Southwest Economy, March April 2006 - FRB Dallas/media/documents/research/s… · Spotlight: Texas Manufacturing On the Record: Pia Orrenius. President’sPerspective T he economy

ISSUE 2MARCH/APRIL 2006

F E D E R A L R E S E R V E B A N K O F D A L L A S

SouthwestEconomy

In Th i s I s sueDid NAFTA SpurTexas Exports?

Dynamic Growth in theRio Grande Valley

Spotlight:Texas Manufacturing

On the Record:Pia Orrenius

President’sPerspectiveThe economy is one of my passions, and I

am a collector of sorts. As I read and listen during the day, I

gather bits of information on a global econo-my that produces jumbo jets, microchips andeverything in between. A tidbit usually grabsmy attention because it provides a lesson—sometimes a small one, sometimes a big one.

I’d like to share a few.• Starting a business takes five days in

the United States, compared with 45 days inGermany, 108 in Spain and no one knowshow many in China. These numbers hint atAmerica’s true strength—a flexible, adaptableeconomy that doesn’t try to thwart competi-tion from new enterprises.

• China has to sell 800 million shirts tobuy a single Airbus A380 jet. I could ask forno better example of international division oflabor and how it pays to move up to highervalue-added production.

• The Apple I personal computer soldfor $667 in 1976. It ran at the speed of 1megahertz and had 4K of memory. Today, aDell Dimension E310 with a Pentium 4

processor provides 2.9 billion times Apple I’s processing power and mil-lions of times more memory, plus a free flat-panel screen and lots ofother features. It costs about $500. Is there any doubt about technology’stendency toward better and cheaper?

Numbers like these, of course, don’t reveal what’s happening in theeconomy as a whole. So I keep a keen eye on the broad data and fore-casts for growth, inflation, employment and other indicators of the econ-omy’s ups and downs.

Even the best statistical fact book cannot replace human experi-ence. One of my most reliable sources of information on the economyis the talks I have regularly with CEOs, COOs and CFOs at dozens ofcompanies, large and small.

These are real-time decisionmakers who are on the front lines,doing the business of America, and they are one of the key inputs theFederal Reserve needs in formulating monetary policy.

These business leaders are often the first to spot dominant andshifting trends—in demand, in hiring, in pricing power, in technology.Many are plugged into the world economy, and they can tell you aboutIndia, China or almost anyplace else.

The numbers and the anecdotes work together to provide me atimely and in-depth view of the regional and national economies.

Richard W. FisherPresident and CEOFederal Reserve Bank of Dallas

“A tidbit usually

grabs my attention

because it provides a

lesson—sometimes a

small one, sometimes

a big one.”

The North American Free Trade Agree-ment unites the United States, Mexico andCanada—three nations with a combinedpopulation of 426 million, total output ofmore than $13 trillion and regional trade of$700 billion in goods and services.

Because of the North American mar-ket’s sheer size, NAFTA has been repeated-ly dissected. Most studies have sought todetermine whether the pact fulfilled propo-nents’ predictions of increased trade, lowerprices and higher incomes or led to whatcritics warned would be a “giant suckingsound” of U.S. jobs going to Mexico.

On balance, researchers have foundNAFTA a slight positive for the U.S. as awhole. For example, a 1996 study estimat-ed that NAFTA had increased U.S. exportsby $5 billion, or 12 percent, a figure pro-jected to grow as more of NAFTA’s phased-

in trade liberalization took effect.1

A lesser volume of research focuseson what NAFTA has meant to state andlocal economies, although theory and com-mon sense suggest trade deals might havedifferent impacts within countries. States’industrial mixes and workforces vary wide-ly, leading to comparative advantages thatinfluence the composition and destinationof exports. Geography is another key fac-tor. Firms may operate in one state ratherthan another to take advantage of proximityto newly opened markets. The results ofnational studies of NAFTA’s effects may notapply uniformly to all states.

Texas is one of the more interestinglenses through which to assess NAFTA. Thestate lies near the center of NAFTA’s eco-nomic space—about equidistant fromMexico City and Toronto, with a 1,200-milefrontier with Mexico and networks of high-ways and rail lines that lead to some of theworld’s busiest border crossings. Texaspolitical and business leaders strongly sup-ported NAFTA’s ratification, an indicationthat many presumed it would benefit thestate’s economy.

Has NAFTA been good for Texas?Merely counting the truckloads passingthrough border checkpoints in the LowerRio Grande Valley, Laredo and El Pasowould make it seem so. A more definitiveanswer, though, involves distilling NAFTA’sinfluence from factors responsible for over-all increases in Texas exports over the pastdecade or so.

NAFTA can’t be deemed a success forTexas if rising exports to Mexico merelyrepresent sales diverted from markets else-where in the world. Trade theory suggeststhat overall economic effects of NAFTA andother preferential trade agreements dependon trade creation net of trade diversion(see box).

A fresh look at the issue, using indus-try-level export data, shows that NAFTAdid indeed increase Texas’ sales to

Did NAFTA Spur TexasExports?By Anil Kumar

FEDERAL RESERVE BANK OF DALLAS • MARCH/APRIL 2006 SouthwestEconomy3

Trade Creation Versus Trade DiversionPreferential trade agreements impose lower tariffs on trade in goods and services among their

member countries. Even with expansion of the multinational World Trade Organization in recent years,nations have found these regional deals increasingly attractive, concluding more than 180 pacts since1990.

Two types of preferential deals are common. Free trade areas, such as NAFTA, reduce tariffs ongoods from member countries but allow each nation to set its own duties for nonmembers. Customsunions, such as the European Union, agree to impose a common tariff wall on imports from nonmem-ber countries. In economic terms, they’re similar, so the following discussion applies to both.

These preferential agreements would normally violate the WTO’s most favored nation rules, whichrequire each member to extend to other members the lowest tariff applicable on all goods and services.In other words, there should be no discrimination or preference in tariffs. To allow the existence of freetrade agreements and customs unions, WTO rules exempt them from the most favored nation rule if theymandate complete tariff elimination among member countries and if tariffs to nonmembers are no higherthan they were before.

Both theory and experience suggest that free trade increases economic welfare. Does the proposi-tion hold for preferential deals as well?

Jacob Viner provided the answer in his classic 1950 book, The Customs Union Issue. It introducedtwo important concepts—trade creation, which denotes new imports and exports, and trade diversion,which means a mere shifting of sources from one country to another. Viner argued that only trade dealsthat lead to net trade creation would improve economic welfare. If net trade diversion occurs primarilyby shifting production from a low-cost nonmember country to a high-cost member country, it will hurtoverall economic welfare.

Texas is one of the more

interesting lenses through

which to assess NAFTA.

