MAY 4, 2010.
Drug War Stalks Texas City
For Years, McAllen Profited From Ties to Mexico, but Now Violence Is Comments (59)

By ANA CAMPOY

MCALLEN, Texas—For most of its history, McAllen was a dusty little farm town at the southern tip of Texas, long on cactus and short on jobs.

That started to change two decades ago, when factories began opening across the Rio Grande. McAllen morphed into a palm-fringed boomtown, sending workers across the border to Reynosa and luring shoppers and vacationers from Mexico's northern industrial center, Monterrey, a few hours away by car.

.Now, drug-gang violence, until recently confined to Ciudad Juárez and other cities far to the west, is startlingly close by. Last month, some 30 gunmen stormed two hotels in Monterrey and kidnapped six people, in a shock for the city. The 130-mile highway from Monterrey to the border has seen a number of incidents, including a recent shoot-out between armed men and the Mexican military.

The gunplay hasn't erupted in McAllen itself, but people here fear their hard-won economic gains, already dimmed by the recession, are under threat.

"So far, the violence has acted as a disruption," said Keith Patridge, whose job as president of the local development agency is to attract companies to the area. "If it were to get worse, it would have a big impact."

Spooked by the spreading violence, fewer companies are investing in the U.S.-Mexico manufacturing corridor than last year. The flow of Mexican consumers, on which McAllen relies for almost a third of its retail revenue, also has dwindled.

Mr. Patridge's agency has assigned an employee to track news of drug-cartel-related incidents and separate fact from rumor. Earlier this year, during a particularly violent period just across the border in Reynosa, some manufacturers there canceled night shifts and banned travel south of the border for McAllen-based employees.

Some trucking companies that move Mexican goods into the U.S. are hiring security convoys. Others are installing light detectors that alert them if truck containers are breached en route, either because merchandise is being stolen or drugs are being smuggled, said Daniel B. Hastings Jr., whose customs-brokerage business has offices in McAllen and other border crossing points.

"If the violence exceeds certain tipping points and people pull out of Mexico, I may have to look for another career," he said.

Most American cities along the border have been hurt by the mayhem in Mexico, but in different ways. McAllen may have the most to lose, economically, because it has made Mexico its reason for being, or at least being more than a down-on-its-luck agricultural center.

Back in 1990, when McAllen's unemployment rate was an eye-popping 22.7% and the town was best known for its vegetable farms, McAllen started encouraging multinational manufacturers to settle on both sides of the border. Today, factories in Reynosa make everything from car parts to kitchen sinks.

Not only do white-collar workers travel from McAllen to Reynosa to work at those plants, but the factories also create jobs in warehousing and other services on the U.S. side of the border. For every 10% increase in manufacturing activity in Reynosa, McAllen sees 5.9% growth in employment, according to the preliminary findings of a study by the Dallas Federal Reserve. McAllen was the only city in the nation to recover its prerecession employment level in the fourth quarter of last year, according to a recent report by the Brookings Institution.

The population of the McAllen metropolitan region has almost doubled since 1990, to more than 740,000. Despite the recession, the city has amassed a healthy budget surplus.

"People ask, 'What's the secret?' " said David Guerra, president of the McAllen branch of the International Bank of Commerce. "It's Mexico."

But the area's gains feel fragile. Hidalgo County, of which McAllen is a part, is one of the poorest in Texas, and about 25% of McAllen's families, many of them Hispanic, live in poverty. Unemployment, while no longer at staggering levels, is the highest of any Texas metropolitan area, at 11.6%. Drug violence could tip the balance.

Reports of shoot-outs and roadblocks along the highway between McAllen and Monterrey dissuaded many people from traveling over the Easter holiday. At a time when Mexicans usually flood McAllen's malls, northbound vehicle traffic from Reynosa's main bridge fell 31% from the same vacation period last year, according to the Mexican agency that operates federal roads and bridges.

Hotel occupancy rates were down to 70% from 73% last year—well below the 94% rate during the Easter holiday period in 2008, according to data from STR Global, a research firm that compiles hotel information.

McAllen Mayor Richard Cortez said he hoped the violence would subside, although he declined to say exactly what the city was doing to address it, citing security. He continues to encourage investors to put money into projects to attract Mexican shoppers.

But luring more investment to McAllen has become harder because of the upheaval in Mexico, said Steve Ahlenius, chief of the local Chamber of Commerce. "We've got our job cut out," he said.

Write to Ana Campoy at ana.campoy@dowjones.com



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