By William C. Gruben
Southwest Economy. Federal Reserve Bank of Dallas |
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One of Mexico's most talked-about economic events this decade has been the downturn in maquiladora, or in-bond export, plants. These plants account for close to half of all Mexican exports to the United States, so it's no wonder they receive so much attention.
Between October 2000 and March 2002, maquiladora employment fell by nearly 277,000, or about 21 percent. Employment recovered through spring of 2003, then fizzled again. The usual causes of maquiladora fluctuations (U.S. demand and Mexican cost factors) have begun to move in directions that induce growth. Are these changes enough to spur a recovery? Maquiladora employment has begun to edge up, but pressures in both directions complicate the answer.
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To understand more than simple generalities about maquiladoras today, two factors deserve attention. First, maquiladoras and their counterparts in other countries are chronically volatile. Maquiladora employment and output fluctuations—both down and up—are greater than in same-industry plants in high-income industrialized countries. Second, while the latest downturn has been spread broadly across maquiladora industries, some have fallen harder than others. Some industries have recovered a little and appear ready to move back up. Others look poised for further decline.
Employment Volatility
Between September 1998 and October 2003, overall maquiladora employment in Mexico rose more than it fell. As seen in Chart 1, employment peaks in October 2000 and then falls hard and fast. Newspapers make much of this drop, but they scarcely ever discuss the upward move over the preceding two years. Maquiladora employment rose more between September 1998 and September 2000 than it fell in the following three years. Despite the sharp decline since October 2000, maquiladora employment has never fallen back to September 1998 levels.
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Maquiladoras act as shock absorbers for manufacturing operations in industrial countries. In any country, certain industries have long-term upward or downward trends. But in the short run, firms in high-income countries use foreign export-processing zone plants such as maquiladoras to take the brunt of shocks to home demand. A given increase or decline in U.S. industrial production triggers much larger increases or declines in maquiladora employment in the corresponding industries in Mexico. After suffering a decline starting in 2000, U.S. industrial production began to recover late in 2001, offering reasons for hope.
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Shock absorbing is not the only factor in maquiladora employment fluctuations. Recent changes in the dollar cost of doing business in Mexico may explain not only some recent problems of the maquiladoras, but also their recent upturn. Between October 1998 and March 2002, the inflation-adjusted value of the dollar weakened against the Mexican peso by 28 percent. At the same time, the dollar strengthened against the currencies of Malaysia, Singapore, Sri Lanka, Thailand and the Philippines. These changes in the real exchange rate lowered the dollar cost of buying products in the five Asian countries, while raising it in Mexico. In Mexico, average manufacturing wages in dollar terms rose 45 percent between 1998 and 2002 but fell in Singapore and Sri Lanka. Since March 2002, however, the real value of the dollar has strengthened 17 percent against the peso, lowering the cost of doing business in Mexico. Meanwhile, the dollar has appreciated only slightly against the currencies of China, Malaysia and the Philippines and declined against those of Sri Lanka, Singapore and Thailand.
| About the Author. Gruben is director general of the Center for Latin American Economics and a vice president in the Research Department of the Federal Reserve Bank of Dallas |
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| About Southwest Economy. Southwest Economy is published six times annually by the Federal Reserve Bank of Dallas. The views expressed are those of the authors and should not be attributed to the Federal Reserve Bank of Dallas or the Federal Reserve System. |
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