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Home , Rio Grande valley

Chart 1 Dynamic Growth in the Tops , U.S., in Job Growth

Index, 1990 =100 Valley 180 170 By José Joaquín López Rio Grande Valley 160

150 Mexico Its proximity to Mexico and fast-grow- The McAllen MSA posted the strongest gains 140 ing, binational job market are major factors of all the Texas–Mexico border metros from 130 Texas in the Rio Grande Valley’s economy. They’re 1997 to 2003, with employment growing an 120 a large part of the reason employment has average 4.6 percent. Brownsville’s 3.1 per- 110 increased at a faster, steadier pace in the cent job growth was nearly twice as fast as 100 Texas’ 1.6 percent. National job creation Valley than in the United States, Mexico or 90 Texas as a whole (Chart 1). over this period was 1.2 percent. 80 Despite rapid job creation, the Valley The years of strong job growth have ’90 ’92 ’94 ’96 ’98 ’00 ’02 ’04 remains relatively poor. The McAllen–Edin- whittled away at the Valley’s once-high SOURCES: Bureau of Labor Statistics; Federal Reserve burg–Mission metropolitan statistical area unemployment rate. McAllen’s jobless rate Bank of ; Instituto Nacional de Estadística, Geografía e Informática. ranks last among the nation’s 361 MSAs, fell from 25.1 percent in April 1990 to 6.6 with a per capita income of $15,184 a year, percent in December 2005. Brownsville’s less than half the national average of dropped from 16.1 percent in April 1991 to separates the United States from Mexico (see $31,472. The Brownsville–Harlingen MSA 6.1 percent in December 2005. map). The region encompasses Cameron, comes in next to last at $16,308. These trends raise several questions. Hidalgo, Starr and Willacy counties, which The combination of rapid job growth What sectors have contributed to the had a combined population of nearly 1.1 and low income is unusual. In a study cov- Valley’s rapid job growth? How does Mexico million in 2005. ering 1967 to 1997, Dallas Fed economist shape the Valley’s economy? Will the strip- In terms of earnings, two sectors Keith Phillips found weak employment ping away of trade barriers in Central account for nearly half the area’s economic gains in other states’ low-income counties— America and the Dominican Republic mean activity. The largest contributor to income is annual averages of 2 percent in Kentucky, new competition or new opportunities? Can government, which includes local, state and 0.4 percent in West Virginia and 0.3 percent the Valley continue to create jobs? Can it federal workers as well as public school in Mississippi. Valley employment, by con- begin to close the income gap? and university employees (Chart 2). This trast, rose 3.4 percent a year over the three sector accounted for more than a quarter of decades. Economic Drivers Valley earnings in 2004, well above the 18 More recent data confirm that the The Rio Grande Valley abuts the Gulf percent state average. Valley is creating jobs at an above-average of Mexico at Texas’ southern tip and stretch- The Valley’s second-largest sector is rate, a trend that dates back to at least 1969. es roughly 100 miles along the river that health care and social assistance. At 20 per- cent of earnings, the 2004 share was two- Rio Grande Valley thirds higher than the 12 percent of a decade earlier. Over the same period, health care’s share of the national economy rose much more slowly, going from 9.5 percent to 10.8 percent. The state is slightly below the U.S. average at 10 percent. Starr TEXAS Retail trade earnings made up almost Rio Grande 10 percent of the Valley economy in 2004, Hidalgo Willacy just about matching the state average. Mexican nationals cross the border to shop Edinburg year-round. Tourist traffic includes Winter Mission McAllen Harlingen Texans, mostly retirees from the Midwest and Canada who spend several months in Cameron the Valley, attracted by warm weather and MEXICO low living costs. Brownsville Spending by Mexicans and other visi- Matamoros tors makes Valley retailing an important export sector, a rarity in nonborder .1

FEDERAL RESERVE BANK OF DALLAS • MARCH/APRIL 2006 11 SouthwestEconomy site Texas. Northern Mexico interacts heavily Chart 2 with the Valley, providing demand for Government, Health Care Biggest Sources of Valley Earnings goods and services as well as a competitive location for low-cost production. Over the years, Mexico has contributed to the Valley’s Other (10.1%) Government, including booms and busts. public schools and universities Agriculture (1.4%) (27.1%) Spending by Mexican shoppers is well Administrative services (2.8%) documented, but Mexico also affects the size Finance (3.3%) of the government sector in the Valley. Many