Mexico—and to Canada as well. Perhapsmore interesting, NAFTA also helped raiseTexas exports to Asia, Europe and LatinAmerica, making a strong case for nettrade creation.

Before and After NAFTANAFTA went into effect Jan. 1, 1994.

In general, it mandated eliminating tradebarriers by 2008. For many products, theagreement did away with tariffs and otherrestraints immediately. Agriculture andapparel were the main sectors scheduledto be liberalized over a longer period.

Pre-NAFTA Mexico had the more pro-tected economy, so it committed to largertariff cuts than the U.S. and Canada.Average Mexican duties on U.S. goods fellfrom 12 percent in 1993 to 1.3 percent in2001, while U.S. tariffs on Mexican goodsdeclined from 2.1 percent to 0.2 percent.2

The effect of NAFTA on U.S.–Canada traderestraints was minimal because the twocountries operated under a free-tradeagreement that took effect in 1989.

Trade has increased by leaps andbounds in the NAFTA years. U.S. exportsto Mexico rose from $42 billion in 1993 to$111 billion in 2004, while imports fromMexico increased from $40 billion to $156billion. Over the same period, U.S. sales toCanada grew from $100 billion to $189 bil-lion, while imports from Canada to the U.S.climbed from $111 billion to $256 billion.

During the first six years of NAFTA,Texas gained ground in many foreign mar-kets, allowing the state to grow faster thanthe nation in overall exports (Chart 1A).Texas exports to Mexico also increased—but not by any more than the nation as awhole. From 1994 to 2000, the growth ofTexas shipments across the Rio Grandemirrored that of U.S. exports, just as it didin the five years prior to NAFTA’s takingeffect (Chart 1B).3 Indeed, both Texas andU.S. exports to Mexico grew steadily beforeand after NAFTA, except for a sharpdecline in 1995, the year following thepact’s implementation. An economic crisisin Mexico led to a steep devaluation of thepeso vis-à-vis the dollar, making U.S.exports to Mexico more expensive.

Given Texas’ proximity to Mexico, itmight be surprising that the state didn’tincrease its market share under NAFTA.Interestingly, one of the expanding marketshas been Canada, the NAFTA partner far-ther from Texas (Chart 1C).

Although trade grew faster withCanada, there’s no denying the importanceof Mexico to the state’s economy. In 1993,nearly 40 percent of Texas’ exports wentto Mexico, compared with less than 10percent of overall U.S. exports (Chart 2).The state trailed the U.S. average in salesto Canada and all other regions exceptLatin America.

In the NAFTA years, Mexico has

SouthwestEconomy FEDERAL RESERVE BANK OF DALLAS • MARCH/APRIL 20064

Chart 1U.S. and Texas Exports:Pre- and Post-NAFTAIndex, 1988 = 100

SOURCE: WISERTrade.

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Chart 2Destination of Exports: 1993–2000Percent of total exports

SOURCE: WISERTrade.

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Texas:2000U.S.:2000Texas:1993U.S.:1993

Trade has increased

by leaps and bounds

in the NAFTA years.

A.

B.

C.

become even more dominant as a marketfor Texas. By 2000, Mexico received morethan 45 percent of Texas’ exports, andCanada also gained as a destination forTexas products.

Broad-based data on exports suggestcontinuity rather than change in the firstyears NAFTA was in effect. Texas and theU.S. sold more to Mexico and Canada in2000 than they did in 1993, but generaltrade patterns didn’t change all that muchin the six-year period. NAFTA’s impacts onthe Texas economy emerge more clearly bylooking at the changes in exports by industry.

Looking at Industry Data For both the U.S. and Texas, the lead-

ing exports are largely the same—industrialmachinery including computer equipment,transportation equipment, electronics,chemicals and instruments (Chart 3). Theyreflect America’s comparative advantages inthe global marketplace. Texas’ mix differsfrom the rest of the country—electronics,for example, has emerged as a particularstrength for the state. Even so, the samefive categories were at the top beforeNAFTA in 1993 and after it in 2000.

In terms of overall exports, somemajor Texas industries show distinct breaksfrom their pre-NAFTA trends (Chart 4).Texas electronics companies, for example,saw their exports grow significantly fasterafter NAFTA went into effect. Chemicals,

which were dropping prior to the tradedeal, began to rise after its implementation.After an initial decline due to Mexico’speso crisis of 1994, transportation equip-ment experienced an uptick in its growthrate.

Not all sectors show rising exports.Texas sales of lumber and wood had beenincreasing before 1994 but declined afterNAFTA. Furniture and fixtures show a simi-lar pattern.

Industry data suggest churningbeneath the surface for Texas exports.How much of it can be attributed toNAFTA? The answer requires a model thattakes into account other factors that mightcontribute to the state’s expanding over-seas sales. Income growth in Texas andMexico would affect exports because richercountries tend to buy more overseas. Thereal exchange rate between the U.S. andMexico is especially important because theperiod under study includes Mexico’s pesocrisis, which induced wide swings in trade.

The worldwide march toward freertrade deserves consideration because it,too, could be expected to increase Texasexports. Since 1990, nations have signedmore than 180 regional free-trade agree-ments. Among the more important oneswere the European Union’s steps towardintegration in 1992 and the liberalization inLatin America symbolized by the SouthernCommon Market, or Mercosur.

Controlling for incomes, a time trend,exchange rates, the EU opening, Mercosurand other industry- or country-specific fac-tors allows us to isolate NAFTA’s impact on28 Texas industries. When it comes toexports to Mexico, 19 of these industriesbenefited from NAFTA, while nine saw salesdecline. Texas exports to Canada rose for 18industries and fell for 10. Half of the 28industries gained in both countries, whilesix declined in both countries (Chart 5).

Industries with statistically significantgains in exports to Mexico as a result ofNAFTA were rubber and miscellaneousplastic products (79 percent), printing andpublishing (78 percent), textile mill prod-ucts (75 percent), petroleum and coal prod-ucts (69 percent), leather and leather prod-ucts (71 percent) and electronic equipment(49 percent). Significant declines werefound in lumber and wood products (89percent) and furniture and fixtures (75 per-cent).

The statistically significant NAFTA win-ners in terms of exports to Canada were oiland gas exploration equipment (286 per-cent), furniture and fixtures (75 percent),industrial machinery including computers(70 percent), apparel (66 percent), instru-ments and related products (58 percent)and rubber and miscellaneous plastic prod-ucts (54 percent). The only significantdecline was in metal mining (88 percent).

The diversity in gains and losses of


Chart 3Composition of Exports: 1993–2000Percent of total exports

SOURCE: WISERTrade.

