Global Policy Forum

New Course for the World Economy: South-South Trade

Trade between developing nations is booming, which potentially marks the beginning of a new era of "rapid growth." The developed world during the 1950s and 1960s experienced a similar growth trajectory. The trade flows, termed South-South trade, has grown dramatically over the past two decades. Nearly half of all the goods and services produced in developing countries are exported to other developing countries. Stronger trade ties among developing countries may yield positive outcomes, but fears are growing that some emerging powers are exploiting these relationships merely to extract raw materials.

By Frank Brandmaier

Monsters and Critics
February 28, 2011

Digging through her wealth of data, Bonnie Galat brings to light the colourful universe of world trade: auto parts from Thailand for customers in Haiti, fertilizer from the West Bank to Malawi, cement from Turkey for buildings in Sierra Leone.

These are only the most exotic examples, says the head of the global trade finance programme of the International Finance Corporation (IFC), the investment arm of the World Bank.

A whopping 42 per cent of all trade guarantees provided by the IFC's five-year old programme have so far been for projects between developing countries, Galat and her team counted. 'That's a large chunk of our programme.'

It's a sign of a gigantic trend. Rising economic powers like China, India and Brasil, but also smaller players like Mali or Vietnam, increasingly rely on each other in terms of trade and investment, and their ties are fast-expanding.

The shift away from decades-old global trade patterns is hard to miss, as old Western economic powerhouses no longer absorb the vast majority of exports from emerging nations.

The share of developing counties' goods and services destined to other developing nations - known as 'South-South' trade - increased from 29 per cent in 1990 to almost half in 2008, according to the World Trade Organisation (WTO).

Just last December, China and India pledged to double their annual bilateral trade to 100 billion dollars within five short years. On a single day, both economic behemoths signed more than 40 deals in sectors from power to telecommunications, worth 16 billion dollars.

A similar story is found between India and Indonesia, a sprawling archipelago of 17,000 islands and home to 230 million people. By 2015 they, too, want to double their trade to 25 billion dollars a year.

The prospect of new and blossoming markets between developing countries can sometimes get analysts quite excited.

'As emerging nations increasingly trade with each other, we could be on the cusp of another economic 'golden age, an emerging market version of the extended period of rapid growth seen in the developed world in the 1950s and 1960s,' Stephen King, chief economist of the bank HSBC, wrote in a recent note.

One caveat: the still 'considerable tariffs' between them, said King. Once removed, 'we could witness an explosion of world trade on a truly momentous scale.'

South Asia and its giant powerhouse India serves as a good example. Almost all transactions the IFC programme in the region guarantees are between developing nations: machinery for Kenya and Nigeria, electronics to Vietnam and Uganda, iron and steel to Bangladesh.

'India makes everything,' says Bonnie Galat. 'The South-South story in Asia is big, and it is driven by India.' Trade within Latin America is also particularly strong, she says.

It's a similar picture with international money flows. The World Bank estimates that South-South foreign direct investment (FDI) now accounts for one third of the total 780 billion dollars reaching developing nations. 'And it is still growing,' says Ngozi Okonjo- Iweala, Managing Director of the World Bank Group.

Investments from South to South, the Wall Street Journal writes, are 'becoming an increasingly important growth strategy for dozens of developing economies around the world.'

No one doubts that the global economy is undergoing rapid and far- reaching changes. After the economic and financial crisis, emerging nations in Asia and Latin America, which survived the turmoil with far less scars than the rich world, have helped to jump-start the world economy after its near-death experience.

'If the same trend continues as for the period 2000 to 2009, then after 10 years or so, developing countries would account for more than one-half of world trade,' says Harsha V Singh, the WTO's deputy director-general.

China is once again the leader of the pack. According to the World Bank, more than 25 per cent of the country's total trade now goes South-South. Projections show that it will grow to half by 2020, and to nearly two thirds just seven years later.

China and other fast-rising economic giants have long set eyes on Africa, in part to secure commodity supplies. The continent's total merchandise trade with developing countries exploded eightfold from 34 billion dollars in 1995 to 283 billion only 12 years later, while trade with rich nations increased only fourfold over the same period.

But despite the economic development that Africa's more rapid integration into the world economy may bring, more than a few groups are sounding the alarm.

Last year, the United Nations Conference on Trade and Development (UNCTAD) urged African governments to ensure that growing ties with rising powers like China and India result in a diversification of their own economies, 'rather than simply in the sale of African commodities and raw materials.'



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