For the past two decades, and especially since the North American Free Trade Agreement (NAFTA) went into effect in 1994, a highly contested economic model that gives pride of place to foreign investors and external markets has governed the decisions of policy-makers in Mexico. This model has performed poorly in the creation of high-quality jobs, and erratically in the provision of decent incomes for workers. This should come as no surprise.
The country has attempted to build an export-oriented economy on the supposed advantage provided by the low wages of most of its workers—a model characterized by its critics as a global “race to the bottom.”
Country after country has joined the race for export-oriented jobs by providing lower and lower labor standards. This pernicious international competition has led to the decline of wages, benefits, working conditions and the ability to organize. The model has brought benefits to large firms, the financial sector and an ever-shrinking layer of high-income administrative and professional workers, but not to the vast majority of working people.
At this point in its history, Mexico should be undertaking a profound transformation of its development project, searching, above all, to bring about a sustained growth of production and income along with significant improvements in the quality of life. This should be carried out through policies that seek to better integrate production for export into the country’s domestic productive structure, to stimulate and coordinate private and public economic activity, and to develop a deeper and more extensive democracy that allows for universal participation in the country’s development process.
Indeed, a declared objective of NAFTA negotiators during the early 1990s was the creation of an agreement that would guarantee the sustained economic growth of the United States, Canada and, most crucially, Mexico. The agreement’s signers declared their hope that the jobs available to Mexican workers would grow in number, in quality and in levels of remuneration. Instead, for workers, we’ve seen that the growth propelled by exports is more an illusion than a reality.
The growth model put in place by NAFTA was not new. The first attempts to create a low-wage, export-oriented industrial structure in Mexico occurred during the 1960s. Structured around a nascent maquila sector, the goal was to transform the country into an exporter of consumer goods and intermediate goods (materials produced for the purpose of being used in a new production process).1 But intermediate goods, rather than becoming an export base, became one of the country’s major imports. Mexico’s manufactured exports were, for the most part, products that required significant amounts of imported inputs. Over the past two decades, this need has deepened, making Mexico extraordinarily dependent on imports in order to grow. This is the hallmark of maquila production.
Maquiladoras assemble final products from intermediate goods typically produced abroad. The vast majority of maquila inputs—the cloth of apparel manufacturing, for example—comes from outside the country, frequently from another branch of the same company that owns the maquila. And the vast majority of maquila output is destined for export, sometimes indirectly through another maquila. Maquila exports now account for about half the country’s official manufacturing exports. Virtually the only money generated by maquila activity that remains in Mexico consists of the wages and benefits paid to Mexican workers and very small additions to the productive infrastructure.
Maquila regulations allow for the unlimited participation of foreign capital in Mexico-based facilities. Maquila companies are entitled to the temporary duty-free import of intermediate goods, machinery and equipment, subject to the posting of a bond guaranteeing that those goods will not remain permanently in Mexico.2
Manufacturing has grown with the maquila program, but the type of productive specialization that has been generated by the program’s assembly of products with imported inputs has generated little or no connection to the rest of Mexico’s productive apparatus. This process has not brought about anything resembling the promised sustained industrial development, especially not in sectors that produce high value-added output. Moreover, it has transferred very little technology and has created very few skilled, well-paid jobs.
In fact, the location of manufacturing zones for export is not determined by competitive factors like skills and knowledge, but on low wages and proximity to import and export markets. Foreign firms are more interested in placing themselves in locations where they can benefit from easy buying and selling with the United States, as long as neither labor nor regulatory costs overtake the advantages of access to the U.S. market. For Mexico, this entrepreneurial interest creates the self-destructive “race to the bottom.” Without exaggeration, we can say that the maquila sector is a low-productivity, unskilled trap for workers and for the country’s economy. In fact, the growth of the maquila sector reached its peak in 2000 and has been declining ever since, as firms find countries with lower production-cost levels.
The other NAFTA-related limitation to overall economic growth is the nature of the flow of foreign direct investment (FDI) to industrial activities outside the maquila sector. This investment rarely turns out to be accompanied by a transfer of technology or, relatedly, an upgrading of jobs.
