The immigration debate has recently been given a boost by the images of thousands of young children, some only infants in their mothers' arms, being stalled at the border in the blazing sun with no food, water or anything else. Their suffering is immeasurable and they are fleeing real violence and danger this time not just better economic opportunities. This actually makes them refugees in the eyes of many which means that the meaningless cruelty, racism and mistreatment directed at is even more egregious and senseless. The violence of the drug wars, which have taken countless lives in Mexico, is a major reason today for so much immigration from Mexico and other parts of Central America (such as Honduras where cities like San Pedro Sula have been called "the murder capital of the world." Honduras has an annual murder rate of more than 85 per 100,000 residents, the highest in the entire world!) as all of Central America seem to be engulfed in a vortex of drug and human trafficking and gang wars. Such violence has sent many millions fleeing for safety over the past few years, mostly to the US. But the real roots of the current immigration crisis are more economic than anything else.
One of the reasons that this is the case is that the real surge in immigration from Mexico to the US took place in the late 1990s after the passage of the North American Free Trade Agreement (NAFTA) which removed tariff barriers to trade between the US and Mexico in 1994. According to the Pew Research Center the number of Mexican born residents of the US increased dramatically after the start of the recession in the early 1970s but this four decade long trend got a real boost in the mid to late nineties. What is truly remarkable is that the four decade long trend which, according to the Center "brought 12 million current immigrants—most of whom came illegally..." came to an abrupt end in the last couple of years. The Center's evidence for this claim is time series data on immigration from Mexico; from 1995 to 2000, nearly three million immigrants from Mexico landed north of the border. Between 2005 and 2010, just under 1.4 million came north from Mexico with a slightly greater number during that time actually going from the US to Mexico! The Center's evidence seems to suggest that the especially sharp trend that began in the mid-1990s was more than halved within the last ten years.
The Center's data show that Mexican immigration to the US peaked around 2000 when about 770,000 immigrants and then rapidly declined to a nadir of about 140,000 in 2010. The question is what caused the late 1990s surge which continues to have its effect today, albeit in a dramatically reduced way. Between 1995 and 2000, the number of foreign born residents living in the US increased by 5.7 million or about 1.1 million a year meaning that the overall growth of foreign born residents in the US increased by 25% during this time, an unprecedented rate of growth. More than half of this total was from Mexico alone! Many experts cite the economic effects of the NAFTA agreement as the main culprit.
Let's begin with the collapse of the Mexican Peso or the so called "Tequila Crisis" in 1994. The government of Ernesto Zedillo devalued the Peso upon assuming the office of president. Immediately after the devaluation was announced in late December 1994, about $4.6 billion, around half the countries foreign exchange reserves at the time, left the country. The dramatic impact of the devaluation, whereby the Peso suffered a 35% loss of value against the US Dollar, was triple digit inflation, massive increases in unemployment, unprecedented capital flight and a profound contraction of the economy in terms of output. The US, IMF and a consortium of private banks came through with a $50 billion bailout package, mostly to restore the lost Dollar reserves suffered by the Central Bank.
Economist Dean Baker very succinctly summed the crisis up this way; "Mexico's economy went into a tailspin that was widely referred to as the "Tequila Crisis," caused largely by the liberalization of capital inflows in previous years and the U.S. Federal Reserve's decision to hike short-term interest rates." The economy had recovered quickly over the course of the late 1990s, due to the generosity of the bailout package which amounted to a significant share of the Mexican GDP at the time, although much of the bailout money was used to pay foreign creditors. The growth of the Mexican economy was impressive in the wake of the crisis but NAFTA ensured that the real benefit went to a small group of domestic rich and foreign owners of capital both financial and industrial.
Economist Mark Weisbrot, of the Center for Economic and Policy Research, and two colleagues authored a recent report on the progress made by the Mexican economy after two full decades of NAFTA. The growth of the Mexican economy has been not been impressive over the full period despite a quick recovery from the 1995 crisis; Mexico's economy has been one of the slowest growing in Latin America growing at only a fraction of the rate it grew between 1960 and 1980 when the size of the economy nearly doubled in inflation adjusted terms! In addition, the Mexican poverty rate has remained unchanged over the past twenty years, average real wage levels have remained unchanged (barely above 1980 levels), unemployment rates are higher and millions of Mexican farmers have been displaced by the US dumping of cheap, subsidized corn on the Mexican market. For the average person in Mexico, NAFTA has famously been a disaster contributing overwhelmingly to the massive increases in immigration to the US over the past two decades.
