As the U.S. and the global economies have been transformed in the last three decades, the Texas economy has changed along with them. The primary changes for Texas have been greater economic diversification, growth of the technology and transportation sectors, and increased integration with both the national the international economies. As a result of these changes, Texas has been less subject to cycles of boom and bust than in the past. These changes have also affected politics in the state, as new economic actors have sought representation of their interests in the political system.

The diversification of the state's economy has been most evident in the dramatic expansion of the microelectronics industry. Three major players in this industry have called Texas home: Dell Computer Corporation, Texas Instruments, and EDS. This last company was built by H. Ross Perot into a powerhouse in the IT consulting industry. Mr. Perot sold much of his stake in EDS, but later founded another powerful competitor names Perot Systems. Others companies, including microchip makers Intel and AMD, established large chip fabrication operations in the state. By the end of the 1990s, most major computer software firms had a significant presence in Texas.

The computer and information technology industries grew rapidly in the second half of the 1990s, fueled in part by massive amounts of venture capital funding and speculative stock investing, but suffered a sharp downturn when the so-called "technology bubble" burst in beginning in 2000. This caused considerable retrenchment for the sector, with many startups declaring bankruptcy. Most large, established companies survived, but cut back or delayed investment in new projects intended for Texas. Many small firms, including many of the fabled "start-ups" of the mid 1990s, failed completely.

The technology bust, the major effects of which lasted through 2003, caused the loss of over 150,000 jobs in Austin, Dallas, and Houston - the three major technology centers in the state. The Austin area lost 6.7 percent of its private sector jobs; Dallas lost 6.4 percent, and Houston lost 3 percent. This represented billions of dollars of private industry wages annually. [3]

The other dramatic development for Texas is greater integration with the international economy. The data table in this chapter's feature Selling to the World reveals that international exports from Texas slightly more than doubled between 1991 and 2001, and continue to increase at a steady rate. This integration was initially evident in the increase in production and trade between the United States and Mexico. This started out in the 1970s and 1980s with the creation of the maquiladora, or assembly, industry on the Mexican side of the border. In the 1970s the Mexican government had decreed that goods could be imported duty free as long as the goods were re-exported after being processed. Machinery imported for such processing also enjoyed exemptions from import duties.

These new import-export arrangements spawned the development of "twin plants" up and down the border between the US and Mexico. The plants in the US would complete the capital-intensive part of a particular production process (typically using expensive machinery), while the Mexican plants would complete the labor-intensive part (involving less expensive machinery). Initially the Mexican plants performed mostly simple assembly of electronic goods, like television sets, or wiring harnesses for automobiles. Some clothing was also produced in the region.

Eventually, considerable new capital investment flowed to both sides of the border. The volume of commercial traffic over the border blossomed. This experience, and the growing integration of the border economy, helped propel the formation of a regional free trade area in which import tariffs would eventually be eliminated. The North American Free Trade Agreement (NAFTA), which included Canada, Mexico and the United States, was inaugurated on January 1,1994. This new market included at the time over 350 million people and approached $10 trillion in gross production. Recently the NAFTA population counts more than 400 million people, with gross production of over $11.7 trillion.

As a result of NAFTA, the volume of trade between Texas and Mexico skyrocketed, while the volume of goods "transshipped" between other states and Mexico through Texas saw similar increases. Texas's total exports to all countries rose by 36 percent between 1997 and 2000, surpassing the $100 billion mark in 2000 for the first time ever. In the same period, exports to Mexico rose 66 percent to almost $48 billion. Exports to Mexico represented 46 percent of all Texas exports in 2000, and continued to grow as a percentage of total exports - albeit much more slowly - in 2001 and 2002.

Although Texas trades with many countries in the world, the concentration of its trade with Mexico means that it is particularly vulnerable to any downturns in that country. Fortunately, the very same free trade agreement that has contributed so much to the vitality of Texas foreign trade also seems to be helping to stabilize the Mexican economy. But the migration of industries such as garments and electronics to areas like Southeast Asia, or even Central America, may make Mexico more vulnerable to economic cycles.

These trends toward greater diversification and global integration have had an important consequence: Texas at the turn of the 21st century was no longer quite so susceptible to crises induced by the collapse of oil prices.

Twice in the last two decades of the century, the state of Texas was struck by powerful economic contractions due to sudden and sustained drops in oil prices, first in 1985-86 and again in 1991-1992. These were especially difficult recessions because business and governments in the state had begun to invest heavily in commercial real estate development and related infrastructure. When oil revenues to both the state and private corporations in the petroleum sector declined sharply, there was a ripple effect throughout the entire economy.

A decade later in 2001, oil prices again fell precipitously. This time, however, the state did not suffer the severe economic recession of previous oil price declines. The boom and bust cycles of commodity dependence, whether related to cotton or oil, seemed to have finally disappeared from the Texas economy.

Changes in economic structure, policy actions, and political strategy work in tandem to continue driving change in the states political economy. The Emerging Technology Fund briefly discussed in section 2.1 provides an example of how these macro-level economic transformations can shape institutions and policy, and provide opportunities for political and business leaders to pursue their policy and political goals. The Emerging Technology Fund was spurred in part by the state's entry into high tech enterprise; in turn, these developments served to encourage the development of policies that advanced more high technology public-private partnerships. It also provided the governor's office with the opportunity to publicly promote such ventures, as well as to influence the distribution of those funds to important interests and regions of the state.

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³ "Austin, Dallas Felt Downturn Most," Austin American Statesman, August 24,2003.