Full text of The Southwest Economy : May 1989

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

1111 II III I{ \1

Itl "I I{\ I

U \'k. 01 () \1 L\S

Maquiladoras
and the
Southwest
Economy

T

he Mexican maquiladora sedor is a
large and growing assemblage of
foreign-owned companies thaI produce
chiefly for expon to the United States.
Because more ~han 80 "percent of
maquiladora manufacruring plants are
within a few miles of the U.S.-Mexico
border, this industry has imponam
implications for the Southwesl economy.
The maquiladora program was
developed in response to the cancellalion of the U.s. bracero program. A

\I \'i I')l'N

shonage of domestic farm labor dUring
World War" led the Uniled States to
admit Mexican laborers to work in our
country. This policy was fonnally
sandioned in the early 1950s. Many
workers left the interior of Mexico and
established pennanent homes on that
country's nonhern border, so they
could take seasonal bracero jobs in the
United States. These events caused
Significant population growth in
nonhem Mexico, but they also caused
U.s. labor groups to organize political

Maquiladora Centers
AI ol Mexico

This document was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org).

"Maquiladora expansion has been particularly strong
during the middle and late 19805. ,.

pressure against the program. [n 1%4,
when 185,000 /'.texicans were working
under Ihe bracero program, the United
States lerminaK>d the program.
To find jobs for the thousands of
unemploy<.'(\ braceros, the Mexican

government designed a program that
used U.S. tariff laws to attract U.s.
manufacturers to the oorder. One of
these laws states thai if a firm brings
inputs from the United St.1tes. assembles them abroad, and returns the
product to our coumry, only the value
added by manufacture is subject to
tariffs. The IOlal value of the impon is
not taxed.
To benefit from this law, Mexico
waivE.'<I a number of its traditional
restrictions on foreign investment. It
allowed l()()..percent foreign control of
plant operatiOns. It also perrniUcd
duty-free impons of materials and
equipment, provided that all output
would be exported from Mexico.
These new rules made it easier for U.S.
and other non-Mexican producers to
use Mexico's low-cost labor to compete
with Asian producers.
Even Ihough the maquiladora
program originally was designed to find
new employment for fann workers,
most of whom were male, the maquiladoras have usually hired females.
During the 1970s, only about one-fifth
of all workers were males. Since then,
the share has risen to a little less than
one-third,
The maquiladorJ program has also
often been called the "twin-plant
program: The idea was Ihat a plant on
the Mexican side would coordinate its
operations with a twin just across the
border in the United States. TIlese

twins do exist. but they are the exception and not the nile. l.ess than 10
percent of the plants in Mexico have a
twin along the u.s. border.
At first, Mexicm law required
maquiladoras to locate on the border.
l":lter, Mexico allowL>d these plants into
much of the interior (see 11)(! map),
Despite Mexico's relaxation of locational restrictions. more than 80 percent
of maquiladora employment is still on
the border, Mexico also relaxed ils
restriction that all products of maquiladords had to be exported. Now. 80
percent of total output has to be
exported. but not all of it.

Chart 1
Maquiladora Employment
Thousands at Ernp1<>ye8s

..,

'00

o

'81

'82

'83

'84

'85

'88

'87

What Made Maquiladoras Grow?

Mexico's maquiladora employment
growth h:ls been r::apid for some time,
but expansion has been particularly
strong dUring the middle and late
1980s. As Chart 1 shows, employment
rose from a little more than 200,000 in
mid-l984 to over 360,000 in mid-I988.
This growth is a reaction. in part. to the
devaluation of the Mexican peso in
1982 and 10 subsequent devaluations.
Before 1982, the peso was persistently
overvalued against the dollar.
While changes in the exchange
value of the peso against the dollar are
related to maquilador::a gro'Nth, a more
direct link is that between dollardenominated labor costs in Mexico and
those in (){her countries. Chart 2
compares U.S. dollar-per·hour manufacturing labor costs in Mexico versus
three of the newly industrialized Pacific
nations. lltese countries are among
Mexico's major competitors for foreignowned assembly plants. Despite some
extreme fluctuations, Mexican labor

This document was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org).

'88

Electrollics account for 42 percent oftotall'aille added by maqlliladora plallts.

