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OSEC Congressional Testimony

Testimony of Labor Secretary Robert B. Reich before the Committee on Banking and Financial Services U.S. House of Representatives [2/9/95]

Good afternoon. Mr. Chairman and members of the Committee. I am pleased to appear before you today to discuss President Clinton's program to restore financial stability to Mexico;

a program developed with strong, bipartisan support from congressional leaders.

Mr. Chairman, since just before Christmas, our neighbors to the South have been sailing through rough waters. Mexico faced a short-term liquidity crisis, which if not addressed quickly and decisively, could have had dire consequences for the Mexican economy and the Mexican people. In our increasingly integrated world economy, the United States would not have been immune to those consequences.

The economic crisis in Mexico, and the hardships faced by the Mexican people, are tightly connected to the economic prospects of American workers and companies. Workers both in the United States and Mexico will be better off because of the President's timely action.

  • Mexico is the third largest market for U.S. products, after Canada and Japan. Mexicans purchased about $47 billion of our goods in the first eleven months of 1994, about 10 percent of total U.S. exports. The jobs of several hundreds of thousands U.S. workers depend on exports to Mexico.
  • Exports to Mexico are critical to the economies of many of our states and to the employment of American workers. California sells $5 billion worth of goods to Mexico annually; Michigan sells $6 billion; and Texas sells $13 billion.
  • Exports to Mexico account for about one-fifth of total exports of Michigan, Arizona and New Mexico, and for about one-third of those of Texas.

Beyond the fact that many hundreds of thousands of U.S. jobs depend on our exports to Mexico is the issue of the quality of export-related jobs. Export jobs are good jobs, paying wages higher than average.

An economic crisis in Mexico, if left unaddressed, could also unleash instability and social problems along our long border with that country. A prolonged economic crisis in Mexico could boost illegal migration to the United States, with the risk of disruptive impacts on labor markets -- especially in the border states.

The President recognized that it is in our national interest to assist Mexico to overcome its liquidity crisis so that the Mexican economy can again begin to grow, and so that Mexican citizens can find productive employment within their borders and purchase U.S. goods. By helping Mexico at this difficult time, we also help ourselves.

From the outset of the Mexican financial crisis, President Clinton has been following developments very closely. As it appeared that the legislation to help Mexico through the current liquidity crisis would not gain Congressional approval quickly enough, the President acted decisively, spearheading a multilateral program to restore financial stability to Mexico.

The new multilateral program provides about $50 billion in financial assistance to Mexico. The majority of this assistance comes from sources other than the United States. We are confident that this level of assistance will permit Mexico to overcome the current liquidity crisis and begin the process of returning growth to the Mexican economy. And Mexico will be able to resume the challenging task of reshaping its economy to face the demands of the coming century.

During the 1980s, real wages in Mexico fell sharply, as inflation reached triple digits. To arrest inflation, labor, business and government entered into a compact to lower prices and wages. Having brought inflation under control, real wages began to increase again in the late 1980s. In 1993 and again in 1994, Mexico adjusted minimum wages to take into account productivity growth and expected inflation, and granted income tax credits to workers at the lower end of the earnings scale to increase their purchasing power. The average manufacturing real wage increased by 19% between 1988 and 1993. Unfortunately, the recent devaluation of the peso, and the expected inflation that will ensue, will very likely undercut the impact of these policies. It will probably take some time for real wages to catch up to 1994 levels. This is clearly not good news. But neither does it undercut the basic case for NAFTA, which was premised on mutual benefits from links between different kinds of economies. We have never counted on quickly eliminating the wage differential between our two economies. That gap will narrow only slowly. In the perspective of that long-term process, the current crisis is properly seen as a relatively minor setback, if we act effectively to help restore financial stability. Financial stability is, after all, a condition of real wage growth. I also anticipate that Mexico will continue to link real wage growth to productivity increases, as this is one way to increase wages and living standards without fueling inflation.

Unlike the situation when I came before the Congress in 1993 to urge approval of the North American Free Trade Agreement (NAFTA), we now have a mechanism in place that allows us to discuss labor issues with Mexico. I am referring, of course, to the North American Agreement on Labor Cooperation, the labor side agreement to NAFTA. Very shortly we hope to take the final step towards implementing the Agreement, the establishment of the trinational Secretariat in Dallas.

Under the North American Agreement on Labor Cooperation -- which has been in effect for a little over a year -- we have maintained a very constructive dialogue with Mexico and Canada on labor issues of common concern. I look forward to meeting in the spring with my counterparts, newly-appointed Mexican Secretary of Labor and Social Welfare Santiago Oñate and Canadian Minister of Human Resources Development Lloyd Axworthy, to continue our discussions. I believe that under the very successful program of trinational cooperative activities that we have been undertaking under the North American Agreement on Labor Cooperation, we could work together with Mexico and Canada to examine trends in wage growth, income distribution, the impact of the industrial relations system on wages and incomes, productivity measurement, and related issues.

Industrial relations issues have been one focus of this interchange. Last year, we held a series of trinational, tripartite workshops on labor law issues, followed by a major conference. We have agreed to step up the dialogue on the specific areas of freedom of association and the right to organize, and these issues will figure prominently on this year's agenda of cooperative activities. An industrial relations system that works, where workers can express their views through the collective bargaining system, is a strong contributor to economic, political, and social stability.

In an economic relationship as important as ours with Mexico, an open, ongoing dialogue is indispensable. I am committed to continuing and deepening this dialogue, through the mechanisms that the NAFTA labor side agreement put in place.

Thank you. I would be happy to answer any questions from the Committee.

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