Instruments

Transportation

Chemicals

Electronics

Industrial machinery and computer equipment

Texas:2000U.S.:2000Texas:1993U.S.:1993

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For both the U.S. and Texas,

the leading exports are

largely the same—

industrial machinery

including computer

equipment, transportation

equipment, electronics,

chemicals and instruments.

exports among industries suggests tradedeals affect economic sectors differently.Lower tariffs no doubt gave some Texasindustries an advantage over Mexican andCanadian companies. Export declines mightsignal an inability to compete, althoughthey could simply reflect some firms’ deci-sions to shift economic activity to otherstates. Because Texas had more winnersthan losers, though, we can conclude thatNAFTA in general made Texas industriesmore competitive.

Overall, NAFTA had an export-weight-ed average effect of 28 percent on Texasexports to Mexico. Adjusted for inflation,the trade deal accounted for roughly aquarter of Texas’ 111 percent increase inexports to Mexico between 1993 and 2000.

During the same period, Texas’NAFTA-related exports to Canada rose 47percent, or about a third of the state’s 131percent gain in that market. Texas sellsquite a bit more to Mexico than to Canada.

Even if the percentage effect is smaller, theNAFTA-led increases in exports to Mexicoare larger in dollar terms.

The results indicate that NAFTA stimu-lated Texas’ exports. These findings are sim-ilar to those of a St. Louis Fed study.4 Usinga different state-level database covering theyears 1988 to 1997, they estimated thatNAFTA increased Texas exports to Mexicoby 14 percent and to Canada by 28 percent.

Global GainsDid gains in the Mexican and

Canadian markets come at the expense ofexports to the rest of the world?

The answer is no. In addition toboosting North American sales, NAFTA alsocontributed to moderate gains in Texas’exports to other parts of the world. Thetrade deal helped boost sales by 17 per-cent in Latin America, not includingMexico; 15 percent in Europe; and 13 per-cent in Asia.

NAFTA didn’t open non-NorthAmerican markets, so why would it helpTexas exports to the rest of the world? Theanswer likely lies in the reorganization ofproduction that comes with exposure tothe global marketplace. As North Americantrade barriers fell, Texas exporters had newincentives to become more competitive,perhaps by cutting costs to match rivals’prices or by incorporating lower-pricedinputs from Mexico. Other factors mightalso be at work. The international-tradeexpertise that firms gained by selling toMexico may have helped them penetrateEurope, Asia and elsewhere. Countries mayhave informally reduced import barriers aspart of a strategy to achieve free-tradeagreements with the U.S.

The estimates of NAFTA’s impacts onTexas exports don’t account for Mexico’shighly successful maquiladora program,which allows U.S. goods to enter Mexicoduty-free for further processing and re-


SOURCE: WISERTrade

export to the United States. In the debate leading to NAFTA’s ratifi-

cation, experts differed on how the tradepact would affect the maquiladoras. Somethought it would strengthen them by boost-ing investment in the plants. Others arguedthat it would erode the maquilas’ advan-tage by lowering tariffs on nearly allimports to Mexico.

Maquiladora employment has grownsteadily for decades, but it acceleratedunder NAFTA (Chart 6). However, a 2001Dallas Fed study concluded that NAFTAhad a negative but statistically insignificantinfluence on the maquiladoras.5 If theindustry hadn’t weakened, the estimates ofNAFTA’s effects on Texas exports wouldhave been larger.

Texas now ranks as America’s topexporting state, with about 14 percent ofthe nation’s overseas sales. At least someof the gains can be attributed to NAFTA,which boosted 2000 exports by an esti-mated 23 percent above their pre-NAFTA1993 levels. The trade pact’s gains havebeen broadly based. Exports to Mexicorose—as many expected—but Texas prod-ucts have also found expanding marketsin Canada, Europe, Asia and Latin Americaas a direct result of NAFTA. The addedoverseas sales amount to a moderate gainfor the state’s economy, leading to fastergrowth and new jobs.

More Texas exports are only half thestory. NAFTA also operated at the industrylevel, prompting a reorganization consistentwith the theory of comparative advantage.As North American barriers fell, suchknowledge- and capital-intensive industriesas electronics, chemicals, transportationequipment and industrial machineryreceived a stimulating jolt. Labor-intensiveindustries, like lumber and furniture,couldn’t maintain their exports.

The data don’t allow industry-specificassessment of NAFTA beyond 2000.However, the steady increase in overallTexas exports in recent years at least sug-gests that NAFTA continues to exert a posi-tive effect on the state’s economy.

Kumar is an economist in the ResearchDepartment of the Federal Reserve Bank ofDallas.

NotesThe author thanks Jason Saving, Mine Yücel and SteveBrown for insightful comments.1 “Distinguishing NAFTA from the Peso Crisis,” by David M.Gould, Federal Reserve Bank of Dallas Southwest Economy,Issue 5, September/October 1996.2 “The Effects of NAFTA on U.S.–Mexican Trade and GDP,”Congressional Budget Office, May 2003.3 The analysis can’t be continued past 2000. The WorldInstitute of Social and Economic Research compiles state-level export figures, providing added detail by industry. Theswitch from Standard Industrial Classification (SIC) to theNorth American Industry Classification System (NAICS) meansdata since 2001 cannot be compared with earlier periods.4 “NAFTA and the Changing Pattern of State Exports,” byCletus C. Coughlin and Howard J. Wall, Working Paper2000-029, Research Division, Federal Reserve Bank of St.Louis, October 2000.5 “Was NAFTA Behind Mexico’s High Maquiladora Growth?”by William C. Gruben, Federal Reserve Bank of DallasEconomic and Financial Review, Third Quarter 2001.


Chart 5Industry Winners and Losers from NAFTA

NOTE: Oil and gas equipment, although statistically significant at a 286 percent increase, falls outside the boundaries ofthis chart.SOURCE: WISERTrade

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Printingandpublishing

Rubber and plastics

Textile mill products

Leather

Petroleumand coal

Metal mining

Electronic equipment

ApparelComputers

Instruments

Furniture and fixtures

Lumber and wood

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Percent

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Losses in Canada,gains in Mexico

SOURCE: WISERTrade; Haver Analytics.

Maquiladoraemployment

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Chart 6Texas Exports to Mexico and Maquiladora Employment: Pre- and Post-NAFTAIndex, 1988 = 100

depending on which group you’re talkingabout. We have an extremely important groupof high-skilled immigrants. We rely on themto fill important, high-level jobs in technolo-gy, science and research. About 40 percent ofour Ph.D. scientists and engineers were bornin another country. We also employ manyhigh-skilled immigrants in the health sector.