Chart 2
Labor Costs lor Selected Countries
and Hong Kong

u.s ea.r. Ptor Hour
'.00

wage. low-skilled labor to attract

manufaauring indusuies. One of the
reasons for this decline in relative costs
has been the adjustmenl of the Mexican

'00

p""'.

~~-----;~~. ~~

'.00

costs have fallen relalive 10 lhose of
other counuies (hal have relied on low-

....:._.. _..

-"'--::"'71""'~.:

....

...... ~:_.
~_

KorN

0.00 77 78 7i 110 'Ill '82 '83 '801 "$$ "llIS '11

What Do Maquiladoras Make?

The mix of maqulladorn products
is narrowly focused. Electronics
account for 42 percent of (Olal \l:llue
added by maquiladora plants. Shipping
costs for electronics are low in relalion
to product value, so long distance
transport expenses are less significant
in determining plant location than Ihey
are for many Other producis. l1tc
electronics-producing maquiladoras are
generally assembly plants. They take

components that are manufactured

elsewhere and they put them logether.
The tariff-saving char.lcteristics of such
operations were whal originally helped
to motivate finns to go to Mexico.
More recently, other lypes of
operations have expanded. Currently,
about 24 percent of tOl:al value added
in maquiladora plants is in lransponation equipment manufacture. Some of
these plants, which manufacture parts
that are used by U.S. and japanese auto
companies, do nOi qualify for the
special U.S. value-adck>d-only tariff
ueaunem thai originally helped to
motivate maquiladora activity. These
plants do more than simply assemble
components. Nevertheless, the labor
savings are signiflC,mt enough SO that
companies will start maquiladoras
anyway.

Who Owns Maquiladoras?

Other factors also motivated the
recem expansion of maquiladora
activity in Mexico. A fairly recent
phenomenon has been the gro"W of
maquiladora plants that are not owned
by U.S. finns. These plants represent
only a small minority of toul maquiladoras. Of the 1,125 maquiladora plants
operating in Mexico in 1987, 53 were
owned by finns that were nOi of U.S.
origin, including 5 French plants, 5
British plants, 4 Dutch plants, and, most
significantly, 31 japanese plants. In
1988, the Japanese added eight more
plants.
Labor costs and access to U.S.
markets are irn(Xlrtant mOlivations for
lhese maquiladora.~, but protectionists
in the United States argue that the
Japanese also use the maquiladora
progr.U11 to avoid quotas imposed on
products that originate in Japan.
Whether or not this is true, anticipation
of funher anti-Japanese protectionist
legislation in the United States may be
motivating the establishment of
japanese plants in Mexico. Nevertheless. a number of the japanese maquiladoras coordinate their operations with
japanese manufacturing activity that
already lakes place in the interior of the
United States. RegardJess of the relative
importance of each of these motivations, foreign maquiladoras have a
more positive impact on U.S. economic
activity than if they were located in
their home COUntries.
Maquiladoras' Impact 00 Tuas

In mid-I987, wben employment in
the great majority of Texas cities was

This document was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org).

Rapid~}'

rising maquiladora lI'ages, in dollar terms,
u'Ould slou' maquiladora grou'tb,

below :I year e;1rlier. all (our m3jor
Texas dlies on the Mexic3n border
were growing. And over lhe previous
24 months, maquiladora employmem in
every one of the Mexican citIes across
from Ihese Texas communities had
grown by 25 percent or more.
Though much is unknown about (he

impact of maquilador.ls on the United
$r:ales. :m estimate of some of the
effects of nuquiladoras on Texas is
possible. First, workers in the Mexican
maquilador:1s spend some of their
income jusl across the border in Ihe
United Stales. [estim:lte that Mexican
maquilador:l workers spend about 565
million annually on purchases in Texas.

These expenditures mean about 4.000
additional jobs in the stale.

A second impact involves the
Texas workers in Texas-based twin
plams. I estimate that about 16,000
Texas workers hold jobs in TCll;3S twins
of the Mexic-.U1 m:lquiladoras. The

impact of purchases in Texas by these
plants and their workers result in an
additional 25.000 jobs in the s~te, so
that the tOtal impact of the U.S, twin
plants is about 41,000 jobs.
Third Is the direct impact that
Mexican maquiladora operations ha\'e
on Texas. We know these Mexican
operations rt..'quire Texas-oo.sed customs
brokers and transpon services. but the
plants also purchase inputs from ITUny
Texas companies. A Sludy of maqUiladoras showed they annually use about
56 billion of inputs from the United
$tates. Though Texas firms supply only
pan of the inputs. purchases from
Texas suppliers could mean as many as
10.000 addidonal jobs for the state.

