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THE BORDERWhat may be North America's hottest growth zone is blossoming where Mexico and the U.S. meet. A quirk of the global economy, it is also--for better or worse--a world unto itselfLorenzo Rodriguez is a man of two worlds: the First and the Third. The ambitious, 34-year-old Mexican lives with his U.S.-born wife and two children in a quiet, upscale neighborhood in El Paso, Texas. It's a comfortable life most Mexicans only can dream of. Such thoughts sometimes enter the young engineer's mind on weekday mornings as he drives across the Rio Grande to work in Ciudad Juarez, Mexico. Rodriguez grew up speaking Spanish and English in this dusty border city of factories and shanty settlements. Now, he works in a gleaming new research center built by General Motors Corp.'s Delphi division at a cost of $13 million. As a top specialist there, he takes a certain pride in working ''on the leading edge,'' solving problems for customers as far away as South Korea. Rodriguez' lifestyle and the contrasting worlds he glides between make him one of Mexico's new fronterizos, or border dwellers. He is indeed a citizen of a very different economy that is emerging along the U.S.-Mexican border. Stretching 2,100 miles from the Pacific Ocean to the Gulf of Mexico (map, page 67), this 130-mile wide strip may be North America's fastest-growing region. With 11 million people and $150 billion in output, it is an economy larger than that of Poland and close to the size of Thailand's (table, page 67). Driving this economic frontier is the energy generated by the collision of the two worlds. From deep in Mexico's heartland, hundreds of thousands of job-seekers stream northward toward the border every year to live in tarpaper and cinderblock slums near factory gates. They are willing to work hard for low pay. U.S. companies, keen on shrinking costs in the face of international competition, have been setting up assembly plants--maquiladoras--on the Mexican side to tap this cheap labor pool. Now totaling 1,500, the maquiladoras may be a key to continued U.S. global competitiveness. Says Frederick M. Shepperd, an Akron-based consultant who helps companies set up operations on the border: ''This is the world's newest hot-growth zone.'' It's no longer an American fiefdom, however. Heavy investments are also pouring in from Asia and Europe as well, spurring expansion of the border's economy at close to a 7% annual clip. Tijuana has become the world's TV-manufacturing capital, churning out 14 million sets a year. Factories are opening daily, from Mexicali to Matamoros. Soaring exports from these plants are helping Mexico pull out of its worst recession in 60 years. And a class of skilled Mexicans--such as Rodriguez--is rising to the fore to run the hundreds of new plants (chart, page 70). MODEL REGION? The border economy, in fact, is flourishing in unexpected ways. When the North American Free Trade Agreement was signed in November, 1993, its promoters predicted that the economies of the U.S. and Mexico would become increasingly integrated. Investment would spread throughout Mexico, which would become a huge market for U.S. goods. Some of the money, of course, would go to the border. But few anticipated the massive rush to the region that followed the December, 1994, peso crash, when Mexican wages plunged 40% in dollar terms, creating an even starker economic fault line. With total wage, rent, and electricity costs running as low as a quarter of those in the U.S., the border became the crossroads for global bargain hunters. The border's surge demonstrates the quirky forces at work in a more open global economy. The combination of a low-wage economy nestled against a prosperous giant is becoming a model for other regions split by wage or technology gaps. Some compare the region to Hong Kong and its manufacturing realm, China's Guangdong Province. Officials from cities along the German-Polish border are studying the U.S.-Mexican experience. The supercharged economics of the border help explain why Mexico ranks only behind China as global investors' favorite location in the developing world. But there is a dark side to the border's allure as well. When goods and capital can flow freely, so can contraband. Since Prohibition days when bootleggers smuggled rum and tequila into the U.S., the border has thrived as a hotbed of illegal activity. But perhaps never as much as now. Drug trafficking generates an estimated $22 billion in annual revenues, which in turn spurs construction, retail, and other businesses. Dope lords buy up luxury homes outside Tijuana and Juarez. Another lucrative business is the ''body trade'' in illegal immigrants. Smugglers known as coyotes charge Mexicans up to $1,500 per person to get them across the border. Fake green cards sell for $45 or so. The currency-exchange houses that clutter Laredo, El Paso, and other cities testify to the boom in legal and illegal pesos turned into dollars each day. THREE-DAY PASSES. As the dollars and pesos churn, they're helping to shape the border's distinct character, giving it the feel