High-skilled immigration has good eco-nomic effects—it adds to GDP growth. It alsohas beneficial fiscal effects—the impact ongovernment finances is large and positive.People tend to focus on illegal or low-skilledimmigration when discussing immigrants andoften do not recognize the tremendous con-tribution of high-skilled immigrants.

Q: What about the low-skilled immigration?

A: With low-skilled immigration, the eco-nomic benefits are there as well but have tobe balanced against the fiscal impact, whichis likely negative.

What makes the fiscal issue more diffi-cult is the distribution of the burden. Thefederal government reaps much of the rev-

enue from immigrants who work and payemployment taxes. State and local govern-ments realize less of that benefit and have topay more of the costs associated with low-skilled immigration—usually health care andeducational expenses.

Q: Does it matter whether the immigration islegal or not?

A: If you’re making value judgments aboutimmigrants, or if you’re discussing nationalsecurity, you probably need to distinguishbetween those who come legally and thosewho don’t. From an economic perspective,however, it makes more sense to differentiateamong immigrants of various skill levels thanit does to focus on legal status.

The economic benefits of low-skilledimmigrants aren’t typically going to dependon how they entered the U.S. Illegal immi-grants may pay less in taxes, but they’re alsoeligible for fewer benefits. So being illegaldoesn’t mean these immigrants have a worsefiscal impact. In fact, a low-skilled illegalimmigrant can create less fiscal burden than alow-skilled legal immigrant because theundocumented don’t qualify for most benefits.

Q: How does immigration affect jobs and earningsfor the native-born population?

A: We focus a lot on that—for example, exact-ly how immigration has affected the wages ofAmericans, particularly the low-skilled wholack a high school degree. The reason weworry about this is that real wages have beenfalling for low-skilled U.S. workers over thepast 25 years or so.

The studies tend to show that not muchof the decline is due to inflows of immigrants.The consensus seems to be that wages areabout 1 to 3 percent lower today as a resultof immigration. Some scholars find largereffects for low-skilled workers. Still, laboreconomists think it’s a bit of a puzzle that theyhaven’t been able to systematically identifylarger adverse wage effects.

The reason may be the way the econo-my is constantly adjusting to the inflow of

OnTheRecord

Q: What can you tell us about the size of theimmigrant population in the United States?

A: Immigrants make up about 12 percent ofthe overall population, which means about 36million foreign-born live in the United States.The commonly accepted estimate for theundocumented portion of the foreign-bornpopulation is 11 million. Immigrants comefrom all parts of the world, but we’ve seen bigchanges in their origins. In the 1950s and1960s, 75 percent of immigrants were fromEurope. Today, about 75 percent are fromLatin America and Asia. Inflows are also muchlarger today, with 1 million to 2 million new-comers entering each year.

What’s interesting about the UnitedStates is how our economy has been able toabsorb immigrants and put them to work.U.S. immigrants have high employment ratescompared with other developed countries.This is partly because we don’t set highentry-level wages or have strict hiring andfiring rules. In this type of flexible system,you have more job openings. You havemore opportunities. You also have lowerentry-level wages, but immigrants at least gettheir foot in the door.

Being in the workforce allows immi-grants to interact with the rest of society.They learn the language faster, pay taxes andbecome stakeholders.

Q: Where do immigrants fit into the U.S. economy?

A: Our immigrants are diverse in economicterms. We rely on immigrants for both high-and low-skilled jobs. Some immigrants domedium-skilled work, but more than anythingelse they’re found on the low and the highends of the education distribution.

The economic effects are different

A C o n v e r s a t i o n w i t h P i a O r r e n i u s

The Economics of Immigration

Congress is considering various proposals for immigration reform this year. Pia Orrenius, a DallasFed senior economist and immigration expert, discusses the economic aspects of the growingnumber of foreign-born workers, including their effects on the U.S. economy, government budgets,and native-born Americans� jobs and earnings.


immigrants. On a geographical basis, forexample, a large influx of immigrants into anarea tends to encourage an inflow of capitalto put them to use. So you have a shift out inlabor supply, but you also have a shift out inlabor demand, and the wage effects are ame-liorated. At the same time, the native laborsupply is changing. We have fewer and fewerlow-skilled workers, largely because olderworkers, who are more likely to lack a highschool degree, are retiring and leaving thelabor force. In that way, low-skilled immi-grants are filling a disappearing niche in ournative labor force. So that, too, might workagainst finding large wage impacts.

Q: Is it all about wages?

A: Economic models say people move inresponse to wage differentials, and that’s pret-ty much it. When wage differentials shrink,migration should slow. Sociologists have longpointed out, however, that other dynamicsaffect immigration, such as family reunifica-tion, risk diversification, security and access tofinancial markets.

Workers are more likely to migrate if pat-terns have been established to help themmake their way to the foreign workplace. InMexico over the past 15 years, for example,we’ve seen increased migration to the U.S.even as living standards in Mexico improvedslightly. Because of the networks and migra-

tion flows in place, it’sgoing to take longer beforea small shrinkage in thewage gap results in adecline in immigration.

Q: What about the AmericanDream of immigrants comingto this country, working hardand prospering? Is it stillalive?

A: Most immigrants start out behind thenative-born because they don’t have theadvantages of growing up in this society. Asthey learn, their wages grow. Within the samegeneration, you should find that immigrantsassimilate to natives with similar characteris-tics—job, age, education and such. So a highschool dropout immigrant will likely achievethe wage outcomes of a native high schooldropout. However, if you don’t take intoaccount education, you don’t see the sameeconomic assimilation. Mexican immigrantswho lack a high school degree don’t achievethe average wages of natives once they cometo the U.S., even after 10 to 15 years.

What we want over generations is for thechildren of immigrants to achieve the sameeducation and incomes as average natives.You do see that for many groups. Our biggestconcern is with Hispanic immigrants, becausethey’re the ones coming in with the lowesteducation levels.

While the great majority of children ofHispanic immigrants do well, their summarystatistics aren’t as favorable. This is because inthe second and third generation they stillhave twice the high school dropout rate asother natives. So a fraction of these immi-grants and their children aren’t assimilatingeven over generations. They’re not achievingoverall U.S. averages in education and wagesas much as they’re assimilating to Hispanicaverages, which are lower.

Q: What are the likely economic effects of aguest-worker program?

A: A guest-worker program would likely have

two components, addressing existing andnew migrants. Incorporating illegal immi-grants who are already here and working,while controversial, would not have largeeconomic effects. These immigrants havealready had a labor-market impact. They’vealready had a fiscal impact. Because they’vebeen working here, we’re not going to sud-denly have a big wage impact or see nativeworkers displaced.

