There’s nothing wrong with seeking to spur national development through increased integration with the global economy. More than most developing countries, Mexico has had plenty of time to develop a strategy to take advantage of the opportunities of globalization.

More than four decades after the maquiladora sector started in Mexico with the Twin Plant program in Juárez-El Paso in 1965, maquilas remain mostly an enclave industry with few productive ties to the national economy. Rather than shaping the maquila sector with forward-looking development policy that would increase industry inputs and use the offshore assembly plants as a base for a less dependent industrial sector, Mexico has been satisfied with the low-wage employment provided by the maquilas.

Downturns in U.S. consumption reverberate directly through the country’s maquilas, which started 2008 employing 2.4 million workers. César Castro, president of the National Maquila Industry Council, now predicts zero growth in maquila exports in 2008.

In January 2008 Castro was predicting that the 5-6% growth rate in 2007 would hold in 2008, despite a stagnating U.S. economy. Given the layoffs spreading throughout the country, it’s likely that by year’s end that the maquila sector will be suffering negative growth.

Going Back Home

As the U.S. economy stagnates and the automobile industry nosedives, the maquila sector is suffering. In Juárez, 18,443 workers have lost their jobs already this year as maquilas shut down or pull back.

Tens of thousands of other maquila workers in this border city across from El Paso have agreed to shorter work weeks and reduced pay (called paros técnicos) to maintain their jobs. Among the maquilas that have resorted to part-time work agreements are Automotive Lighting, Lear, Raychem Packaging, Philips, and Autoelectrónica de Juárez.

While maquila exports to the European Union are increasing—up 15-20% in the last year due to the attractive peso-Euro exchange rate—the recessionary market in the United States is taking its toll throughout Mexico.

Hardest hit so far—accounting for 65-70% of the layoffs—are the automobile parts assembly plants, especially those that export parts for gas-guzzling brands produced by Ford and GM. Pharmaceuticals, electronics, and airplane parts are expected to weather the U.S. downturn, but most other sectors, such as homebuilding supplies, will be feeling the pain.

In the past, maquila workers would often leave their jobs to migrate to the United States. But the immigration crackdown and hard times in the U.S.—particularly in hard-hit industries like construction that employ immigrants—have dissuaded Mexicans from making the trip north. Alan Tello, director of the Center for Economic and Social Information (CIES) in Juárez, calculates that 80% of the laid-off maquila workers in Juárez are heading back to their home communities.

Jesús José Díaz Monarrez, secretary general of the CTM’s Northern Workers Federation, acknowledged that laid-off maquila workers have essentially only three options these days: "enter the underground economy [informal sector], return to your place of origin, or aggravate the public safety problem."

Rather than admitting it’s time to leave behind its dependent development strategy, the Mexican government has worked with the maquila sector to extend it into the country’s interior, selling poverty-stricken rural areas as a "mini-China." After the last U.S. recession in 2001-2002 when maquila employment dropped 21% with many plants relocating in China, Mexico increased its promotion of rural Mexico as an attractive option for businesses looking to pay wages below the going rate in the border cities.

Some maquila owners agreed. "You do not even need to go to South Mexico to get to ‘little China,’" said Doug Donahue, a partner in a San Antonio-based maquila investment firm, which owns a maquila in Durango. "Durango, San Luis Potosi, and Zacatecas are all within eight hours of the border and all have very competitive labor rates that can compete with China."

Mexico has also given special tax exemptions and tax breaks to the maquila sector. The government has temporarily exempted (until 2012) most of the industry from the recent IETU tax with the so-called "maquila decree." Even so, maquila industrialists are warning that the plants will leave the country in mass if maquilas are not permanently exempted from the tax.

The National Action Party (PAN) government under President Vicente Fox also agreed to the liberalization of NAFTA "rules of origin," allowing an even higher percentage of maquila inputs to come from outside North America, meaning that the maquilas can now import more production inputs from non-NAFTA countries, thus further reducing the links with the region’s domestic economies.

The maquila sector accounts for 84% of the country’s manufactured exports and 49% of the country’s imports (as inputs for the assembled exports). When maquiladoras take a heavy hit, the whole economy shudders.

Already, before the worst has hit, forecasts of Mexico’s economic growth are being calculated downward—dropping from 3.3% in 2007 to 1.9% in 2008.

Mexico’s economy is teetering from declining growth, sharp decreases in remittances, looming credit card crisis, a deepening energy crisis, a highly vulnerable maquila sector, and spreading drug violence.

Certainly, the U.S. economy can be rightly blamed for the recent drop in immigrant remittances and the rise in maquila unemployment. And the U.S. market for illegal drugs, money laundering and steady supply of arms help fuel the drug wars.

But Mexico’s development model—or lack thereof—should be a focus of reflection about its economic ills. Mexico has had more than four decades to build an export sector that fosters endogenous industry, but industry in Mexico has become increasingly an extension of foreign, mainly U.S., companies, that function as an isolated enclave with few links to other productive sectors.

The maquila industry, initially designed to employ the migrant population accumulating on the northern border (many of whom had returned from the United States after the end of the Bracero guestworker program), was in its early years an aberration from Mexico’s import-substitution, state-directed economy. But over the last couple of decades maquilas have become the embodiment of Mexico’s dependent, ruthlessly pro-business economic policy.

Across Mexico, but especially along the border, government officials and business associations are downplaying the maquila layoffs. But as a June 23 editorial in the Juárez newspaper El Diario warns the government: " If you don’t provide a community with employment, and instead you begin to lose jobs, any crisis—like the [drug] violence that confronts the state—is likely to worsen, since the affected areas become even more vulnerable as unemployment surges alongside other social problems."