NAFTA's first decade

The Mexican society has been characterized by large inequality regarding the distribution of wealth. In 1989, the richest ten percent of Mexicans earned approximately 38 percent of total income whereas the poorest 40 percent received only 13 percent. The 1990 consensus revealed that 63.2 percent of the Mexican population had a disposable income of less than $200, representing twice the minimum wage, while price levels approached those in the United States. Mexico has suffered among others from a long absence of free election caused by a failing democratic regime and no emancipated labor movement. The rule of law has helped to keep the outcome of economic growth in the hands of a majority.7 Although Mexico generated high levels of postwar economic growth (five to six percent per year from 1950s to 1970s)8 even during recessionary phases of the U.S. economy, it could never smooth out its huge disparities in income distribution. Recessions in the 1980s, an import-substituting industrialization model and a strong dependence on oil exports, representing 75 percent of total exports in early 1980s, have additionally deteriorated the economic situation.9

Many of Mexico’s economic problems can be traced back to the country’s inability to attract foreign capital – the condition for substantial economic growth in emerging countries. Mexico’s costs of attracting foreign investments were high in the past: High interest rates and reduced domestic spending burdened the economic development significantly. Consequently, the Salinas Administration intended to break the cycle of current-account deficits, currency depreciation, higher interest rates and inflation, the coming economic downturn and an increasing reliance on foreign capital to finance the deficit. However, despite several stabilization programs including trade liberalization, privatization and reduced restrictions on foreign investments, the country faced serious economic imbalances by early 1994.10

In order to create jobs for its population and attract foreign capital, Mexico established the maquiladora industry on the border to the United States in the mid-1960s. Companies located in this area were allowed to import components and machinery free of duty and reexport the assembled products. Only the added value had to be taxed. Maquiladora plants were attractive to foreign investors because it was beneficial to transfer labor-intensive operations to Mexico due to its cheap labor costs.11 On average labor costs in Mexico amounted to only 11 percent of those in the United States.12 In particular, the United States made use of this cheap production factor, lower environmental standards and the absence of labor unions. Thus, U.S. investors were major capital providers and accounted for 43.1 percent of total FDI in 2003.13 The program was important for the Mexican economy because it was an area with high growth rates regarding production and employment. In 2000, 1.3 million workers were employed in the maquiladora industry representing more than one third of all workers employed in manufacturing processes. However, over the last couple of years, growth in the maquiladora industry has diminished due to increased competition from China and Central America.14