The Light at the End of the Tunnel: The South-South Locomotive

Dr. Can Erbil*


South-South Trade In the aftermath of the global financial crisis, trade between developing countries (South-South trade [1]) has become more vital and more vibrant than ever.

Just as developing countries are becoming increasingly important markets for high-income exporters, so too are other developing countries becoming more important destinations for the exports of developing countries.*2+‛ ‚Between 1990 and 2008 world trade expanded almost four-fold, but South-South trade multiplied more than ten times.*3+‛ ‚Since 1990, South-South trade has risen from 7 percent of total world trade to 18 percent [4], while North-North trade has fallen from 65 percent to 50 percent *5+‛.
According to ITC’s latest figures, almost 45% of world trade is conducted by developing countries with nearly half of this trade categorized as South–South trade [6].

Switch over

In addition to these increases in volume and share of trade, there have also been significant changes in the composition and destination of exports from the South (developing countries). Previously, South was mainly engaged in trade with North, selling them manufactured goods and commodities. More recently, especially after the crisis, South surprised the trade pessimists by not only being able to produce competitive, higher value-added products; but also increasing its own consumption of such pro- ducts. The developing world can no longer simply be labeled as ‚poor‛ *7+.
Scholars and practitioners believe that this new dynamic can go beyond helping the South. Develo- ping economies now have the potential to ‚switch over‛ to become locomotives in the global economy. Similar arguments create new terminology like ‚reverse de-coupling‛ and ‚re-coupling‛ describing the increasing South-South synergy.

Beyond Gains from Trade

When we take a closer look at the accelerating momentum of South-South trade, we find out that it offers much more than the standard efficiency and specialization gains of trade:

• It relies less on developed country markets, hence it is subject to less volatility coming from the developed country demand [8].
• Unlike the North-South trade, there is no donor-recipient relation between the trading partners and trade is not driven or shaped by international official development assistance  (ODA) commitments.
• It is market-driven, transmitted by the international supply chains of the South.
• Higher existing trade barriers [9] between developing countries point to more potential welfare gains from lowering those barriers.
• Similarly, there is also more potential and a higher rate of return to proactive trade facilitation and aid for trade [10]:

 Investments in trade-related infrastructure
 Investments in trade information and trade promotion facilities
 Institutional capacity building, trade support institutions
 Research, awareness, technical assis- tance, information platforms, clusters, business networks, trade and business facilitation
 Lowering technical barriers to trade
 Learning process for exports and international procurement
 Expanding trade in services

• South-South trade can better utilize the demand at the ‚bottom of the pyramid‛.
• It has more potential to cut distance related trade costs.
• South-South trade can have a greater impact on poverty reduction.
• It builds further backward-forward linkages between industries providing an opportunity of sustainable industrialization for the South.
• It provides the opportunity to reduce the dependence on commodity exports for many developing countries.
• It promotes more trade in services among developing countries, which has positive spillover effects on merchandise trade, skill and capability gaps and beyond.
• More cooperation among developing countries results in significant active participation in multilateral trade talks.
• Expanded South-South trade can help reduce policy barriers among developing countries and have a stabilizing affect in high- tension regions.
• Promoting South-South trade will also help reduce ‚global imbalances–North reducing their net imports from South after the crisis and South discovering itself as a new source of demand.

South-South Trade Development Strategy

To take full advantage of these existing and potential gains, an effective, pro-poor South-South trade development strategy is critical.

In many aspects, this strategy is similar to a North-South trade expansion strategy. It emphasizes less barriers to trade, taking more advantage of the already existing openness by utilizing trade facilitation and aid for trade tools, and more competition and trade in services.

However, there are also more South-specific elements to the South-South trade development strategy:

• The bottom-up, demand driven South- South trade needs to be aligned with macro, top-down, national and cross-border initiatives.
• Multi-stake ownership, public-private partnerships, interactions of the private sector, governments and international organizations are particularly important for the South.
• Cross-border regional integration via preferential trade agreements (PTAs [11]), bilateral, sub-regional and regional approaches will help South to take advantage of econo- mies of scale and identify comparative advantages resulting from low factor costs and trade linkages.
• Promoting export diversification is particularly important for the South. It dampens the affects of external shocks and decreases volatility and vulnerability.
• South needs to prioritize liberalizing nontariff barriers, which are the biggest obstacle in expanding trade.
• Finding the cohesion between UNCTAD’s Global System of Trade Preferences among Developing Countries (GSTP) and the Doha Development Agenda (DDA) and concluding the Doha process would generate additional benefits for the South and promote the South-South trade expansion.
• Simplifying ‚rules of origin‛ and making it more transparent would also benefit South in general and the least developed countries (LDC) in particular.
• Paying special attention to LDC within the South through pro-development policies like unilateral tariff preference schemes, techni- cal assistance and technology transfer, would strengthen the South-South cooperation and its potential.

Of course, this strategy should not undermine the importance of the existing North-South trade relationship and Dynamics [12]. Caution and End Goal

While promoting South-South trade and cooperation, it is imperative that policymakers, businessmen, practitioners and governments should keep in mind that there is not a country called ‚South‛ and that a ‚one size fits all‛ solution will not work. All of the recommendations and policies listed above need to be evaluated at the country level and adjusted to their domestic needs and goals. Flexible steps and country-specific solutions fitted to each nation’s institutions will assure ownership. Each country needs to own its version of the South-South trade expansion strategy [13].

There is now no doubt that new export and domestic demand-led growth will pay greater attention to South-South trade and that it is here to stay.

While discussing how to harness the potential of expanded South-South trade and cooperation, one should not forget that the end goal is poverty reduction and development, and not more trade.

Lastly, in light of the current events in Tunisia and Egypt, it is necessary to ask whether this South-South locomotive has been an engine or a drag to recent social movements and increasing demand for freedom and democracy in the South. PR

Notes:
* Can Erbil is Assistant Professor at the Department of Economics and International Business School and Assistant Director of Center for German and European Studies at Brandeis University, MA, USA. He is also the Director of the Economic Modeling School of EcoMod, Brussels, Belgium.

1) There are also many differences within South itself, with major countries like China, India and Brazil driving these trends. Aggregating all of these countries under the title of
‚South‛ may be a simplification, but the author believes it is also useful to give a snapshot of the greater picture and a continuum of the literature which often refers to developing and developed countries as two well-defined separate groups. An extended version of this note investigates South in more detail, dividing it up into sub-groups like ‚BRIC‛, ‚MIST‛, transitioning South, etc…
2) Development in Trade 2010, The World Bank
3) OECD
4) Part of this growth comes from intermediate goods as a result of increased outsourcing and off-shoring activities initiated in the North
5) IMF DOTS
6) International Trade Forum, Shifting Markets, Issue 2, 2010
7) The expansion of the middle class in the South has contributed to this process.
8) But more subject to developing country de- mand volatility.
9) Especially non-tariff barriers
10) This points to endogenous trade barriers: more trade causes lower trade costs. Many of the barriers South is facing are indeed not traditional policy barriers. Moreover, based on Anderson and Yotov (2010) the faster-growing sectors gain ‚reduced sellers’ incidence‛ even if trade costs are constant,
which points to additional gains.
11) PTAs, which can enhance South-South trade, can slow down regional integration if they act as substitutes to regional trade agreements. A careful study is needed to fully assess the dynamic and static effects of a PTA.
12) There are additional benefits of North-South trade, such as technology transfer.
13) The quality of institutions in each country becomes crucial to implement this step successfully.

 

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