The Export Elite Rises in Mexico

For Alejandro Alvarez, owner of a Levi’s factory, these are the best of times. With his profits soaring, the entrepreneur has bought a new house, packed off his son to a Texas boarding school and thrilled his wife with a European holiday.

Ricardo Magdaleno is optimistic too. As factories busily add extensions, the construction executive has rehired all 40 workers he laid off during the economic crisis.

Julio Villanueva, a night-shift mechanic at the Nissan plant here, is cheered to see new employees and more overtime. “You feel a bit more secure,” he said.

As Mexico emerges from its worst recession in 60 years, a new elite is emerging--people like Alvarez, Magdaleno and Villanueva. Call them Dollar Mexicans.

They are part of the country’s export boom, turning out ever more cars, clothes and televisions for U.S. consumers. An insignificant group only 15 years ago, they now produce one-fourth the country’s output--and are leaping ahead at Asian-style growth rates.

But if they are living the best of times, most of their countrymen are still living the worst. Peso Mexicans--those who produce goods for local consumers--are barely scraping by.

Little noticed outside Mexico, the split between the Dollar and Peso Mexicans represents one of this country’s greatest difficulties.

The Dollar Mexicans have emerged as a large enough force to keep social peace, analysts say. And they could eventually lead Mexico into an era of strong economic growth and higher living standards.

But they are still a minority--and will probably remain so for several years. Many analysts are concerned that in the meantime, Mexico’s historic gap between rich and poor is being significantly widened and the country becoming increasingly polarized. The question is whether the Dollar Mexican economy can grow fast enough to bring the rest of the nation along with it and avoid a political backlash that could reverse Mexico’s direction.

“There are two different economies. One . . . is growing fast. But it doesn’t have the capacity to create the jobs or growth to pull the rest of the country along,” said Luis Rubio, director of the Mexico City think tank CIDAC.

Said Alejandro Valenzuela, a senior Finance Ministry official: “You could call it a tale of two countries.”

To get a look at Mexico’s new elite, consider Aguascalientes, a central city of 600,000 with a tiny core of Spanish colonial palaces and mile after mile of whirring factories.

In the past two years, foreign exports from the city and its suburbs have nearly doubled. While Mexico’s economy withered 6.2% during the worst year of the crisis, Aguascalientes’ output barely dropped.

“We bet very strongly on the opening up of foreign trade,” said Otto Granados Roldan, the state governor. “The results are clear.”

Look no farther than Alvarez’s assembly plant, or maquiladora. Women furiously jam denim into sewing machines, turning out 50,000 pairs of Levi’s and Gitano jeans a week bound for bedroom closets from Glendale to Scarsdale. Alvarez’s laundries “stone wash” tens of thousands of other pairs for local plants.

When the peso crashed in late 1994, Alvarez’s services became cheaper in dollar terms, enabling him to sell more. He’s hired 600 new employees--part of a job explosion in clothing factories here.

“The crisis helped us,” boasted Alvarez, 42, who sports a Ralph Lauren sweater and works at a desk decorated with golf knickknacks.

‘A Different Mexico’

But Alvarez’s success isn’t just due to the peso’s plunge. It represents the radical change wrought by free trade. Until the economy opened to the outside world in the mid-1980s, many Mexican firms displayed all the entrepreneurial flair of a Soviet potato collective.

“When we began our business, we told our people, ‘This is a different Mexico. We have to change,’ ” Alvarez said.

That meant providing extra training and more-up-to-date machines, and insisting that shipments be timely. Alvarez’s workers wear blue jackets emblazoned with the logo: “Quality is not an accident.”

“We have seen a marked improvement” in quality and efficiency, said Levi’s spokesman Vada Manager.

But Mexico’s exporters now stretch far beyond the maquiladoras. There are the big cement, chemical and steel industries centered in Monterrey in the northeast. There are powerhouse multinationals like General Motors and Chrysler. And there are more than 10,000 Mexican firms exporting everything from evening gowns to frozen broccoli.

