DRUG WAR STALKS TEXAS CITY

For Years, McAllen Profited From Ties to Mexico, but Now Violence Is
Reversing Gains

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. Texas City Turns to Mexico

Now, drug-gang violence, until recently confined to Ciudad Juarez 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.