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The future of the maquila industry in Mexico.

The Future of the maquila Industry in Mexico

Several elements play an important role in determining the future of the maquila industry, which has evidenced such dramsatic growth throughout the 1980s. The first of those elements is the growth of the U.S. economy, particularly of the electronic and automobile industries, the two most important sectors represented in the maquila industry. The second key element is the capacity of Mexico to sustain its competitive labor situation with respect to the Asian countries in which in-bond plants also operate. Third, the slowdown or continuous growth of the Mexican maquilas will depend on the economic performance of Mexico, particularly its success in maintaining the stability of the country, keeping inflation down, and supplying the infrastructure needed in the communities along the border with the United States.

The near-term transition of the U.S. economy to substantially slower real domestic economic activity can be expected to affect maquila growth adversely. Predictions from economists suggest that the easing of credit conditions by the Federal Reserve will stimulate investment and consumer expenditure for big ticket items, mitigating the decline in domestic demand that could result in recession. The U.S. electronics industry is expected to have position growth rates. However, the forecast for the U.S. automobile industry suggests continuous market weakness, accumulation of large inventories, and large production cuts. Because of slower growth in the U.S. economy and weakness in the U.S. automobile and electronics industries, we can expect a deceleration of maquila growth in Mexico.

Second, the future of the maquila industry in Mexico will depend on the competitive situation of Mexico in terms of cost and productivity of the labor force compared to other countries with in-bond plants. Mexico continues to be the least expensive place to produce when compared to Taiwan, Korea, and Singapore. However, new competitors such as the Philippines, China, and Malaysia have lower labor costs than Mexico. Nevertheless, proximity to the United States is a strong factor in favor of Mexico.

The economic outlook for Mexico is optimistic. The government extended the Solidarity Pact through the end of March 1990. This extension continued the one-peso-per-day depreciation of the exchange rate and the freeze on most controlled prices. Wage control continues, although a 6 percent revision was allowed in July. Agreement on the external debt reduction and a near guarantee of a bridge loan have given credibility to the pact and have boosted expectations about economic performance in the medium term. Foreign investment is expected to play a key role during this administration, increasing almost twofold from $2.72 billion in 1989 to $5.4 billion in 1994.

Labor costs in dollar terms are expected to rise if inflation and minimum wages increase and if the peso rises against the dollar. Economists predict that there will be moderate average inflation of 19.8 percent at the end of 1989 and 15.3 percent at the end of 1990. These are significantly lower rates than the 131.8 percent in 1987 and 114.2 percent in 1988, although still higher than the targeted rate of 5 percent. A continuing devaluation of the peso is likely, but at a much slower rate. The devaluation rate was 148.55 percent and 138.2 percent during 1986 and 1987; it will continue to average 16 percent at the end of this year and 13 percent for 1990. No further increases in minimum wages are expected for the rest of 1989, and a modest increase is expected in 1990. All these changes will mean that salaries will be somewhat higher than they have been, the devluation not having fully compensated for increases in the minimum wage and inflation. Higher wages in dollar terms and the slower growth of the U.S. economy, particularly in the automobile and the electronic industries, suggest stable growth for the maquila industry in the year ahead. However, if the already serious shortcomings of infrastructure worsen, maquila growth along the border will definitely slow.

The maquila industry's deceleration results from a slowdown of the U.S. economy during 1989-90 and from a weakening of the U.S. industrial sector. The deceleration is also a lagged effect of the significant increases in Mexican costs recorded during 1988 and the beginning of 1989. This trend will continue despite support for this sector from the present Mexican administration and despite the persistence of the wage differential between Mexico and other countries.
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Author:Echeverri-Carroll, Elsie
Publication:Texas Business Review
Date:Dec 1, 1989
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