Accommodation and other services (3.4%) Mexican students attend school on the U.S. side of the border, boosting the education Professional services (3.5%) segment. The region, moreover, serves as a Transportation and warehousing (3.7%) base for an extensive U.S. Customs and Border Protection presence. The agency is an Wholesale (3.7%) important source of income because its jobs are relatively high paying. In 2003, average Construction (4.5%) annual earnings for civilian federal workers Health care and Manufacturing (6.7%) social assistance in the Valley were $83,562, up 11 percent (20%) Retail (9.8%) from 1998 when adjusted for inflation. By contrast, the area’s overall average earnings were $26,874 in 2003, a gain of 4 percent. SOURCE: Bureau of Economic Analysis. Businesses on the Texas side of the border get a boost from a strong Mexican industry, which takes advan- The percentage of sales to nonresidents important source of income and jobs in tage of duty-free imports from the United averaged about 35 percent in McAllen and rural areas, but agriculture’s overall share States for assembly and re-export. Reynosa, 26 percent in Brownsville over 1978–2001 of the Valley economy has been declining across the Rio Grande from McAllen, and (Chart 3). This number is considerably for more than three decades (Chart 4). By Matamoros, Brownsville’s sister , are higher for Laredo, the main port of entry 2004, farming accounted for less than 1.4 home to roughly a third of the maquiladora for U.S.–Mexico land-borne trade, and percent of total earnings, making it one of employment along the Texas–Mexico bor- much lower for El Paso, which relies more the smallest sectors. der. In addition, Reynosa’s maquiladora heavily on the maquiladora industry in industry has had the fastest job growth Cuidad Juárez. Ties to Mexico and Beyond along the U.S.–Mexico border since 2000, Agriculture has historically been one Across the Rio Grande from the Valley and it was the only maquiladora industry of the Valley’s cultural and economic main- lies Mexico—a developing country with its that did not see employment declines dur- stays. The annual harvest remains an most dynamic regions in the north, oppo- ing the most recent U.S. recession (Chart 5).

Chart 3 Chart 4 Nonresident Spending Boosts Agricultural Earnings Share Declines

Border Retail Sales Share of total Valley earnings (percent)

Share of total retail sales, 1978–2001 average (percent) 10 60 9 McAllen MSA McAllen MSA 5-year moving average 8 50 Brownsville MSA Brownsville MSA 5-year moving average 7 40 6 30 5

20 4

3 10 2 0 Brownsville McAllen Laredo El Paso 1

SOURCE: “Texas Border Benefits from Retail Sales to 0 Mexican Nationals,” by Keith R. Phillips and ’69 ’71 ’73 ’75 ’77 ’79 ’81 ’83 ’85 ’87 ’89 ’91 ’93 ’95 ’97 ’99 ’01 ’03 Roberto Coronado, in The Face of Texas, Federal Reserve Bank of Dallas, October 2005. SOURCE: Bureau of Economic Analysis.

SouthwestEconomy 12 FEDERAL RESERVE BANK OF DALLAS • MARCH/APRIL 2006 With Mexico’s low-wage workers so variety of previously nontraded goods and near, the Valley’s manufacturing sector has services can redefine the pattern of Chart 5 been limited. It accounts for 6 percent of imports and exports. The Valley can bene- Maquiladora Job Growth employment, less than the state’s 9 percent fit from increasing trade with the DR- and the nation’s 11 percent. The manufac- CAFTA nations by selling beef, medicinal Strongest in Reynosa turing across the border, however, beefs up products such as aloe vera, processed Index, January 2000 = 100 transport, warehousing and other business food, , and unique fruits and vegeta- 160 Cd. Juárez (opposite El Paso) services that supply . Research bles, such as the Sweet Texas Red 150 Cd. Reynosa (McAllen) by Dallas Fed economists Bill Gilmer and and the Texas 1015 SuperSweet Matamoros (Brownsville) 140 Nuevo Laredo (Laredo) Jesus Cañas finds that maquiladoras and Onion. The pre-CAFTA duty on such prod- 130 Piedras Negras (Eagle Pass) their supporting industries play a key role ucts ranged from 1 percent for cotton to Cd. Acuña (Del Rio) 120 in allocating employment across sectors in 30 percent for beef. four pairs of border cities.2 Both the Valley and DR-CAFTA coun- 110 Proximity to Mexico increases the ties produce sugar, but Texas growers 100 importance of the dollar–peso exchange have little to fear from the new trade pact. 90 rate to the Valley. Fluctuations affect the The Valley’s sugar industry, which repre- 80 purchasing power of Mexican shoppers and sents about 10 percent of the area’s agri- 70 tourists, and sharp declines in the peso’s cultural output, retains substantial protec- 60 real value have negatively impacted such tion under the agreement. The quota over 2000 2001 2002 2003 2004 2005 sectors as retail and leisure. Valley MSAs are the next 15 years will reach 150,000 metric SOURCE: Instituto Nacional de Estadística, Geografía e typical of all those along the border. They tons, 1.9 percent of 2004 U.S. production. Informática. show a strong correlation between the Under the current farm bill, the domestic U.S–Mexico real exchange rate and the sugar program remains unaffected, while business-cycle index, as determined by total sugar imports are kept below 1.4 mil- employment, jobless rates, retail sales and lion metric tons—a comfortable cushion The Valley’s Prospects total wages (Chart 6). considering the size of sugar influx from the Overall, the Valley’s short-term outlook Since Mexico’s adoption of floating DR-CAFTA area. The over-the-quota U.S. tar- is positive. Employment gains are likely to exchange rates in early 1995, however, the iff on sugar will not change. It’s currently continue at a relatively strong pace, espe- peso has shown more stability, notably sur- above 100 percent, one of the highest the cially in health care, now the largest private- viving a period of uncertainty during the United States imposes. sector employer. Key drivers of employment 2000 presidential election. Since then, low Because imports from DR-CAFTA coun- will probably remain strong, and agriculture inflation in Mexico and other factors have tries will not significantly threaten the U.S. can benefit from more exports. Because the caused the peso to strengthen, improving its sugar industry, Valley producers’ market health care and federal government sectors purchasing power. The Valley economy will allotment is unlikely to decline significantly benefit if the peso maintains its stability as a result of the agreement. (Continued on back page) through this year’s elections. Although Mexico will continue to be a dominant factor for the Valley economy, new business opportunities could arise in other nations. In 2005, Congress approved Chart 6 the Central American Free Trade Agreement Business Cycles, Exchange Rates Correlate in Valley MSAs (DR-CAFTA), with Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and the Business-cycle index, October 1980 = 100 Real dollar–peso exchange rate Dominican Republic. The agreement will 350 .02 eventually eliminate tariffs and other trade .018 barriers among the participants. 300 .016 These countries’ main exports include Exchange rate .014 coffee, sugar, petroleum, bananas and gold. 250 Their main imports are machinery and .012 equipment, raw materials, consumer goods, 200 .01 cotton and fabrics. This pattern is consistent .008 with trade theory, which predicts that coun- 150 McAllen tries will export goods produced with an MSA .006 abundant factor, such as low-skilled labor, .004 100 while importing goods and services pro- Brownsville .002 duced using a locally scarce input, such as MSA 50 0 capital or highly skilled labor. ’81 ’83 ’85 ’87 ’89 ’91 ’93 ’95 ’97 ’99 ’01 ’03 ’05 As barriers between the DR-CAFTA SOURCES: Federal Reserve Bank of Dallas; Banco de México. countries fall, however, access to a larger