What might change is that they wouldget temporary legal status in the U.S., andthey’d be able to get driver’s licenses andopen bank accounts. It would make theirlives easier. It really wouldn’t worsen the fis-cal situation because, as guest workers, theimmigrants presumably wouldn’t be eligiblefor more public benefits than they are now.

The economic effects of legalizing newmigrant workers is more complicated. If theprogram simply institutionalizes the existingstream of undocumented workers, economicand fiscal effects will be much what they aretoday. In fact, depending on how it’s imple-mented and how employers are impacted, aguest-worker program combined withstricter enforcement could actually serve toreduce the demand for immigrant labor.

If the program comes with fees onemployers and workers or if employeeswho were off the books are now going tobe contributing employment taxes, the pro-gram would raise the cost of immigrantworkers. This would increase the relativedemand for native-born workers. If there isno cap on the number of new workers com-ing in or other measures to limit the guest-worker inflows, then increases in labor sup-ply could negate any benefit for natives.


“A low-skilled illegal immigrant can create less fiscal

burden than a low-skilled legal immigrant because

the undocumented don’t qualify for most benefits.”

SpotLight

state’s 907,500 factory jobs are located in ornear the state’s big cities (see chart). Themetropolitan areas offer a ready supply ofskilled workers and access to transportation.

A third of the state’s manufacturing jobsare in North Texas—22 percent in the Dallasarea and 11 percent in the Fort Worth area.Houston and its environs account for 24 per-cent. Austin and nearby Round Rock are at 6percent, San Antonio at 5 percent.

Border counties have a below-averageshare of manufacturing jobs, most likelybecause of the proximity of less expensiveproduction in Mexico. Only 14 Texas coun-ties report no manufacturing at all.

The state’s metropolitan areas differ intheir industrial profiles. Dallas leads in pri-mary metals, furniture, wood, paper, print-ing, food, textiles and nonmetallic mineralproducts, such as brick, glass and cement.

Houston has half of the state’s petrole-um and chemicals manufacturing jobs androughly a third of the workers making fabri-cated metals, machinery and electrical equip-

ment. Houston alsoleads the state injobs for workersmaking beverages,with 27 percent. SanAntonio has the nextlargest concentra-tion—16 percent.

Houston andDallas are eachhome to slightlymore than 20 per-cent of workersmaking rubber andplastics products.

While Austin isone of the nation’shigh-tech capitals,Dallas has Texas’largest concentra-tion of workersmaking computerand electronicsproducts, with 43percent of the state’semployment. Austin

employs 26 percent of these workers.Fort Worth–Arlington leads the state in

rolling out transportation equipment, with 36percent of jobs. Dallas also is home to agood number of factory jobs making trans-portation equipment, with 21 percent.

While still important, factory employ-ment isn’t what it once was. The rapidincrease of service jobs has led manufactur-ing to slip as a share of Texas employment.Manufacturing accounts for roughly 9 per-cent of Texas employment today, down from13 percent a decade ago.

The industry faces competitive pres-sures from low-cost producers in China,Mexico and elsewhere. Firms will seek themost cost-efficient method to produce,sometimes choosing to increase productivitythrough investments in machinery ratherthan workers. As a result, while the state’stotal factory output has continued to rise,many of Texas’ 23,300 manufacturers areproducing more with fewer workers.

The wide dispersion of factory jobsacross the state, however, suggests thatmany communities still have a significantstake in maintaining a favorable climate formanufacturing.

—Fiona Sigalla and Franklin D. Berger

n the current recovery, manufacturinghas bounced back faster in Texas than in thenation as a whole. Last year, Texas addedroughly 7,500 manufacturing jobs, a 0.8 per-cent increase, compared with a U.S. loss of72,500 jobs, a 0.5 percent decline.

Jobs, of course, are just one measureof manufacturing performance. Investmentsin technology and knowledge have helpedfirms raise productivity. Production esti-mates, however, are available only with alag and only for the state as a whole.Employment is the best indicator of wheremanufacturers locate within the state.

Manufacturing remains vital to manycommunities. In 21 of Texas’ 254 counties, itaccounts for 20 percent or more of the jobs(see map). Factories are responsible for athird or more of total employment in fivecounties—Titus and Morris in East Texas,Calhoun and Lavaca on the Gulf Coast, andMoore in the Panhandle.

Overall, manufacturing is a largelyurban enterprise. Nearly 90 percent of the

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NA0More than 0 to 10%More than 10% to 20%More than 20% to 30%More than 30%

NOTE: Data for counties marked not available (NA) are not released by the Texas Workforce Commission because of confidentiality concerns. In the aggregate, these counties represent only 1.3 percent of Texas manufacturing employment.

Manufacturing Jobs as Share of Total Employment

SOURCE: Texas Workforce Commission.

Houston– Baytown– Sugar Land

Dallas– Plano–Irving

Other metropolitan areas

Outside MSAs

Fort Worth–Arlington

Austin–Round Rock

San Antonio

El Paso

Beaumont–Port Arthur Waco

24%

22%

13%

12%

11%

6%

5%

3%

2% 2%

SOURCE: Texas Workforce Commission.

Texas Manufacturing Employment

Texas Manufacturing

Factories Still Matter in Much of State

ts proximity to Mexico and fast-grow-ing, binational job market are major factorsin the Rio Grande Valley’s economy. They’rea large part of the reason employment hasincreased at a faster, steadier pace in theValley than in the United States, Mexico orTexas as a whole (Chart 1).

Despite rapid job creation, the Valleyremains relatively poor. The McAllen–Edin-burg–Mission metropolitan statistical arearanks last among the nation’s 361 MSAs,with a per capita income of $15,184 a year,less than half the national average of$31,472. The Brownsville–Harlingen MSAcomes in next to last at $16,308.

The combination of rapid job growthand low income is unusual. In a study cov-ering 1967 to 1997, Dallas Fed economistKeith Phillips found weak employmentgains in other states’ low-income counties—annual averages of 2 percent in Kentucky,0.4 percent in West Virginia and 0.3 percentin Mississippi. Valley employment, by con-trast, rose 3.4 percent a year over the threedecades.

More recent data confirm that theValley is creating jobs at an above-averagerate, a trend that dates back to at least 1969.

The McAllen MSA posted the strongest gainsof all the Texas–Mexico border metros from1997 to 2003, with employment growing anaverage 4.6 percent. Brownsville’s 3.1 per-cent job growth was nearly twice as fast asTexas’ 1.6 percent. National job creationover this period was 1.2 percent.

The years of strong job growth havewhittled away at the Valley’s once-highunemployment rate. McAllen’s jobless ratefell from 25.1 percent in April 1990 to 6.6percent in December 2005. Brownsville’sdropped from 16.1 percent in April 1991 to6.1 percent in December 2005.

