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February 1995, Volume 2, Number 2

Devaluation and Mexico to US Migration

Avoiding increased Mexico-to-US unauthorized migration due to recession in Mexico and a wider US-Mexican wage gap was a pillar argument in favor of the Clinton Administration's proposal to provide $40 billion in Congressionally approved loan guarantees to Mexico. The loan guarantee proposal was withdrawn on January 31, 1995, and replaced with a package of aid that does not require Congressional approval.

Mexico's peso hit a record low of US$1=6.55 on January 30, 1995, down over 40 percent from the $1=3.45 pesos on December 20, 1994. After the announcement of the aid program, the peso rebounded to $1=5.75 pesos.

Many in Congress wanted to make the loan guarantee conditional on Mexico cooperating with the US to reduce illegal immigration. Although the aid package has no formal side conditions on immigration, US officials reported that there was an "understanding" that Mexico would cooperate with the US to manage migration.

President Clinton, among others, argued that the Mexican aid package would "help us to better protect our borders." The 1982 peso devaluation of 72 percent was followed by a 30 percent increase in apprehensions in 1983 and 1984, from about 1 million to 1.3 million.

Legal and unauthorized Mexican migration to the US, which averaged about 300,000 settlers and 800,000 to two million sojourners per year over the past decade, is expected to increase as a result the peso devaluation and hard times in Mexico. The US Treasury originally predicted 30 percent or 430,000 additional illegal entries in 1995--implying a "normal" flow of 1.4 million unauthorized Mexican entries per year-- if the US did not provide aid to Mexico.

The Treasury Department based its estimates partially on research by Tom Espenshade, a Princeton demographer, who used INS apprehension data to estimate that a 40 percent peso devaluation would increase illegal entries by about 460,000 annually. However, most of these additional illegal Mexican entrants would probably not settle in the US--the estimated increase in the settled illegal Mexican population would be only about 40,000, implying that the US loan guarantee would have provided $1 million for each settled illegal Mexican migrant avoided.

Treasury assumed a 1 to 1 linkage between the peso and emigration, meaning that a 1 percent devaluation would be follows by a one percent increase in illegal immigration. Most migration researchers were unwilling to be so precise, and few believe that the relationship between the peso and emigration is linear. INS Commissioner Doris Meissner, for example, says only that emigration pressure will increase. Village economic modeling by UCD Professor Ed Taylor finds that a 10 percent devaluation in the 1980s was associated with 18 percent more emigration, but a 30 percent devaluation increases exits from Mexican villages of persons headed for the US by 25 percent.

Not everyone agrees that the peso devaluation will immediately increase unauthorized Mexico-to-US migration. Mexican migration expert Jorge Bustamante noted that coyotes set the cost of being smuggled into the US in dollars, and that some potential migrants may not be able to accumulate 30 percent more to pay smugglers immediately. Michael Teitelbaum of the Commission on Immigration Reform noted that the increased value in Mexico of the $3 to $4 billion in remittances from US migrants may make potential migrants better off, if Mexicans in the US continue to remit at the same levels and inflation in Mexico does not offset the effects of the devaluation.

Along the US-Mexican border, there are reports that apprehensions and attempted illegal entries rose in January 1995, but it will be several months before it can be determined whether reports of increased unauthorized border-crossings reflect the peso devaluation and hard times in Mexico or represent reactions by the usual flow of unauthorized migrants to INS border control efforts.

There is general agreement that the migration effects of the peso devaluation will not become apparent until March or April 1995, when seasonal migrants seek US jobs. These migrants will have to elude a beefed up Border Patrol to enter the US illegally.

Emigration pressures and migration flows will also depend on economic prospects in Mexico and California, the destination of most illegal Mexican immigrants. On January 3, 1995, Mexican President Zedillo made a speech that laid out plans to deal with the economic crisis that caused the peso to lose over 30 percent of its value in the last two weeks of 1994. The theme of the speech was sacrifice and austerity--wages and prices are to rise slower than inflation, the government will try to sell off more public enterprises, and government spending is to be cut. On January 17, 1995, the Zedillo government and the opposition parties signed a political reform agreement designed to minimize political unrest by ensuring honest elections, thus restoring the confidence of foreign investors.

A sluggish Mexican economy in 1995 could increase both internal migration to the northern border areas and emigration pressure. The Mexican economy is expected to grow less than one percent in 1995, inflation is projected to be 15 to 20 percent, and some foreign investors may put at least a temporary stop on plans to build or expand factories and stores, slowing job creation.

