The Mexican comeback: how middle-income economies can compete with China.

• Author: Farrell, Diana
• Position: Economic conditions in China

China has set the world's economies oil edge. The country's entry into the World Trade Organization in 2001, its increasing dominance in a broad range of manufacturing export sectors ranging from textiles to electronics, and its rising prominence in such lucrative export markets as the United States, have other countries scrambling to respond.

No one is more concerned than middle-income countries such as Mexico, Brazil, Poland, Portugal, and South Korea. (1) Rising standards of living there have significantly weakened long-held positions as low-wage producers and exporters. The problem has been particularly acute in Mexico. Since 2000, more than 270,000 Mexicans have lost manufacturing jobs, and hundreds of factories have closed their doors following the post-NAFTA boom in the 1990s, many leaving for lower-cost production locations in Asia--like China.

But Mexican factories are humming once again. The World Bank reports that maquiladora factories added more than 81,000 jobs in the first eight months of 2004, a 7.8 percent gain alter three straight years of losses. (2) GDP growth was 4.4 percent in the third quarter, the best quarterly performance since the height of the technology boom in 2000. (3) Toyota, DaimlerChrysler, Lexmark International, Deere & Co., Electrolux, and Flextronics am all expanding existing facilities or building new plants to take advantage of Mexico's still relatively low-cost labor and proximity to the United States. (4)

Certainly much of this resurgence in manufacturing is tied to the recovery of the U.S. economy. But something else is going on: Mexico is beginning to adapt to the pressures of globalization.

CAPITALIZING ON COMPARATIVE ADVANTAGE

Middle-income countries such as Mexico are learning that they must find their position of true comparative advantage in the global economy. Rather than trying to win back low-wage jobs lost to China, these nations must create jobs in higher-value-added activities to continue moving up the development path.

The former Eastern Bloc workforces have highly educated, moderately paid scientists and engineers that offer a natural off-shoring resource for Western European companies. Poland was a particularly bright spot in the 1990s for foreign direct investment, but has lost significant ground to lower-cost labor in the Czech Republic and Slowtkia in recent years. Poland's natural advantage its relatively high number of university graduates and academic centers--should position it...