Even as Mexico has suffered an economic meltdown, these companies have quietly been working a revolution. In five years, productivity in Mexican manufacturing has soared 35%, according to the Central Bank. The exporters, of course, aren’t the only efficient industries; but they are the most obvious symbol of the country’s emerging modern business sector.

Led by these “downsized” and restructured firms, Mexico may finally be on the verge of a period of rapid growth. The U.S.-based consulting firm Ciemex-WEFA predicts that the economy will grow at an average annual rate of 6% from 1998 to 2001--assuming there isn’t severe political turbulence--continuing the brisk pace of last year’s recovery after 1995’s steep 6.2% decline. “Finally, after 20 years of looking for a formula, for [a way of] restructuring the economy, the car is going to run again,” predicted Abel Beltran del Rio, Ciemex-WEFA’s president.

Key to Social Stability

But the Dollar Mexicans have wrought change that is even more profound. Providing jobs and hope, they’ve become a key to social stability, analysts say.

Political scientist Jorge Castaneda argues that one-fifth to one-fourth of Mexicans live off the dollar economy. They are mainly in the export industry, but some are in tourism. The figures include Mexicans receiving money from abroad.

“A nationwide social explosion, such as the Revolution of 1910, is virtually impossible while such a large, regionally well-distributed, broadly based segment of the population is thriving” and millions of others hope to join in, Castaneda wrote last summer in the magazine Foreign Affairs.

That stabilizing influence is obvious in Aguascalientes. Here there are no signs of even the limited unrest that has appeared lately in poorer areas of Mexico--such as that carried out by left-wing rebels of the Popular Revolutionary Army.

“If anyone wearing a mask turned up here, people would say, ‘Hey, I have my work, leave me alone,’ ” said Sergio Lopez, owner of a local factory that makes comforters and tablecloths for Mexican and foreign markets.

Like other industrial cities such as Tijuana and Monterrey, Aguascalientes has been a magnet for tens of thousands of job-seekers who arrive from poorer areas.

But such cities remain rare. Even though the export sector has grown rapidly in the past five years, it employs only about 10% to 15% of workers. And that percentage will probably grow slowly in the next few years.

That’s because exporters remain largely separate from the rest of the economy. Unlike in burgeoning Asian economies, factories here use relatively few home-grown parts. The maquiladoras offer the most dramatic example: Only about 2% of their components are Mexican-made.

It isn’t easy for Mexican suppliers to hook their wagon to the exporters.

Magdaleno, a 39-year-old engineer, heads an Aguascalientes company that tests materials and provides supervisors for construction projects. When home sales plunged during the recession, he was forced to lay off 40 of his 100 employees and nearly closed his doors. Then he switched to working on export-oriented factories--and hired back all his staff.

His storefront office today is a far cry from what it looked like two years ago. To satisfy the demands of clients such as Nissan and Texas Instruments, Magdaleno had to buy new computers and high-tech equipment--even a laser machine. Several employees are learning English.

“We had to adapt to Japanese, Korean and American companies” with higher quality standards than Mexican clients, Magdaleno said.

Trickle-Down Hopes

The question for Mexico is how long it will take to create more Magdalenos. Mexico’s small- and medium-sized industries are still largely prostrate from the economic crisis and foreign competition. And would-be suppliers face an uphill battle getting loans from the country’s troubled banks.

Some economists think that, spurred by North American Free Trade Agreement requirements for local parts, a domestic industry linked to the export sector could develop in a decade. But it could take longer.

“The structure of things that belong to an industrial environment--engineering knowledge, skilled personnel, good-quality supplies--are nonexistent, except in a very few cities like Aguascalientes and Monterrey,” said Rogelio Ramirez de la O, a prominent economic consultant in Mexico City. “This has to be created from scratch.”

The development of separate economies has also worsened Mexico’s geographic split, between an industrial north and a rural, poorer south.