Let's begin with agriculture. The report points out that, "From 1991-2007, there were 4.9 million Mexican family farmers displaced; while seasonal labor in agro-export industries increased by about 3 million. This meant a net loss of 1.9 million jobs." The dramatic impact on the agricultural sector has meant greater immigration to the US since the mid-1990s. Laura Carlsen of Foreign Policy in Focus has authored a report claiming that as a result of US dumping of basic grains on the Mexican food market has harmed local food production making it impossible to keep up with population growth. The loss of local food self sufficiency has ultimately led, not only to unemployment of displaced villagers, but to higher local food prices and massive food insecurity for the Mexican population. She cites official statistics that show,
"...the number of people living in “food poverty” (the inability to purchase the basic food basket) rose from 18 million in 2008 to 20 million by late 2010. About one-fifth of Mexican children currently suffer from malnutrition. An innovative measurement applied by the National Institute for Nutrition registers a daily count of 728,909 malnourished children under five for October 18, 2011. Government statistics report that 25 percent of the population does not have access to basic food."
Subsequent crises aggravate the food issue each time. The tragedy is that for generations hunger was uncommon in Mexico since it was one country whose agricultural production made it self sufficient in staple foods. In addition, staple foods like corn, the price of which had been stable for decades, shot up in the wake of the NAFTA dumping. According to a Public Citizen report, although the price paid to Mexican corn farmers declined by 66% in the wake of the US dumping, the ultimate consequence of the drop in local food production caused eventual food price increases on the local market. NAFTA rules regarding the lifting of subsidies for local farmers cause food prices to skyrocket. The report asserts, "Though the price paid to Mexican farmers for corn plummeted after NAFTA, the deregulated retail price of tortillas – Mexico’s staple food – shot up 279 percent in the pact’s first 10 years." And corn isn't the only staple affected; hundreds of thousands of tons of US pork exports to Mexico under the terms of the NAFTA treaty have displaced thousands of local pig farmers. This has cost thousands of jobs, caused more rural poverty and increased immigration to the US. But agricultural displacement is only one among many problems caused by economic liberalization.
Statistics have shown that Mexican GDP growth rates have began to fall behind the overall Latin American average for most of the time the NAFTA treaty has been in effect. The effect of NAFTA on the Mexican employment picture has been dire. According to the CEPR report cited above, average annual unemployment rates declined immediately after 1995, mostly due to the bailout package from the Peso crisis, but began a sharp trend upward after 2000 approximating pre-NAFTA peaks of about 6.2% by 2008 with the global financial meltdown. One reason has been the impact on consumer and small business credit of the bank privatization which took place around the early to mid-1990s. Though this was not actually part of the NAFTA treaty, it was part of the Mexico's general trend toward economic liberalization which had severe consequences for the local economy and Mexico's working families.
Mexican President Lopez Portillo nationalized the Mexican banking sector in 1982 in response to an crisis which resulted massive capital flight. All 60 private banks in Mexico were nationalized with the exception of two. By 1990, an effort to reprivatize the Mexican banking sector was underway with an amendment to the Mexican Constitution allowing foreign ownership of local banks having been passed the previous year. The privatization drive of the Mexican government at this time resulted in a highly concentrated financial sector which by 1994, accounted for about 47% of the entire Mexican economy (which here includes money held by Mexican residents in foreign bank branches of domestic banks). According to a position paper published by the St. Louis Federal Reserve Bank, commercial bank lending increased rapidly in the wake of local private sector purchases of Mexican banks but the growth of non-performing loans made many of these banks unviable. According to Stephen Haber, the ratio of non-performing loans as a share of total outstanding bank loans in Mexico averaged about ten percent from 1997 to 2000. The rapid expansion of commercial credit soon ran up against private sector insolvency and bank failures. Total bank lending, commercial and consumer, dropped precipitously from 1996 to 2000; according to Haber's figures total commercial bank lending in Mexico collapsed from over 1.4 trillion Real in the mid-1990s to around 330 billion Real in 1999. Consumer and real estate lending suffered similarly dramatic declines over the same period. Haber describes the "exit" of the banking system from the real domestic economy which eventually had a severe impact on overall economic performance;
Mexican banks, particularly those that are foreign owned, have graduallyThe private Mexican banking system increasingly lent to other banks and governments as private sector lending declined. The post-2000 foreign takeover of the Mexican banking system made credit access for small business and consumers even tighter which led to the collapse of local business and increased unemployment levels.
retreated from the loan business since 1998. Rather than earn income from lending,
which is subject to default risk, they have increasingly allocated their assets to the holding of securities. In early 1998, 72 percent of Mexican bank assets were dedicated to
loans. By early 2003, loans made up on average, only 56 percent of assets. The drop is
even more pronounced when we treat foreign owned banks in isolation from domestically
owned banks. Foreign MA banks had, on average, loan asset ratios of 76 percent in mid-
1998. By early 2003, the ratio of loans to assets in those banks was only 52 percent.
Foreign de Novo banks retreated even further. Their loan assets ratio in 1998 always
exceeded 50 percent. By early 2003 it had fallen to 15 percent...the real value of total bank lending in early 2003 was less than half of what it was in March 1995 and approximates the value of bank lending at the time of privatization in December 1991.