These trends raise several questions.What sectors have contributed to theValley’s rapid job growth? How does Mexicoshape the Valley’s economy? Will the strip-ping away of trade barriers in CentralAmerica and the Dominican Republic meannew competition or new opportunities? Canthe Valley continue to create jobs? Can itbegin to close the income gap?

Economic DriversThe Rio Grande Valley abuts the Gulf

of Mexico at Texas’ southern tip and stretch-es roughly 100 miles along the river that

separates the United States from Mexico (seemap). The region encompasses Cameron,Hidalgo, Starr and Willacy counties, whichhad a combined population of nearly 1.1million in 2005.

In terms of earnings, two sectorsaccount for nearly half the area’s economicactivity. The largest contributor to income isgovernment, which includes local, state andfederal workers as well as public schooland university employees (Chart 2). Thissector accounted for more than a quarter ofValley earnings in 2004, well above the 18percent state average.

The Valley’s second-largest sector ishealth care and social assistance. At 20 per-cent of earnings, the 2004 share was two-thirds higher than the 12 percent of adecade earlier. Over the same period, healthcare’s share of the national economy rosemuch more slowly, going from 9.5 percentto 10.8 percent. The state is slightly belowthe U.S. average at 10 percent.

Retail trade earnings made up almost10 percent of the Valley economy in 2004,just about matching the state average.Mexican nationals cross the border to shopyear-round. Tourist traffic includes WinterTexans, mostly retirees from the Midwestand Canada who spend several months inthe Valley, attracted by warm weather andlow living costs.

Spending by Mexicans and other visi-tors makes Valley retailing an importantexport sector, a rarity in nonborder cities.1

Dynamic Growth in the Rio Grande ValleyBy José Joaquín López

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Chart 1Valley Tops Texas, U.S., Mexico in Job GrowthIndex, 1990 =100

SOURCES: Bureau of Labor Statistics; Federal Reserve Bank of Dallas; Instituto Nacional de Estadística, Geografía e Informática.

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Brownsville

McAllen

Matamoros

Reynosa

Gulf of Mexico

TEXAS

MEXICOCameron

WillacyHidalgo

Starr

Mission Harlingen

Edinburg

Rio Grande Valley

The percentage of sales to nonresidentsaveraged about 35 percent in McAllen and26 percent in Brownsville over 1978–2001(Chart 3). This number is considerablyhigher for Laredo, the main port of entryfor U.S.–Mexico land-borne trade, andmuch lower for El Paso, which relies moreheavily on the maquiladora industry inCuidad Juárez.

Agriculture has historically been oneof the Valley’s cultural and economic main-stays. The annual harvest remains an

important source of income and jobs inrural areas, but agriculture’s overall shareof the Valley economy has been decliningfor more than three decades (Chart 4). By2004, farming accounted for less than 1.4percent of total earnings, making it one ofthe smallest sectors.

Ties to Mexico and BeyondAcross the Rio Grande from the Valley

lies Mexico—a developing country with itsmost dynamic regions in the north, oppo-

site Texas. Northern Mexico interacts heavilywith the Valley, providing demand forgoods and services as well as a competitivelocation for low-cost production. Over theyears, Mexico has contributed to the Valley’sbooms and busts.

Spending by Mexican shoppers is welldocumented, but Mexico also affects the sizeof the government sector in the Valley. ManyMexican students attend school on the U.S.side of the border, boosting the educationsegment. The region, moreover, serves as abase for an extensive U.S. Customs andBorder Protection presence. The agency is animportant source of income because its jobsare relatively high paying. In 2003, averageannual earnings for civilian federal workersin the Valley were $83,562, up 11 percentfrom 1998 when adjusted for inflation. Bycontrast, the area’s overall average earningswere $26,874 in 2003, a gain of 4 percent.

Businesses on the Texas side of theborder get a boost from a strong Mexicanmaquiladora industry, which takes advan-tage of duty-free imports from the UnitedStates for assembly and re-export. Reynosa,across the Rio Grande from McAllen, andMatamoros, Brownsville’s sister city, arehome to roughly a third of the maquiladoraemployment along the Texas–Mexico bor-der. In addition, Reynosa’s maquiladoraindustry has had the fastest job growthalong the U.S.–Mexico border since 2000,and it was the only maquiladora industrythat did not see employment declines dur-ing the most recent U.S. recession (Chart 5).


Chart 2Government, Health Care Biggest Sources of Valley Earnings

Government, includingpublic schools and universities(27.1%)

Accommodation and other services (3.4%)

Health care and social assistance(20%)

Administrative services (2.8%)

Professional services (3.5%)

Transportation and warehousing (3.7%)

Finance (3.3%)

Retail (9.8%)

Wholesale (3.7%)

Manufacturing (6.7%)

Construction (4.5%)

Other (10.1%)

Agriculture (1.4%)

Chart 3Nonresident Spending Boosts Border Retail SalesShare of total retail sales, 1978–2001 average (percent)

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El PasoLaredoMcAllenBrownsville

Chart 4Agricultural Earnings Share DeclinesShare of total Valley earnings (percent)

SOURCE: Bureau of Economic Analysis.

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McAllen MSA5-year moving average

Brownsville MSA5-year moving average

McAllen MSA

Brownsville MSA

SOURCE: Bureau of Economic Analysis.

SOURCE: “Texas Border Benefits from Retail Sales to Mexican Nationals,” by Keith R. Phillips and Roberto Coronado, in The Face of Texas, Federal Reserve Bank of Dallas, October 2005.

With Mexico’s low-wage workers sonear, the Valley’s manufacturing sector hasbeen limited. It accounts for 6 percent ofemployment, less than the state’s 9 percentand the nation’s 11 percent. The manufac-turing across the border, however, beefs uptransport, warehousing and other businessservices that supply maquiladoras. Researchby Dallas Fed economists Bill Gilmer andJesus Cañas finds that maquiladoras andtheir supporting industries play a key rolein allocating employment across sectors infour pairs of border cities.2

Proximity to Mexico increases theimportance of the dollar–peso exchangerate to the Valley. Fluctuations affect thepurchasing power of Mexican shoppers andtourists, and sharp declines in the peso’sreal value have negatively impacted suchsectors as retail and leisure. Valley MSAs aretypical of all those along the border. Theyshow a strong correlation between theU.S–Mexico real exchange rate and thebusiness-cycle index, as determined byemployment, jobless rates, retail sales andtotal wages (Chart 6).

