The Implosion of Detroit

The city of Detroit was founded in 1701. During the 20th century it developed with the expansion of the automobile industry and also suffered as a result of the industry’s subsequent decline, which has taken place over 40 years. In 1950 Detroit’s population reached 1.8 million people; in the last decade this has reduced to less than 700,000. Since 2000, Detroit has lost a quarter of its inhabitants, a clear sign of the rapid decline of the industrial sector.

On July 19, the city declared bankruptcy, as it was unable to pay its huge debts, which have reached $18 billion. This is the largest bankruptcy of a large city in the United States, followed by Jefferson County, Ala., which declared bankruptcy in 2011 with debts of $4.2 billion and a population of 659,000.

The legal confrontation with bondholders, pensioners and other creditors is open. There is complete uncertainty among the public; no one knows if there will be municipal services or if they should change their residence. The city only has 30 cents for each dollar of debt.

The largest part of the debt – almost half – is unfunded obligations for retirement plans and health costs for the retired. It has been proposed to reduce 90 percent of these costs and accept the political and social problems that would entail.

There are legal differences between bankruptcy in a company — for example, General Motors, the largest company in the area — and a city, but in the end each have to pay their debts in some way. One of the assumptions in Detroit is that the government will intervene and help, just as they did in 2009 when General Motors received a bailout.

However, there is no evidence that this will happen for the city of Detroit. No one wants to support what is widely believed to be decades of poor fiscal administration by the municipal government. It is funny (is it?) that in the case of large banks, the criteria of systematic risk was applied and the Treasury and the Federal Reserve intervened to rescue them. But in a city, the reason of systematic risk does not exist. Decision makers, believing that the fall of Detroit will not affect other cities, are exempted from the moral weight associated with the issue of how to deal with Detroit. As if this weren’t exactly the same case with the banks.

There are even reports that creditors are looking at the important collection at the Art Institute of Detroit, which the city owns. This event is not trivial. This ownership scheme is not common in other large museums, and represents a good example of what is public and the necessity to preserve it as it is. This museum is considered to be one of the top 10 encyclopedic museums in the United States.

The state’s attorney general said, “If you could sell off Detroit’s hospitals and its universities, would you do that, too? If you do things like this, you’re basically spelling the end of the city as an ongoing entity.” But as things are going these days, this is not an impossible scenario.

In the ‘70s, the automobile industry began to fall in terms of productivity and had high labor costs due to competition from Japanese companies like Honda, Nissan and Toyota and German companies like BMW. The gap widened until 2008; today, in addition to the fall of demand due to the financial crisis, consolidation is difficult.

In images of the city, you can see large abandoned and destroyed areas — an example of how a city can go from boom town to ghost town.

The boom was not only industrial. It was in Detroit where one company pushed for racial integration through music. Motown, created by Barry Gordy Jr. in 1959, continues to be a cultural reference. Part of its history, as much of the implosion in Detroit as that of Motown, can be seen in the movie “Searching for Sugar Man,” which follows the life of the musician Sixto Rodriquez.

The automobile industry continues to be an integral part of the economy in Detroit. Its weakening came as a result of high costs and production in countries such as Mexico. There the major industrial exports generate intra-firm trade with GM, Ford and Chrysler.

But industry in the United States, including the automobile industry, is in the process of reconstructing itself, which includes returning to local production. Here is where Detroit and its crisis have a place. This could modify conditions in Mexico significantly.

Detroit’s case proves that the urban process is closely associated with the productive structure and its fast changes in a global era of free trade. It deals with the special dimension of economic growth and how it affects various parts of Mexico.

The distance between Detroit and Mexico City is 3,745 kilometers; a little less to Silao; 3,033 to Chihuahua; 2,499 to Saltillo and 2,914 to Hermosillo. But the economic and financial distance is much less. The changes in the organization of the automobile industry are strategies for the United States. They can happen fast and cause changes in productivity, finances, demographics and territory — all subjects very relevant to Mexico.