The post-1994 flow of FDI is a development that can be attributed to the liberalization of investment rules created by NAFTA, and it largely involves the purchase by foreigners of already-existing productive facilities or a significant proportion of the shares of Mexican enterprises.3 And because this type of foreign involvement does not entail the construction of any new plants, foreign companies have established themselves or consolidated their presence in the Mexican economy without adding to the productive capacity of the country. This has been particularly the case in the textile industry as well as the non-maquila production of food. It has also been the case in the financial sector. A good example is the enormous inflow of funds in 2000 and 2001 derived from the merger of Spain’s financial giant BBVA-Probursa with Mexico’s largest bank, Bancomer, followed by Citigroup’s purchase of Mexico’s second-largest bank, Banamex.
In addition to the purchase of existing firms, the overall flow of FDI to industrial activities has diminished since 1980 and has been increasingly directed to services, especially finance. In 1980, 80% of FDI was directed to manufacturing. In 2004 this proportion was only 52%, and limited to a small number of industries. In the manufacturing sector itself, 31% of non-maquila manufacturing exports came from the automobile industry. International trade has been concentrated in a segment of firms who rely on outside suppliers, making their links with the national economy rather insignificant. This has led to the erosion of internal production chains, a phenomenon partly due to the trade opening and the lack of competitivity of a number of Mexico’s industrial sectors.4
Another growth sector since the advent of NAFTA consists of micro-enterprises made up of fewer than five employees, including one-person activities. These micro-enterprises—for the most part low-income, unstable activities—now account for about 50% of the non-agricultural jobs in the country. In general, they represent a form of survival, a scheme that has been adopted by an ever-widening group of the population in a setting of falling wages and hard-to-find good jobs. As the table (opposite) indicates, average wages in the micro-enterprise sector have an estimated value of only 43% of the already-low national average.
The self-employed also constitute a growth sector. In the nonagricultural workforce the proportion of wageworkers as a whole has fallen from 74% in 1991 to 68% in 2004. Further, salaried jobs represent only 65% of the new jobs created between 1991 and 1998 in the most urbanized areas.5 The result of this difficulty is that the self-employed (including, for example, street-corner vendors of chewing gum) now represent about 24% of the workforce. The self-employed also earn below-average incomes (see Table).
Between the third trimester of 2000 and the second trimester of 2004, 2.8 million work “positions” were created in Mexico, of which 54% were filled by wageworkers, 4% by employers and 43% by the self-employed. These numbers give us a snapshot of the current situation. What stands out is that 65% of these new positions came with no benefits, indicating an increase in the precariousness of labor. According to government figures, 49% of these new jobs were sealed with only a verbal agreement. And even among those with a formal written contract, 13% came with no benefits.6
The available options for over two-thirds of the workforce are now in the commercial or service sectors. Of this population, 67% of those in commerce and 47% of those in services work in micro-enterprises of five or fewer workers.7 The conditions of income, productivity and work in these firms are extremely precarious and represent the only option for large segments of the population. Since larger-size firms have fewer and fewer jobs to offer, self-employment or micro-enterprise employment have become the only options for much of the Mexican workforce.
The situation is grim. The trend is ominous.
About the Author
Carlos Salas is a research economist at the Instituto de Estudios del Trabajo in Mexico City and teaches economics at the Universidad Autónoma Metropolitana, Iztapalapa.
Notes
1. Bank of Mexico, Balance of Payments.
2. The Mexican regulations coincided with a rule in the U.S. Tariff Code (HTS 9802) that allowed U.S. firms to send manufactured exports abroad and re-import the final product, paying customs duties only on the value added abroad.
3. Fidel Aroche, “Structured Transformations and Important Coefficients in the North American Economies,” Economic Systems Research, Vol. 14, 2002, pp. 257-273.
4. CEPAL, La Inversion Extranjera Directa en América Latina y el Caribe, (Santiago: CEPAL, 2000). Also see J. Máttar, J.C. Moreno Bird and W. Peres, “Foreign Investment in Mexico after Economic Reform,” in Kevin Middlebrook, et al, Confronting Development (Stanford: Stanford University Press, 2003).
5. National Employment Survey, National Institute of Statistical and Geographical Information (INEGI), Mexico City, various years.
6. National Employment Survey, INEGI, Mexico City, various years.
7. National Employment Survey, INEGI, Mexico City, various years.