Fut\ll"e Growth

Chart 3

\'l;'h.i1e it is dear that the maquiladora sector has been growing rapidly,
the outlook for future growth is less
clear. \l1ut clouds this outlook is that.
e\'en though Mexican wages are Slill far
belov.· U.S. wages. Mexican monef.3ry
and exchange rate policy is C1using the
dollar cost of a Mexican worker to rise
faster than the cost of a U.S. worker.
....Iexico has taken strong stcps to
reduce its rate of infb.tion from over
1(1() percent in 1987 to about 60 percent
in 1988. But even though the f'Jte of
price increase in Mexico slowed
subst:mtially last year, prices there h:l\'e
increased considerably faster than in
the United Statcs.
In a markct of freely fiuClu:lling
exchange rates. we would expect
devalu:uions of the peso to bring the
relative buying power of the dollar
back into adjustment. The peso-dollar
exchange rate, however, has changed
very little since late in 1987, because
the Mexican government has lx.-cn
defending the peso by purchasing it
with foreign currency. nle result has
been a substantial decline in the real
peso dollar exchange rnte (see Chart
3). This means that a dollar now buys
much less of ffiOS( Mexican products
than it did a )'ear ago.
So far, the Mexican government
has acted to hold wage increases well
below the rate of inflation, SO the dollar
cost of workers in MexiCO has nQl. risen
by as much as o\'erall prices have.
E\'en so. the average dollar "",-age and
benefit cost per Mexican maquiladora
employee rose by more than 21 percent
between mid-l987 and mid-I988.

(~,..o.--l

U.S. Real Exchange Rate with Mexico

"*' ......

1~100

""
'"
'"
'"

.

,'"

tlO ·tlO

"1

'82

"S3

...

"85

'81

"17

'1lll

A more serious concern is the
potential for funher wage pressures in
response to recent infi:uion and the
possibility that these pressures will be
expressed through increases in dollar
cost per worker. A wage adjustment
would not demoy the maquiladora
industry; it has existed and even grown
when the dollar cost of wages in
Mexico W:lS alx)\'e that in Far Eastern
countries. But rnpidly rising maquiladora wages. in dollar teons, will slow
growth.

Summary
In recent years, relatively low
dollar wages have stimulated growth in
maquiladora employment-with a
significant impact on the Texas
economy. Last summer, overall
a\·ctage monthly wages and salaries
,,'ere less than S300 per employee. BUI
if Mexic:.m rates of wage growth
outpace those elsewhere, the potential
for maquiladora expansion will
diminish.
-William C. Gruben

This document was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org).

ECONOMIC COMMENTARY
by Robert H. Boykin, President
Federal Reseroe Bank ofDallas
Excerpted below are bighlightsfrom testimOlly give'll try Robert
Boykin at a special bearing ofthe Committee on Ballkill& Finance

and UrlXIIl Affairs, U.S. HOUSll ofRepresentatives, 011 March II,
1989 ill san AII/onio, Texas. III his testimony, Mr. &ykill discussed the thrift crisis OIld the legislaliol/ recenl/y proposed try
Presidem Blish loaddress this critical issue. l

