Exporting Growth: The Crucial Link Between Expansion and Infrastructure Development

Mexico is facing a unique economic challenge as the strength of the Peso continues to rise, presenting both opportunities and obstacles for the country. According to a report from the Los Angeles Times, the Mexican Peso has surged by 18% against the dollar over the 12 months ending September 2023.

This surge in the Peso poses a particular dilemma for Mexico, as the country is the second-highest recipient of dollar remittances globally, following closely behind India. According to data from the World Bank, remittances to Mexico have doubled, reaching a record high of $58.5 billion, constituting a substantial 4.32% of Mexico’s GDP.

The consequence of a strengthening Peso is that Mexicans residing abroad may find it necessary to increase the volume of dollar remittances to maintain the same financial support to their families back home. The President of Mexico has even dubbed this phenomenon the “Mexican Miracle,” highlighting the positive impact on the country’s economy.

The driving force behind the strengthening of the Mexican Peso is the robust growth in the country’s manufacturing sector. This growth is attributed to onshoring, where American companies relocate their supply chains closer to home, and Asian manufacturers capitalize on Mexico’s proximity to the lucrative American market.

The currency dynamics in Mexico play a crucial role in this scenario. The Mexican Peso has been free-floating since 1994, and its exchange value responds directly to local economic conditions. The increased demand for the Peso is fueled by the growth in local manufacturing and job creation, as these factors require more funds for importing goods into Mexico.

However, the “Mexican miracle” comes with its challenges. The stronger Peso makes Mexican exports more expensive, putting them at a disadvantage against cheaper Asian exports. Additionally, the favorable exchange rate makes imports to Mexico cheaper, benefiting consumers but potentially hurting local industries.

The situation in Mexico offers valuable lessons for other emerging economies, including Nigeria. To become a successful exporting nation, Nigeria must focus on attracting export orders and earnings by positioning itself as a low-cost global supplier. This transformation requires substantial investment in infrastructure, increased productivity, and the creation of local jobs centered around exporting.

A viable model for achieving this goal can be found in the Chinese approach, where coastal areas were leased to foreigners to establish factories for manufacturing and exporting into China. Ethiopia has also adopted a similar model, constructing large industrial parks across the country with the necessary infrastructure for manufacturing and direct connections to ports for efficient export.

Incentives provided by these countries, such as customs duty exemptions for spare parts and extended income tax exemptions for significant exporters, further support the growth of local manufacturing and export-oriented industries.

The key takeaway for Nigeria is that infrastructure development is essential for fostering a thriving export-driven economy. While concerns about exchange rates are valid, addressing fundamental issues related to infrastructure and policy support for local job creation should take precedence. Without a functional infrastructure, Nigeria may struggle to compete with global counterparts in the race to become a low-cost global supplier.

In conclusion, the Mexican experience underscores the importance of a balanced approach to economic development, emphasizing not only currency dynamics but also the critical role of infrastructure in supporting local industries and export-oriented growth. Nigeria’s economic decisions should prioritize building a solid foundation for sustained development rather than fixating solely on exchange rates.