FEDERAL RESERVE BANK OF DALLAS • MARCH/APRIL 2006 13 SouthwestEconomy Dynamic Growth in the Rio Grande Valley (Continued from page 13)

pay above-average wages, the growth of school dropout rate to the state average, these industries is good for the Valley income would go up an estimated $2 billion economy. a year.3 Rising maquiladora employment, espe- Some trends are encouraging. Local cially in Reynosa, should also boost the university enrollment has been rising for the economy over the next year or so. Steady past four years, perhaps a sign the Valley is job and population growth will continue to responding to an economic environment fuel commercial and residential construction, that rewards higher skills. In addition, SouthwestEconomy is published resulting in an optimistic forecast for this increased state funding for public education six times annually by the Federal Reserve Bank of otherwise volatile sector. during the 1990s may start having a positive Dallas. The views expressed are those of the authors Although Mexico’s July presidential impact on education, and thus, on per and should not be attributed to the Federal Reserve Bank of Dallas or the Federal Reserve System. election may create some uncertainty, float- capita income. Articles may be reprinted on the condition that ing exchange rates and relatively stable In summary, fast convergence toward the source is credited and a copy is provided to the currency-market fundamentals reduce the state and national levels of per capita Research Department of the Federal Reserve Bank of likelihood of a peso shock. With its strength income will depend mainly on the Valley’s Dallas. sustained, Mexico’s currency should contin- ability to improve the education of its work- Southwest Economy is available free of charge by writing the Public Affairs Department, Federal ue to stimulate the Valley’s retail and leisure force, a long-term commitment that can only Reserve Bank of Dallas, P.O. Box 655906, Dallas, TX sectors. succeed through the combined efforts of 75265-5906; by fax at 214-922-5268; or by tele- Longer term, the Valley faces chal- households, businesses and government. phone at 214-922-5254. This publication is available lenges. Consistent and rapid job growth on the Dallas Fed web site, www.dallasfed.org. since the early 1990s has helped the region López is an economic analyst at the shed its reputation for high unemployment, Branch of the Federal Reserve Bank of Dallas. Executive Vice President and Director of Research but the economy hasn’t been catching up Harvey Rosenblum with national and state levels of per capita Notes Director of Research Publications income. 1 Exceptions are major tourist areas, such as Las Vegas, where W. Michael Cox Most likely, low educational attainment a large share of retail sales is to nonresidents. lies at the heart of this. The region has been 2 "Industrial Structure and Economic Complementarities in Executive Editor unable to improve the education level of its City Pairs on the Texas–Mexico Border," by Robert W. Gilmer Mine Yücel workforce relative to the state since the and Jesus Cañas, Federal Reserve Bank of Dallas Working Editor 1970s. In 2000, the percentage of the labor Paper no. 0503, 2005. Richard Alm force with less than a high school education 3 “Secondary Education: Its Impact on Border Income,” by averaged 52 percent in the Valley and 24 Thomas Fullerton Jr., The Border Economy, Federal Reserve Associate Editors percent in Texas, according to the Census Bank of Dallas, June 2001. Jennifer Afflerbach Bureau. If the Valley were to reduce its high Kay Champagne Monica Reeves

Graphic Designer Gene Autry