The Federal Reserve Bank of Dallas suppons, in principle, the
legislation proposed by Presidem Bush for the refonn and
recovery of the thrift industJy. A salis/aclory soIutio't to the
problems pUlgui1l8 the thrifts is essemial to ensure the ceo/willie
weI/-being C!ltbe nation as a whole and particularly the DaNas
Federal Reserve DisJrict (Texas, Louisiana, and New Mexico). It is
imperative mal a solution to this crisis be reached as qUickly as
possible; the threat this situation poses ClfU10l be allowed [0
continue. Removing this thre:1.I could contribute substantially to
broadening the region's rwo-year old economic recovery.
The Impact of the Thrift Crisis on Banks and Healthy Thrifts
The thrift crisis has Significantly increased the cost of funds for
financial institutions in the District. 2 In Texas, interest premiums
on deposits averaged 28 basis !Wints for banks and more than 50
basis !Wints for thrifts in 1988. Even sound, healthy Texas banks
have paid an additional 10 to 20 basis points for funds in 1988,
compared to banks in similar financial condition elsewhere.
'llle so-called Texas premium on deposits can be anributed to
IWO factors. The first is the large volume of nonperfonning re-.ll
estate loans held by banks and thrifts. Banks have not yet
managed to fully write down their real estate loan portfolios to
current values. Consequently, questioru; persist regarding the value
of these assets, making the financial condition of these institutions
unclear. llte second factor driving up the cost of funds at District
institutions has been the aggressive pursuit of funds by insolvent
thrifts. Insolvent thrifts bid up deposit rates to auract funds,
forcing the healthy members of the industry to raise their own
deposit rates in order to compele.
The Texas premium on deposit rntes has affected the bottom
line for commercial banks. This is illustrnted by the negative
return on assets at Texas banks for the past twO years. As losses
have mounted, the equity capital position of the District's banks
has also fallen--from an avernge of 6.9 percent of assets in 1985 {Q
an estimated 4.9 percem in 1988. Moreover, over the same
period, the banks' primary capital position has declined from 7.8
percent of assets to 6.6 percent in 1988. This compares to the
current regulatory standard of 5.5 percent for primary capital and
suggests that District banks are approaching regulatory minimums.
In fact, many banks have fallen below the regulatory minimum.
TIle upshot of this situation is thaI otherwise healthy banks
and thrifts have been negatively affected by the continued
operation of insolvent thrift institutions. It is likely that the District's

financial sector wlll continue to deteriorate until the situation is
resolved.

1be Need for Both Public and Private capital
One aspect of the President's proposal is panicularly importam for the SOUth\....est-namely, the need for both public and
privatc capital in any successful restructuring of the thrift industry.
PriV'".llC capital provides a cushion for the deposit insurance funds
and is cssential if risk to those funds is to be kept within reasonable bounds. In the current environment, however, private capital
cannot be anracted to the thrift industry without sufficient public
capital. [n shon, there is a symbiotic relationship between those
two components of capital. If the infusion of public capital falls
shon of what is necessary to anrnct private capital, the effectiveness of the public infusion will be nullified in tlle long run.
We have seen that !Wim illustrnted in the Southwest Plan.
The recapilalizations undcnaken thus far have resulted in a disappointingly small infusion of private capital into the tluifts. Consequently, the restructuring has been too dependent on federal
assistance.
Another point should be addressed. Under the proposed
legislation, thrifts are to be brought up to commercial bank capital
standard~ over time. A large number of thrifts are currently solvent
but not in robust health. Presumably, the worst of the thrift
problems will be addressed under the plan now in Congress. BUl
additional thought should be given to how these moderntely
healthy and barely solvent thrifts (and, 10 some extent, banks as
well) can rnise the required capital and, at the same time, compete
with publicly recapilalized institutions.

Summary
The prolonged operntion of insolvent thrifts constitutes an
immediatc threat to the deposit insurance fund, 10 solvent banks
and thrifts, and to the stabi1i[y of thc financial system itself.
Strategies that have been employed by insolvent institutions could
both compound the problems of currently solvent institutions and
lead to a new generntion of bankrupt thrifts and commercial
banks. Any delays in resolving the current crisis will only seIVe to
increase the cost to taxpayers, to further urxlennine the public's
confidence in the financial system. and to endanger the frngile
economic recovery currently under way in the Southwest. We
view the President'S plan as one which can resolve the crisis, and
we urge its prompt enactment.
A copy of Mr. Boykin's romplete testimony is aV'"diiabie by writing the
PubliC Affairs Dcpanmem. Feder.ll Reser,'c Bank of Dallas, Station K,
Dallas, Texas 75222, or by ClUing (214) 651-6289.
, See Genic D. ShOll and JeffCT)' W. Gunther. tbe Texas Thrift Sihmti()Il:
Implicalkmsfvr the Texas Fillancial brdustry. Federal Reserve Bank of
I

Dallas, Financial Industry Studies Deparunen.t (Dallas, St.'P'ember 1988),
for a romplell: discussion.

