your income.You cannot further the brotherhood of man by inciting class hatred. You cannot establish security on borrowed money. You cannot build character by taking away men"s initiative and independence. You cannot help men permanently by doing for them what they could and should do for themselves.

Boetcker

TW

Ski Baja - 1-11-2004 at 01:28 PM

And why would that be TW ?

Anonymous - 1-11-2004 at 03:14 PM

TW. The problems with educating the Children are not any thing compared to the Children in the U>S.
Children in Mexico have poverty to overcome for their education. They overcome it very well in the Rural parts of Mexico.For an examole go to a place South of San Quintin near a Packing Shed and do a days work at the Schools,Take pictures,Take notes, talk to teachers, Talk to Students.

Go to a similar School in Rural America and do the same thing.

Then and only then will you understand!
You cannot learn from some of the Posters on Nomad as they have their own Bias.

As you have been able to decipher there are a Large Group of the Nomads who go to Baja simply to have a good time,to relax,to get away from another culture,to Drink, to go naked with out prying eyes,to go fishing, diving, mission Hunting,racing cars and many things that keeps them from really getting to know the People of Baja.

"A Fool takes no pleasure in understanding bur only in disclosing what is on his Mind.

Proverbs 18:2

For the record

Ski Baja - 1-11-2004 at 03:19 PM

Public nudity is against the law in Mexico for you exhibitionists that are now thinking about running around naked.:lol:

Understanding

Ski Baja - 1-11-2004 at 04:07 PM

People that visit a foreign country that feel they are "superior beings" rather than realizing they just have an economical advantage will most assuredly learn and see more in a travel guide rather than actually being there.:lol:

Anonymous - 1-11-2004 at 04:25 PM

" It does not always Rain when a Pig Squeals"

Proverb