Since Mexico’s adoption of floatingexchange rates in early 1995, however, thepeso has shown more stability, notably sur-viving a period of uncertainty during the2000 presidential election. Since then, lowinflation in Mexico and other factors havecaused the peso to strengthen, improving itspurchasing power. The Valley economy willbenefit if the peso maintains its stabilitythrough this year’s elections.

Although Mexico will continue to be adominant factor for the Valley economy,new business opportunities could arise inother nations. In 2005, Congress approvedthe Central American Free Trade Agreement(DR-CAFTA), with Costa Rica, El Salvador,Guatemala, Honduras, Nicaragua and theDominican Republic. The agreement willeventually eliminate tariffs and other tradebarriers among the participants.

These countries’ main exports includecoffee, sugar, petroleum, bananas and gold.Their main imports are machinery andequipment, raw materials, consumer goods,cotton and fabrics. This pattern is consistentwith trade theory, which predicts that coun-tries will export goods produced with anabundant factor, such as low-skilled labor,while importing goods and services pro-duced using a locally scarce input, such ascapital or highly skilled labor.

As barriers between the DR-CAFTAcountries fall, however, access to a larger

variety of previously nontraded goods andservices can redefine the pattern ofimports and exports. The Valley can bene-fit from increasing trade with the DR-CAFTA nations by selling beef, medicinalproducts such as aloe vera, processedfood, cotton, and unique fruits and vegeta-bles, such as the Sweet Texas RedGrapefruit and the Texas 1015 SuperSweetOnion. The pre-CAFTA duty on such prod-ucts ranged from 1 percent for cotton to30 percent for beef.

Both the Valley and DR-CAFTA coun-ties produce sugar, but Texas growershave little to fear from the new trade pact.The Valley’s sugar industry, which repre-sents about 10 percent of the area’s agri-cultural output, retains substantial protec-tion under the agreement. The quota overthe next 15 years will reach 150,000 metrictons, 1.9 percent of 2004 U.S. production.Under the current farm bill, the domesticsugar program remains unaffected, whiletotal sugar imports are kept below 1.4 mil-lion metric tons—a comfortable cushionconsidering the size of sugar influx from theDR-CAFTA area. The over-the-quota U.S. tar-iff on sugar will not change. It’s currentlyabove 100 percent, one of the highest theUnited States imposes.

Because imports from DR-CAFTA coun-tries will not significantly threaten the U.S.sugar industry, Valley producers’ marketallotment is unlikely to decline significantlyas a result of the agreement.

The Valley’s ProspectsOverall, the Valley’s short-term outlook

is positive. Employment gains are likely tocontinue at a relatively strong pace, espe-cially in health care, now the largest private-sector employer. Key drivers of employmentwill probably remain strong, and agriculturecan benefit from more exports. Because thehealth care and federal government sectors

(Continued on back page)


Chart 5Maquiladora Job Growth Strongest in ReynosaIndex, January 2000 = 100

SOURCE: Instituto Nacional de Estadística, Geografía e Informática.

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Cd. Acuña (Del Rio)Piedras Negras (Eagle Pass)Nuevo Laredo (Laredo)Matamoros (Brownsville)Cd. Reynosa (McAllen)Cd. Juárez (opposite El Paso)

200520042003200220012000

Chart 6Business Cycles, Exchange Rates Correlate in Valley MSAsBusiness-cycle index, October 1980 = 100 Real dollar–peso exchange rate

SOURCES: Federal Reserve Bank of Dallas; Banco de México.

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A prolonged period of sparse rainfall has been hard onTexas agriculture. The Texas Agricultural Extension Serviceestimates the state’s drought losses from September throughJanuary at $1.5 billion.

So far, the cattle industry has been the hardest hit. Thedrought has meant higher feed costs, less wheat in pasturesand losses from selling livestock at lighter-than-normalweights. About 1 million acres of range- and pastureland andthousands of head of cattle and horses have been lost towildfires.

The drought has added to agriculture’s financial stress.Farmers and ranchers had already been hurt by rising fuel-

related costs and sagging market prices for crops.After one of the driest years on record in 2005, this year

is shaping up to be as dry, if not worse. Without significantand widespread rain in the spring and summer, the drought’seffects could spread to farmers and other agriculture–relatedbusinesses. Consumers could face higher prices for meat,produce and other foods, and banks could see higher farm-loan delinquency rates.

Recent rains have helped ease the dry spell in someparts of the state, and agricultural lenders have not yet indi-cated that the drought has impacted farm-loan quality or per-formance.

AGRICULTURE: Drought Taking Toll on the State

An annual revision of job data indicates that Texasemployment grew last year nearly twice as fast as previouslyreported. The Texas Workforce Commission now puts jobgrowth from December 2004 to December 2005 at 2.7 per-cent, up from the previous estimate of 1.5 percent.

Updating the data adds about 119,000 jobs to Texas’employment growth for 2005. Among the significant gainerswere government, manufacturing, professional and businessservices, and trade and warehousing.

The revisions incorporate more comprehensive surveydata into previously published monthly data. They’re part ofa nationwide review conducted by the federal Bureau of

Two Texas cities, both already significant beneficiaries ofdefense dollars, will add jobs as the Pentagon closes basesand reassigns personnel.

El Paso’s Fort Bliss will gain 11,395 military and civilianpositions. About 3,800 troops came in late 2005. Another3,800 troops were scheduled to arrive in the first few monthsof 2006, with the rest to follow over the next five years.

The incoming troops are already boosting homebuildingand other activities, and estimates of economic ripples raisethe overall impact to as many as 20,198 jobs, or 6.1 percentof El Paso’s current employment. In recent years, El Paso hasbeen adding an average of 3,666 new jobs per year, so themilitary boost is equivalent to 5.5 years of job creation.

TEXAS JOBS: Growth Stronger Than Earlier EstimatesLabor Statistics and state employment authorities.

Government statisticians rework the data once a year,but each quarter the Dallas Fed anticipates the monthly revi-sions with a benchmarking methodology developed by econ-omists Franklin D. Berger and Keith R. Phillips. Prior to thelatest revision, the Dallas Fed model had been projectingTexas job growth of 2.1 percent for 2005—anticipating halfthe eventual revision.

To calculate the revisions on a timely basis, the DallasFed economists incorporate the same data the BLS later uses.Their estimates are regularly posted on the Bank’s Internetsite, www.dallasfed.org.

DEFENSE: Military Expansion on Tap for El Paso, San AntonioSan Antonio’s Fort Sam Houston will add 9,339 military

and civilian jobs. Cutbacks at other San Antonio military facil-ities will reduce the regional economy’s gain to 5,459 jobs, or0.5 percent, including indirect effects.

