1. Economics
October 14, 2014updated 20 Jul 2021 3:50pm

Chart: Mexico City moved its manufacturing sector elsewhere to make way for a new service economy

By City Monitor Staff

The size of a city’s service sector is often seen as a pretty good indicator of its development and influence (it’s the major factor the Globalisation and World Cities thinktank uses to determine its yearly ranking of world cities, for a start).

By this definition, Mexico City’s had a pretty good couple of decades. During Calos Salinas de Gortari’s stint as Mexico’s president between 1988 and1994, some of his biggest reforms aimed to shift the base of Mexico City’s economy from manufacturing to services. The president privatised banks and airlines, signed free trade agreements, and encouraged the construction of high-rise office buildings throughout the city.  By 2010, services made up 63.5 per cent of the metropolitan area’s GDP; manufacturing made up less than 1 per cent. Here’s the growth in the services sector since 2003:

Value of services (Mexican pesos) in real GDP. Source: CityMetric Intelligence.

While President de Gortari led the capital towards a service-based economy, factories were encouraged to ship out to other, cheaper cities like Reynosa, on the north-eastern border with Texas, and Xalapa near the south-eastern coast. This was largely to cut pollution and sprawl in Mexico City, but it actually worked out pretty well for Reynosa and Xalapa: their manufacturing sectors have been increasing steadily ever since.

Share (%) of manufacturing, mining and utilities in total GDP. Source: CityMetric Intelligence.

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One factor contributing to Mexico’s growth as a manufacturing power has been China’s rising labour costs. Firms have traditionally been attracted to China by its low wages and other costs. From 1995 to 2010, though, average monthly wages have climbed from RMB500 to RMB4,000: gradually, other economies started looking a lot more competitive.

By 2011, a Merrill Lynch report found last year, Chinese wages had surpassed those in Mexico. They look set to keep rising, too: as part of China’s 2011-2015 five year plan, the minimum wage is slated to increase by 13 per cent per year.

This is probably one reason why Mexican cities have begun to attract large amount of foreign investment: in 2013, a record $35bn from the US alone.

This has been especially apparent in the automobile sector. Seven out of the 10 largest car manufacturers now have plants in Mexican cities; since 2012, Chrysler and Audi both invested over $1bn in their Mexican operations. Renault-Nissan recently opened a $1bn plant in Aguascalientes, a small city in central Mexico whose economy has traditionally relied on agriculture. The city now accounts for around 8 per cent of the country’s direct foreign investment, despite containing only 1 per cent of its population.

Meanwhile, authorities in Reynosa have set up special manufacturing free trade zones to attract foreign investment, and the city’s industrial parks now play host to 200 firms including Nokia and Motorola. By 2050, HSBC predicts, Mexico will have the eighth largest economy in the world. President de Gortari’s masterplan might just have worked.

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