Moreover, these estimates understate the decline in lending. During the initial phase of bank privatization in Mexico, virtually all lending went either to consumers or to the private sector. Since the 1995-96 crisis, the banks have retreated from consumer and private sector lending. In March 2003, the real value of loans for commercial, housing, and consumer purposes was only one-quarter what it had been in March 1995...As a result, banks play only a small role in financing the real economy in Mexico.As table 18 demonstrates, bank lending as a percentage of GDP is only 15 percent. To put this into perspective, in a typical OECD country, the ratio of bank lending to GDP is on the order of 100 percent. Moreover, it is low even by Mexican historical standards. Nearly 100 years ago, in 1910, the ratio stood at 25 percent.
By 2000, several government financial reforms in Mexico allowed foreign banks to own increasing shares of local private banks. Citibank was the main US corporate beneficiary of this policy (Bob Rubin, a former CEO of Citibank, was instrumental in putting together the 1995 bailout package for Mexico when he was Clinton's treasury secretary.) According to the Fed report foreign control of Mexican bank assets went from a paltry 7% in 1996 to a peak of 82% in 2004 where it has basically remained! By late 2006, domestic Mexican bank assets totaled nearly $2.6 trillion Pesos most of it controlled by foreign banks. Even before the entry of foreign banks into the Mexican market, the credit market was highly concentrated; on the eve of privatization in 1991, only four out of Mexico's 19 banks held about 70% of the entire system's bank assets. Foreign control led to even higher concentration and tightening of credit.
Prior to NAFTA, it was generally understood that more than half of all urban employment was provided by small businesses. As credit problems grew, the contribution of small business to non-agricultural employment dropped dramatically. One Public Citizen report asserts;
Small and medium-sized Mexican businesses that survived the initial NAFTA shock were faced with a difficult uphill struggle: between 1992 and 1998, the share of total Mexican employment provided by micro, small and midsize firms fell from 51 to 42.8%. Credit has also become a problem for domestic businesses. As Mexico’s banking system was bought up by foreign (largely U.S.) interests, lending to Mexican business declined from 10% of GDP in 1994 to 0.3% in 2000.Such developments have, over time, led to chronically high unemployment and suppressed wage levels. The result is more outmigration in search of economic opportunities.
This brings us to the third and final aspect of the economic changes in the 1990s, many of which were promoted by the NAFTA trade reforms, which constrained employment growth and led to further immigration north of the border. The maquiladora sector, or what is also commonly referred to "export platforms" grew markedly after the NAFTA implementation. Such industrial zones typically consist of manufacturing assembly plants making cheap consumer goods for export. These industries, which are often foreign owned, generally have little overall impact on the overall domestic economy since industrial inputs, machinery and other necessities are provided from the foreign corporations' home base. There is a clear lack of economic linkage between the maquiladora sector and the rest of the domestic economy. Therefore the growth of this sector has very little potential to stimulate the local economy due to its foreign domination. In addition, the maquiladora sector in Mexico, like other such export platforms, has increasingly made us of state of the art labor saving technology despite wages being extremely low. Despite rapid employment and investment growth in the maquiladora sector after 1994, its expansion limited long term potential employment growth in Mexico even as the Mexican economy grew impressively over the next several years.