The lower wages and costs wrought by the peso devaluation should make Mexico more attractive to foreign investors. Indeed, there has already been US interest in shifting to unused maquiladoras in the border areas plastics and other light-assembly work to take advantage of Mexican wages and benefits that have fallen from $2 hourly to $1.50 [about half of these wage costs are payroll taxes and benefits]. Since labor markets in Mexican border cities are fairly tight, such an expansion of maquiladora activity should attract internal migrants to the border. If the California and US border economies improve as expected in 1995, there could be more stepping-stone migration across the border.

There is no doubt that Mexico will, over the next two decades, emerge as an important low-cost manufacturing center of North America. But no one knows exactly when and how this economic transformation will occur. At least two to three million of Mexico's five to six million farmers, plus their families, are likely to leave the land over the next two decades, but it is not clear whether foreign investment will create jobs for them in central Mexico or in border areas, or whether many will migrate to the US.

Unlike fast-growing Asian nations, Mexico's 1990s boom was fueled largely by foreign savings. An overvalued peso made imports of both capital and consumer goods cheap, and could be sustained as long as foreigners believed that Mexico truly was the next "tiger." In effect, US and other foreign investors lent money to Mexico, and Mexicans used these foreign savings to buy US goods--it is in this manner that the US Treasury can assert that $40 billion in US exports to Mexico supports about 800,000 US jobs.

A report released last week by the Federal Reserve Bank of Dallas estimated that the peso devaluation will reduce American exports to Mexico by $10 billion or 20 percent in 1995 versus 1994

Mexico has learned that foreign money has an easy-come, easy-go quality. The country achieved more than four percent economic growth-- 4.5 percent--only in 1990.

An "orderly" peso devaluation was advocated by the Mexico's new finance minister during the summer of 1994, but ex-President Salinas reportedly wanted to be one of the few recent Mexican presidents to leave office without a massive devaluation. When the government that took office on December 1, announced its economic plans, local and foreign investors saw that the $30 billion trade deficit would not be reduced in 1995. With the Mexican Central Bank running out of reserves to support the peso, they bet that Mexico would have to de-value its currency, which it did (MN, Jan 1995).

The peso devaluation should help to create jobs in Mexico's tourism industry, third largest after oil and manufacturing. In 1994, an estimated 17 million US residents visited Mexico, and accounted for about three-fourths of Mexico's $7.5 billion tourism revenues. Globally, 528 million international tourists spent $321 billion in 1994.

During the 1980s, Mexico managed to keep its unemployment rate low despite depression and economic restructuring--the official urban unemployment rate (desempleo abierto) for Mexico fell after 1983, reaching a low of 2.6 percent in 1991. Mexico's unemployment rate is low because it measures only persons separated from formal job relationships, and because "unemployed" persons not eligible for UI are pushed into marginal jobs and considered employed. The unemployed in Mexico are persons who can afford to search for work full time--usually better educated and more affluent workers.

The Clinton aid package for Mexico is not popular--79 percent of those surveyed in one poll opposed it and, near the end of January, groups ranging from Ross Perot's United We Stand to Prop 187 supporters promised to work to defeat Mexican aid.

Allen Myerson, "US Jobs to Dwindle with the Peso," International Herald Tribune, January 31, 1995. Lawrence O'Rourke, "Mexico rescue stalls; Peso Hits Record Low," Sacramento Bee, January 31, 1995, A1. Roberto Suro, "Estimates of Migration from Peso Crisis are overstated, experts say," Washington Post, January 26, 1995, A20; Melissa Healy, "Aid to Mexico Efforts Face Problems," Los Angeles Times, January 28, 1995, A25. Marcus Stern, "White House Inflated Data on Migrants," San Diego Union-Tribune, January 28, 1995. Marcus Breton, "Many Feel Prop 187 won't slow Migration," Sacramento Bee, January 23, 1995, A13. "Tyson Says Mexican Crisis May Cut US GDP Growth by 1. PCT Point," AFX News, January 20, 1995. Tim Carrington and Jackie Calmes," US Rescue Plan for Mexico Prompts Conditions from both Liberals, Conservatives in Congress," Wall Street Journal, January 19, 1995, A18. David Sanger, "Mexico Crisis seen spurring flow of Aliens," New York Times, January 18, 1995, A3. Alfredo Corchado, "Migration north is wa