By Dr. Jim Peach, Professor of Economics, New Mexico State University
In December 1994, the Mexican economy entered its worst recession since the great depression of the 1930s. During 1995 Real Gross Domestic Product (RGDP), the broadest measure of economic activity, declined by 6.94 percent; inflation, as measured by the Consumer Price Index (CPI) reached 51.97 percent; the open unemployment rate reached levels not previously recorded by the current statistical system; the peso which had traded at 3.3 to the U.S. dollar in early December 1994 was trading at 7.7 to the dollar by December 1995; and, the index of Mexican stock prices (Bolsa de Valores) declined by more than a third in the first months of 1995.
The onset of the crisis as well as its intensity surprised most U.S. and Mexican officials and the international financial community. In Mexico, public confidence in the new administration of President Ernesto Zedillo was badly shaken. The U.S. government, concerned that the crisis would spread beyond the borders of Mexico, responded with a controversial financial aid package designed to help restore stability to the Mexican economy.
In the border region, the effects of the peso devaluation were immediate, variable from place to place, highly publicized and generally of short duration. In downtown El Paso, for example, retail sales declined dramatically during the first few months of 1995. Many downtown El Paso retail businesses were forced to reduce their staff, cut back on inventories or quit business altogether. However, as measured by tax receipts, retail sales in El Paso were only 2.2 percent lower in 1995 than in 1994. Other cities along the border experienced larger decreases in retail sales. Laredo, for example, experienced a decline of 13.7 percent in retail sales during 1995 and Brownsville experienced a decline of 9.5 percent in retail sales. In contrast, retail sales increased in Dona Ana County (NM) during 1995.
Unemployment rates are another key indicator of economic activity in the border region. Typically, U.S. border city unemployment rates are higher than the national and corresponding state rates. The impact of the Mexican crisis on border region unemployment was mixed. In Dona Ana County (Las Cruces) the average annual unemployment rate in 1994 and 1995 was 8.6 percent. In El Paso, the annual unemployment rate was 10.4 percent in 1994 (before the crisis) and 10.5 percent in 1995. In Laredo, however, the unemployment rate increased from 9.6 percent in 1994 to 15.4 percent in 1995.
Less data are available to indicate the impact of the devaluation on the Mexican side of the border. As on the U.S. side, retail sales declined in many Mexican border cities. Yet, despite the very real hardships imposed by the crisis on the people of Mexico, there were some positive effects of the devaluation. Maquiladora employment increased rapidly after the December 1994 devaluation. In December 1994, total maquiladora employment was 600,585. By July 1996 maquila employment had increased to 680,209, an increase of 13.3 percent. The increases in maquila employment, largely but not entirely in Mexico’s northern border region, occurred despite the general increase in unemployment in Mexico.
By late 1995 or early 1996, there were signs that the Mexican economy was beginning to recover. RGDP, which had declined nearly seven percent in 1995, was 7.2 percent higher in the second quarter of 1996 than in the second quarter of 1995. Mexico’s exports to the rest of the world, particularly the U.S., increased significantly in 1995 and early 1996, while Mexico imported fewer goods and services in 1995 than in 1994. By mid 1996, it was also apparent that Mexican inflation and interest rates would be lower in 1996 than in 1995.
These are indeed positive signs for the Mexican economy and the people of Mexico. Neverthless, it is worth remembering that the structural economic conditions which ultimately caused the 1994-95 crisis have not been solved. Mexico’s external debt (now approximately $160 billion) is higher than it was in late 1994. Each year, there are approximately a million new entrants in Mexico’s labor market and Mexico is not generating enough jobs to employ them. Mexico’s chronic income distribution problem has not been solved. The Mexican government does not have the flexibility in its budget to provide greatly needed new investment in infrastructure (especially the transportation and education sectors). Nor, is the private sector likely to make such investments. In short, while it is reasonable to expect a short-term economic recovery in Mexico, we should not assume that la crisis has been solved.