Mexico's rapid development of its Maquiladora sector can be seen as one of the factors facilitating immigration to the US despite its rapid growth. It is certainly true that employment in the Maquiladora border industries grew very quickly in the 1990s. A 2002 report by an University of California economist on the staff of National Bureau of Economic Research explains;
Between 1990 and 2002, real value added by the maquiladora industry grew at an astounding annual average rate of 10%. To put this growth in perceptive, over the same period real GDP in Mexico expanded by an annual average rate of only 3%. Since 1984, employment in maquiladoras has risen from 180,000 workers to 1.1 million workers, or to over one-quarter of Mexico's total manufacturing labor force. By 2000, the maquila sector generated 48% of Mexico's exports and 35% of the country's imports. These plants remain concentrated in Mexican states along the Mexico-U.S. border, which in 2002 accounted for over 80% of total maquiladora employmentThe problem with the growing dominance of the Maquila sector in the Mexican economy at this time was its overwhelming reliance on foreign demand making the entire Mexican economy vulnerable to shocks and cyclical downturns in the economies of its trade partners (about 94% of Mexican exports went to the US throughout this period). This caused massive economic instability for the domestic economy. As mentioned above, the disconnect between the maquila sector and the rest of the domestic economy prevents maquiladora production from having any stimulative effect on the general Mexican economy. Labor is just about the only local input in maquiladora sector production and wages are notoriously low. Thus, the wages paid in the export sector cannot be expected to stimulate sufficient effective demand to sustain economic growth. In addition, the maquila sector's increasing shift to capital intensive production poses strict upper limits on employment potential.
What should be apparent at this point is that the story of the Maquila sector is really the story of globalization itself. Direct foreign investment concentrates in low wage countries costing jobs in both the global north and south. Capital becomes hyper mobile across borders globally creating a "race to the bottom" that increasingly concentrates wealth and income slowing the global economy's long term growth potential. Ever intensified global searches for cheaper and cheaper labor makes even Maquila employment vulnerable to even lower cost labor in places like China which ultimately took much manufacturing investment away from Mexico. According to a 2009 report by The Economist, "...maquiladoras lost more than 30 percent of its workforce during the last U.S. recession from 2001 to 2002." Chinese wages were still much lower than those in Mexico.
Another report put it this way;
From January 2001 through June 2002, Mexico lost nearly 600 maquiladoras out of an active roster of 3,200 export assembly plants, mostly in electronics and ready-made clothing. During that period, 250,000 jobs vanished, 15 per cent of the maquila workforce. According to Mexican Labour Secretariat calculations, 1.9 plants closed down for good every workday during that 18-month stretch, taking an average of 532 jobs each with them. During the first four months of 2002, Juárez alone lost 141 jobs a day. Most of the runaways have moved production to China,...Pressure from China and elsewhere to move to a more capital intensive model of manufacturing, even in low wage assembly industries, has lowered employment potential. A undated working paper put out by the Mexican National Strategy Team published within the last five years or so explains the issue. It begins by noting that the Maquiladora industrialization strategy began in 1965 to cope with the unemployment suddenly created by the abrupt end of the US Bracero Program by President Johnson in 1964. In the first twenty years of the program, Maquila production was low wage, labor intensive, final stage assembly manufacturing. But from the 1990s onward, more capital intensive, high tech manufacturing replaced earlier simple assembly production making the annual double digit employment growth of the first twenty years of this policy a thing of the past. High tech production of consumer electronics, auto parts and home appliances came to dominate the maquiladora sector limiting the long term potential for job growth. The above mentioned position paper entitled A HIGH-TECH, LOW EMPLOYMENT FUTURE IN THE MANUFACTURING SECTOR- A CORRECT CONCLUSION? assesses the current situation;
The maquiladora industry is experiencing moderate growth. Last year, employment grew 5.7 percent. Even though, we have new maquiladoras opening in Mexico, such manufacturing operations are small [and] less labor intensive. As the plants move from labor to capital-intensive, we cannot expect a return to 16 percent annual job growth.It should be clear by now that the real problem of Mexican immigration to the US is economic. From the beginning of NAFTA to the US recovery from the 2001 recession, we saw a decade of high annual rates of Mexican immigration to the US all of which seemed to be the result of the early economic impact of globalization and its associated neo-liberal, free market policies. The economic trends of this period led to the high concentration wealth, income and industrial output and the lowering of living standards and opportunities for more and more people, especially in the global south. Immigration in modern times is economically driven; in a word, it is simply labor migration.
Since the industrial revolution in Europe in the mid-19th century, we saw millions of people come to the US in search of jobs; over thirty million left Europe for the US between 1877 and 1924. Immigration after WWII from the global south to the US and Canada was often a response to the rapid urbanization and foreign direct investment in low wage countries that placed upper limits on employment as high tech manufacturing by foreign firms put local labor intensive ones out of business by gaining market share at the expense of local small business. Today, the effects of NAFTA and globalization can be said to be the reason that so many immigrants from south of the border are here today. Violence may have caused a recent uptick in immigration after a long reprieve but it is NAFTA that is really at the root of the entire immigration issue. So long as joblessness and poverty continue in Mexico we can expect more chaos on the border. It is clear that any viable long term solution will depend on how we deal with the fallout from globalization rather than on temporary palliatives to "secure the southern border."