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Ricardo Castro-Garza
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backLATINtalk June, 2012
Mexico replacing China for low-cost goods
Cheap labor making it more popular with foreign companies.
Julio Don Juan makes $400 a month at a noisy, cramped Mexico City call center. Without a raise in three years, he says, he had to pull his 7-year-old son out of a special-needs school he can no longer afford.
In some places, he might seek another job. Not in Mexico, where wages after inflation have risen at an annual pace of 0.4 percent since 2005 - worse than other nations in the region including Brazil, Colombia and Uruguay, according to the International Labour Organization. Close to one-third of Mexicans toil in the informal economy without steady income. Julio Don Juan says many would envy him.
The cheap labor that is helping Mexico surpass China as a low-cost supplier of manufacturing goods to the United States - and has lured companies such as Nissan - has restrained progress for many of the country's 112 million citizens. While Enrique Peña Nieto, the front-runner in polls to capture the July 1 presidential vote, has said wages are too low, whoever wins confronts the challenge of boosting workers' incomes - but not so much that assembly lines leave for other markets.
"The trick isn't only to pay better salaries, it's to make raises more sustainable," said Sergio Luna, chief economist at Citigroup's Banamex unit in Mexico City. "We have to be more productive, but it won't be easy because it implies changing the status quo."
Mexico's low wages, cheap peso and surging auto shipments to the U.S. - which buys 80 percent of its exports - have increased manufacturing competitiveness during the past decade as labor costs in China and Japan have risen.
This has put Mexico's economy on a sounder footing than Brazil's to weather a prolonged global downturn. After trailing growth in Latin America's biggest economy during the past decade - and watching as a commodities boom allowed Brazil to increase wages an annual average 3.4 percent above inflation from 2005 to 2011 - Mexico is poised to outperform Brazil for the second consecutive year.
President Felipe Calderón's government forecasts gross domestic product will expand 3.5 percent this year and says exports will probably surpass a 2011 record of $350 billion. By contrast, Brazil will grow 2.5 percent, according to a central-bank survey of economists this month.
"A changing of the guard is slowly but surely taking place," Nomura Holdings analysts wrote in a May report. "Ten years from now, we are confident that Mexico will likely be seen as having become the most dynamic economy in the region."
Low wages aren't Mexico's only attraction: Inflation that reached 180 percent in 1988 has been kept under control by a central bank that since January 2010 has been under the stewardship of Agustín Carstens. The former deputy managing director of the International Monetary Fund has kept the benchmark rate at 4.5 percent since taking office, helping to fuel a rally in government bonds.
Investors also benefit from laws that limit the government deficit and trade accords with more than 30 nations, including the North American Free Trade Agreement with the U.S. and Canada. Mexico also offers savings for companies that want to be closer to American consumers, after a tripling of oil prices in the past decade raised transportation costs for Asian manufacturers.
Nissan, Japan's second-largest automaker, shifted production of low-cost cars to Thailand and Mexico in recent years to counter losses as the yen appreciated, while Mexico's peso slumped 18 percent in the past six years against the U.S. dollar. The company's Mexican output hit a record 607,087 cars and light-duty trucks last year, rising 20 percent from 2010.
The latest company to expand operations is Plantronics Inc., which this month announced a $30 million investment after closing its plant in China as wages began rising there, said Cesar Lopez Ramos, the company's Mexico legal representative.
Mexico has proven more attractive for the Santa Cruz, Calif.-based headset maker because of its steady wages and "human capital that is more developed and capable of not only making products but innovating," Lopez Ramos said.
Some Mexicans criticize Calderón's National Action Party, or PAN, for not spreading the benefits of economic stability more widely during 12 years of rule. In the absence of a stronger domestic market, jobs remain heavily dependent on U.S. consumers and foreign-operated assembly plants, known as maquiladoras. Unemployment, currently at 4.9 percent, has been more than double a 2000 low of 2.2 percent since 2009.
"We're scraping by," said Julio Don Juan, 37, the call-center worker. "Because costs keep rising, I'm actually getting a pay cut each year rather than a raise." He lives with his parents, who help him care for his son.
Economy Minister Bruno Ferrari says low inflation and expanded social programs have reduced poverty during the past dozen years and stemmed declines in purchasing power from previous decades.
The share of Mexicans suffering from food poverty - lack of access to healthy, nutritious meals - fell to 19 percent in 2010 from 24 percent in 2000, according to government data.
Source: Arizona Daily Star - GAI
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