The cities in which industry is flourishing are generally in northern or north-central Mexico, partly because of proximity to the U.S. border. Traditionally more developed, the north appears to be increasingly pulling away from southern Mexico, which struggles with extreme poverty, rebel movements and marginalized Indians.

Secession Threat

In one example of the growing polarity, leading business executives in Monterrey even threatened to launch a separatist campaign last fall after learning that federal tax outlays to their state, Nuevo Leon, had dropped.

“We’ve got to do something extreme, and it would be worthwhile to make a big effort to make Nuevo Leon independent from the rest of the country,” Luis Enrique Grajeda, head of the main local employers group, insisted at the time.

The idea didn’t get off the ground. But northern business leaders and politicians continue to gripe that their region is forced to subsidize poorer states.

Meanwhile, for all the success of the Dollar Mexicans, most workers continue to hurt. About half of all workers earn less than the minimum wage of 1980 (equivalent to $9 a day at current rates), according to calculations by the Mexico City economic analysis firm GEA.

Wage Erosion Hurts All

Wage erosion hurts even Dollar Mexicans. True, they’ve kept their jobs as hundreds of thousands of other Mexicans lost theirs. And many get good benefits. But their salaries are also held down by the huge pool of willing, unemployed workers. According to Ciemex-WEFA, wages in the manufacturing sector won’t return to 1993 levels until early next century.

Part of the problem is simply the powerful hangover from the recession. The economic downturn officially ended last spring. But with salaries eaten up by inflation and the devaluation--the peso is still worth less than half its pre-recession level--many consumers feel that the crisis isn’t over.

Nationwide, supermarket sales are down one-fifth since the start of the crisis--and still dropping. Yet Mexico’s submissive, pro-government labor unions have been reluctant to press for higher wages.

Perhaps most important, hundreds of thousands of unskilled young people are flooding the work force, the tail end of a baby boom. Just to employ all of them, Mexico must create more than 1 million jobs a year.

Unable to find jobs, many wind up swelling the ranks of the “informal” economy, hawking sneakers, chewing gum and music cassettes in the street markets that have proliferated in Mexican cities under swaths of pink plastic.

Villanueva, 25, the Nissan mechanic, knows he’s one of the lucky workers. In his small, Nissan-subsidized apartment, the fruits of his labor rise in a high-tech pyramid: an eight-piece stereo, a 25-inch Sony television and a VCR.

He earns about $65 a week, good money for a blue-collar worker. But Villanueva is frustrated.

“The business is based on exports, but the salaries have stayed almost the same. We’ve had increases, but not big ones,” he grumbled.

The salary gap has important implications. While Mexico may not be facing a social revolution, it has a huge population of dissatisfied workers.

Hundreds of thousands will probably continue to emigrate to the United States. At home, social problems that have characterized the economic crisis--most obviously, spiraling street crime--are likely to persist. That signals a bumpy ride for the next few years as Mexico attempts to solidify its free-market experiment.

Some wonder if Mexico can maintain its economic policies when their benefits are trickling down so slowly. President Ernesto Zedillo, whose term ends in 2000, is firmly committed to the free-market revolution.

But the country’s No. 3 political force, the left-wing Democratic Revolutionary Party, says it will try to limit Mexico’s foreign debt repayment and loosen government spending. It and the conservative National Action Party have gained ground in local elections recently, due to voters’ dissatisfaction with the economy.

Even the U.S. ambassador, James R. Jones, a strong supporter of Zedillo, has warned publicly that unless the benefits of an open economy spread, “demagogues” could arise in five or 10 years and attempt to undo the reforms.

The question, then, is whether the benefits of the Dollar Mexicans will spread to the Peso Mexicans quickly enough.

“There’s a very big price that has to be paid when you want to change the economy,” said Jonathan Heath, an independent Mexico City economist.

“Before things get better, they have to get worse--and that’s what nobody told us.”