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

The 1989 Drought: An Update
During February and March, rain and snow improved soil
moisture conditions in parts of Texas. But soils remain

Probabllity 01

Drooght Conditions Ending by Mid·September

(P",C8Il\)

abnormally dry throughout most of the Siale. Rainfall is
unlikely to end drought conditions before the end of summer.

In 1988. drought. or abnormally dry soil, devastated
agricultural production across the country. By midsummer,
much of the nation was roasting in extreme drought. At that
time the Southwest was experiencing only modernle drought
conditions, and mosl famlCrs in the region completed the year
with good crop and livestock production.
During the fall of 1988, soil moisture conditions worsened

in Texas. By Derember, a large portion of the slate was in
severe drought. Historical rainfall indicated a low probability
that dry soil conditions would improve by spring or midsum·
mer. 1 Insufficient soil moisture began to threaten 1989
agriculrural production.
Since January, rain and snow prOVided sufficient moisture
to encourage some spring planting. Much of Texas remains in
drought, however, and plantings of com and sorghum are
below average. [n the Rio Grande Valley, dry weather is
discouraging some planting. Fanners will need additional rain
soon to ensure good crop development.
While soil moisture conditions have improved in north·
central and west Texas, conditions remain very dry throughout
most of the state (see the map). The drought is now extreme
in central and coastal Texas. In the panhandle, soil conditions
have deteriorated from wet to near a mild drought in the past
two months. Soil moisture has also declined around
Brownsville, pushing that area into moderate drought.
Given historical rainfall, dry soil conditions are likely 10
persist through the summer. In the drought-amicted areas of

1•.6'18.0'

""'=O:J

the state, the probability of the drought ending by midSeptember ranges from 1.6 to 30.6 percent. l
Dry soil does not guarantee poor crop and livestock
production, but dry soil puts Texas agricultural in(.'Ome at risk.
Well-timed rainfall remains essential for good crop and
livestock production.
-Fiona Sigalla
I Sec The Soutbwest £Col/omy, March 1989.
, See Thomas R. Karl, Richard w. Knight, D. S. Ezell, and Frank T.
Quinlan, Probabilities and Prec/pilallor, Reql/ired to End/Ameliorate
Droughts. Historical dimalology s<'Ties 3-16, (Asheville, N.C.:

N3tionaJ Oceanic: and Atrnospheri<: Administration, National Climatic
Data Center. 1986).
Technically. a drought ends when soil moisture improves to mild
drought.

Oil Price Gains likely 10 Be Sustained
Market conditions suggest that recent gains in oil prices
will likely be sustained in the near future. And by year's end,
oil prices may rise further.
Although renewed OPEC solidarity has accompanied
recent gains in oil prices, growing oil demand is driving the
increases. Recent data indicate that world oil consumption
increased by more than 3 percent dUring 1988. PreviOUS estimates were closer to 2 percent. Solid economic growth and
continued adjustment to lower oil price expectations appear to
be the main factors boosting world oil demand. Besides
boosting prices, increasing demand is helping OPEC achieve
solidarity.
Because changes in crude oil inventories are inferred from
estimates of production and consumption, the data revision also
means that current oil inventories are much lower than analysts
previously thought. With low inventories and continued growth
in demand, oil prices are unlikely to drop in the spring, when
demand typically takes a seasonal decline. When demand
begins its seasonal rise in the fall, strong demand and the current degree of OPEC cooperation could mean rising oil prices.

Higher oil prices and changing perceptions of oil market
conditions have increased oil field exploration and development. On a seasonally adjusted basis, lhe U.S. and Texas rig
counts were aboul 10 percent higher in the first half of March
than in February. Further gains in drilling are likely.
-Stephen P. A. Brown

The Sowhwest £Col/amy is published six times annually
by the Federal Reserve Bank of Dallas. The views expressed are those of lhe authors and should not be altributed to lhe Federal Reserve Bank of Dallas or the Federal
Reserve System.
Articles may be reprinted on lhe condition that the
source is credited and a copy is proVided to the Research
Deparlment of the Federal Reserve Bank of Dallas.
The Sowhwest Economy is available without charge by
writing the Public Affairs Department, Federal Reserve Bank
of Dallas, Station K, Dallas, Texas 75222, or by telephoning
(214) 651-6289.

This document was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org).