of a separate state. Mexicans who prove that they live in border towns are given passes allowing them to cross into the U.S. for stays of up to 72 hours at any time. Mexican border residents not only buy goods in U.S. stores, they also pick up American political ideas. That may be why border communities have led the resistance to the political dynasty of Mexico's Institutional Revolutionary Party (PRI). Two of six border states have elected governors from the opposition National Action Party (PAN). Four border cities, including Tijuana and Ciudad Juarez, also are run by the PAN. Is the booming border good or bad for the U.S.? Corporate America surely gains, sharpening its competitive edge by investing in the sprawl of low-cost manufacturers right next door. Lucent Technologies Inc. and GM are among companies opening new border factories, figuring they can cut costs while using higher-paid skilled workers at home for more sophisticated tasks. Meanwhile, such Asian companies as Sony Corp. and Daewoo Corp. are building factories to take advantage of Mexico's much touted workforce as well as the tariff cuts provided by NAFTA. That isn't necessarily bad news for U.S. workers. For every factory opened in Mexico, the U.S. wins service, transportation, or distribution jobs. ''This is going to be the Hong Kong of North America's Pacific Coast,'' declares Tijuana Mayor Jose Guadalupe Osuna Millan. Even if that's hyperbole, the companies are coming. Sanyo Electric Co. recently moved its North American headquarters from New York to San Diego to be next to its factory in Tijuana, where it employs 5,000. Samsung plans to spend $670 million by 2000 on a complex employing 7,500 people to make TV sets, computer monitors, and components in Tijuana. U.S. suppliers of components are profiting from the rise in border investment, too. Under NAFTA, the most important components in products such as VCRs must be made in North America to benefit from the treaty's free-trade umbrella. European and Asian companies thus look to U.S. and Mexican suppliers. ''Our plan is to buy everything we can in this region,'' says Dean H. Kim, general purchasing manager at Daewoo's VCR plant in San Luis Rio Colorado, Mexico. The growth isn't only in electronics. Low-tech production continues to boom, as well. Dozens of plants producing garments, cheap consumer goods, and simple components have sprung up along the border, employing hundreds of thousands (chart, page 70). Maquiladora workers earn an average of $5 to $7 a day plus benefits, rivaling Asia's low-wage economies. That's down from about $9 a day before the devaluation. Including rent and administrative expenses, it costs just $4 dollars an hour per worker to run a plant in Tijuana, compared with $18 to $25 in San Diego. TERRORIZED RANCHERS. Although the wages are low, demand for the jobs is high because the pay is better than elsewhere in Mexico, and the country's pool of workers is expanding by more than one million a year. Living standards are slowly improving. In many families, more than one member works in a maquiladora. Pooling wages allows them to move from shanties into larger, cinder-block homes. Yet the region must grapple with Third World-style woes. Economists estimate that the border needs at least $8 billion just to bring drinking water, sewage treatment, and garbage collection to all its residents. Officials are also struggling to control the illegal economy. Traffickers have infiltrated Mexican law-enforcement agencies and pay off some U.S. border officials. Kingpins terrorize American ranchers who refuse to allow passage of drugs across their lands. To slow down illegal immigration, the U.S. Border Patrol has installed sensors, cameras, and 40 miles of 14-foot-high fence. Even so, more than 1.5 million illegals were caught across the border in 1996, some more than once. These issues will confront President Clinton when he makes his first state visit to Mexico on May 6-7. But when he meets President Ernesto Zedillo Ponce de Leon in Mexico City, Clinton hopes to focus on economics rather than on immigration and drugs, aides say. The Administration is keen to whittle down Mexico's $15.9 billion trade surplus with the U.S. Clinton's biggest challenge, though, will be convincing the U.S. Congress that NAFTA, an engine of border growth, has been a good thing. NAFTA comes up for a mandatory three-year review on July 1. ''Job creation has been real on both sides of the border,'' says Counselor to the President Thomas F. McLarty III. NAFTA opponents, however, are likely to argue the opposite: that jobs are flowing mostly southward, across the border. BUSINESS WEEK correspondents spent a month exploring the border cities and their poorest neighborhoods, touring factories, riding with the Border Patrol, and talking to the everyday people who make this region their home. Here are their reports.
By Geri Smith in San Diego and Tijuana, and Elisabeth Malkin in El Paso and Ciudad Juarez RELATED ITEMS
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Updated June 15, 1997 by bwwebmaster
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