The realignment will reduce employment in severalTexas communities. For the most part, the losses will be smallrelative to total employment—less than 1 percentage point.Taking the biggest hits will be Corpus Christi, losing 7,026jobs (3.2 percent), and Wichita Falls, down 4,360 jobs (4.7percent).

After all gains and losses are taken into account, Texaswill add 13,848 jobs from the Pentagon’s realignment.

NoteWorthy QUOTABLE “The oil industry has slowly come to believethat price incentives can be trusted this time and has finallybegun to act on them.”

—Bill Gilmer, Vice President


RegionalUpdatey all accounts, the sluggish economic

growth witnessed in the years following the2001 downturn is a thing of the past. In2005, the Texas economy gathered speed,posting its best performance in five years.Moreover, job growth in the Lone Star Stateoutpaced that of the United States, rising ata rate more in line with its historical aver-age. So far in 2006, signs continue to pointto a steady Texas expansion, with fewclouds on the horizon.

Texas employment rose a solid 2.7 per-cent in 2005, according to revised job datareleased March 9 by the Texas WorkforceCommission (TWC). This pace of job expan-sion was near Texas’ 35-year historical aver-age of 2.9 percent and faster than nationalemployment growth. (2005 U.S. employmentgrowth was 1.5 percent, slightly below its35-year historical average of 1.8 percent.)Texas job growth last year was broad basedacross major industries and metros. Thegoods sector (natural resources and mining,

construction and manufacturing) provided asubstantial boost after displaying weaknessduring most of the recession and recovery.

Texas labor market activity remainedpositive in January, with job gains of 11,700(1.4 percent annualized), according to datareleased by the TWC and seasonally adjust-ed by the Dallas Fed. The largest gains wererecorded in professional and business serv-ices (3,200), educational and health services(2,700), and trade, transportation and utili-ties (2,500). The construction industryadded 1,700 jobs as demand for new homesremained elevated and commercial con-struction continued to edge up. AlthoughJanuary’s overall employment growth wasmore moderate than that recorded in 2005,anecdotal reports, such as the EleventhDistrict Beige Book, indicate Texas labormarket activity remains strong.

Besides employment, other economicmeasures suggest the Texas expansionremains on track. The Dallas Fed’s Texas

Texas Economy on Solid Footing

Coincident Index—a business-cycle indexmade up of current indicators—rose at asolid 3.4 percent annualized pace inJanuary. Despite slower growth in the indexin late 2005 (mostly due to rising unemploy-ment rates following the hurricanes), theindex gained ground overall last year, risingat a pace of 3.6 percent—up from 2004’sgrowth of 2.9 percent.

Additionally, real Texas exports aregrowing at a good clip, up 1.9 percent infourth quarter 2005 and 5.9 percent from ayear earlier. Because Mexico is Texas’ largesttrading partner, the country’s recent eco-nomic pickup should give an added boost.Moreover, elevated energy prices havepushed the Texas rig count to its highestlevel in about 20 years. Finally, a Januaryuptick in the Texas Leading Index confirmsthe state’s economy remains on solid footingfor growth in the months ahead.

—D’Ann Petersen

B

Index, January 2001 = 100

Texas Leading Index on the Rise

Texas Employment Growth Exceeds U.S. in 2005Percent*

Elevated Energy Prices Boost Texas Rig Count

Index

Texas Coincident Index in Positive Territory

Texas

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SouthwestEconomy is publishedsix times annually by the Federal Reserve Bank ofDallas. The views expressed are those of the authorsand should not be attributed to the Federal ReserveBank of Dallas or the Federal Reserve System.

Articles may be reprinted on the condition thatthe source is credited and a copy is provided to theResearch Department of the Federal Reserve Bank ofDallas.

Southwest Economy is available free of chargeby writing the Public Affairs Department, FederalReserve Bank of Dallas, P.O. Box 655906, Dallas, TX75265-5906; by fax at 214-922-5268; or by tele-phone at 214-922-5254. This publication is availableon the Dallas Fed web site, www.dallasfed.org.

Executive Vice President and Director of ResearchHarvey Rosenblum

Director of Research PublicationsW. Michael Cox

Executive EditorMine Yücel

EditorRichard Alm

Associate EditorsJennifer Afflerbach

Kay ChampagneMonica Reeves

Graphic DesignerGene Autry

pay above-average wages, the growth ofthese industries is good for the Valleyeconomy.

Rising maquiladora employment, espe-cially in Reynosa, should also boost theeconomy over the next year or so. Steadyjob and population growth will continue tofuel commercial and residential construction,resulting in an optimistic forecast for thisotherwise volatile sector.

Although Mexico’s July presidentialelection may create some uncertainty, float-ing exchange rates and relatively stablecurrency-market fundamentals reduce thelikelihood of a peso shock. With its strengthsustained, Mexico’s currency should contin-ue to stimulate the Valley’s retail and leisuresectors.

Longer term, the Valley faces chal-lenges. Consistent and rapid job growthsince the early 1990s has helped the regionshed its reputation for high unemployment,but the economy hasn’t been catching upwith national and state levels of per capitaincome.

Most likely, low educational attainmentlies at the heart of this. The region has beenunable to improve the education level of itsworkforce relative to the state since the1970s. In 2000, the percentage of the laborforce with less than a high school educationaveraged 52 percent in the Valley and 24percent in Texas, according to the CensusBureau. If the Valley were to reduce its high

school dropout rate to the state average,income would go up an estimated $2 billiona year.3

Some trends are encouraging. Localuniversity enrollment has been rising for thepast four years, perhaps a sign the Valley isresponding to an economic environmentthat rewards higher skills. In addition,increased state funding for public educationduring the 1990s may start having a positiveimpact on education, and thus, on percapita income.

In summary, fast convergence towardstate and national levels of per capitaincome will depend mainly on the Valley’sability to improve the education of its work-force, a long-term commitment that can onlysucceed through the combined efforts ofhouseholds, businesses and government.

López is an economic analyst at the San AntonioBranch of the Federal Reserve Bank of Dallas.

Notes1 Exceptions are major tourist areas, such as Las Vegas, wherea large share of retail sales is to nonresidents.2 "Industrial Structure and Economic Complementarities inCity Pairs on the Texas–Mexico Border," by Robert W. Gilmerand Jesus Cañas, Federal Reserve Bank of Dallas WorkingPaper no. 0503, 2005.3 “Secondary Education: Its Impact on Border Income,” byThomas Fullerton Jr., The Border Economy, Federal ReserveBank of Dallas, June 2001.

Dynamic Growth in the Rio Grande Valley(Continued from page 13)

Documents

Southwest Economy, March April 2006 - FRB Dallas/media/documents/research/s… · Spotlight: Texas Manufacturing On the Record: Pia Orrenius. President’sPerspective T he economy