Features

Inclusiveness and sustainability in global trade – the South-South dimension

29 March 2012
ITC News

The world is still reeling from the worst recession since the Great Depression and the path to sustainable economic growth continues to be elusive. The tentative recovery remains fragile, particularly in developed countries where high levels of indebtedness are damaging business confidence and holding back demand. Concerns about a possible double-dip recession are growing.

The origins of this precarious global position lie in an approach to economic policy that has taken hold over the past three decades and has given precedence to the financial sector. The process of finance-driven globalization has resulted in a growing separation between the real and financial economy with the latter increasingly dominant as money moves swiftly around the globe in search of speculative gains. In this unbalanced world, growth has become dependent on increasing injections of debt that have brought short bursts of prosperity but often ended abruptly and with destructive consequences. This pattern of boom and bust has fed into another rising trend, namely a growing level of inequality. Those at the bottom of the ladder have gained least and suffered most during these cycles. At the same time, systemic fragilities have increased as inequality and indebtedness feed dangerously off each other.

While the causes of the crisis lie in the advanced countries, the economic and social fall-out continues to be felt worldwide. Global trade contracted sharply soon after the crisis hit in 2009, but rebounded in 2010. However, the impact has varied across regions. In least developed countries, merchandise trade indices suffered a very strong reversal and exports in 2010 were still below 2008 levels. More generally, volatility in the price of commodities as well as exchange rates due to increased financial speculation has meant that trade activity is increasingly separated from economic fundamentals. Given the sharp impact of the crisis on the trade prospects of developing countries, increasing attention is turning to the much-touted ‘rise of the South’ as a new source of more inclusive and sustainable trade opportunities. 

 

The rise of the South

Since the start of the new millennium, the global economy has seen the emergence of strong growth poles in the global South and the intensification of South-South linkages through trade, capital, technology and labour flows. The rise of the South has resulted in a shift in the balance of the world economy. 

However, while there has undoubtedly been a shift in the world economic order, we must be careful not to conflate the success of China and India into a wider rise of the South. Output growth has held out better in developing than developed economies over the past decade, but this has been uneven, and high growth does not necessarily indicate productive capacity. For many least developed countries, economic growth in the 2000s was driven largely by rising commodity prices. This situation is therefore unlikely to be sustained and not indicative of gains in productive capacity.

The past decade has seen a major expansion in trade between countries of the South. The importance of southern markets has been steadily on the rise as they have become both destinations for exports and sources of imports. South-South trade grew on average by 12% per year from 1996 to 2009, which is 50% faster than North-South trade. In 2010, the share of developing and transition economies in the world’s total foreign direct investment reached that of developed economies for the first time.

However, as with economic growth, the expansion in South-South trade has been uneven. Intraregional trade in Latin America and in Africa lags behind intra-Asian trade. Asia alone accounts for more than 66% of all South-South merchandise trade, and it is Asian firms that have taken the lead in interregional trade along a South-South axis. There has also been a large increase in trade across regions. For example, between 2002 and 2005, Brazilian trade with Africa rose by 153% in terms of exports and 149% in terms of imports. Trade with Asia grew by 111%, with exports and imports almost equal.

Notwithstanding these advances, exporters in the South still tend to focus on traditional markets in industrialized countries, but there are benefits from trading with other countries in the South. The markets in the North are highly competitive and difficult to enter. They require large volumes, exacting quality control, packaging and corporate social responsibility standards. South-South trade can offer immediate opportunities for exporting at a manageable scale before tackling the markets of the North. 

The main constraints to South-South trade are trade barriers that are considerably higher than in developed countries, as well as weaknesses in physical and institutional infrastructure. In addition, there is a perception that developing countries mainly produce similar goods – raw materials and commodities – and therefore do not have much to offer. This perception, combined with the notion that low GDP levels mean there is little market potential, tends to limit trade activity. However, the rapid growth of South-South trade in East Asia has demonstrated not only that these constraints can be overcome by well-designed policies, but also that such trade can bring significant benefits to the region.

While South-South trade provides major opportunities for developing countries, it should not be seen as a panacea. Many of the caveats that apply to North-South trade also apply here. For trade to promote development, it needs to foster productive capacity and move away from specialization in commodities.  In both cases, proactive policies are needed to ensure that the benefits of trade are widely shared and support a country's structural transformation.  However, recent UNCTAD studies have shown that intra-regional South-South trade can often be more conducive to diversification, structural change and industrial upgrading than overall trade. 

 

The way forward

There is potential for considerable expansion of trade among the countries of the South. While this expansion is market-driven and can only be sustained through the private sector, governments have a vital role to play in creating the conditions for trade growth. In this area, the work of ITC to support trade facilitation is more important now than ever before. Particularly significant is the South-South Trade Promotion Programme that has raised awareness of trade potential between developing countries in various sectors. Through its technical assistance on legal, finance, packaging and export quality management issues, ITC continues to strengthen trade promotion infrastructure. Similarly, through its supply and demand surveys on countries and products, ITC fills trade information gaps, encourages information exchange and helps to harmonize inspection and certification procedures.

The United Nations Conference on Trade and Development (UNCTAD) has also long supported South-South cooperation, for example with the establishment of the Global System of Trade Preferences, which was launched at UNCTAD XI in Sao Paulo in 2004 to provide a framework for mutual trade and economic cooperation among developing countries through the exchange of market concessions. UNCTAD further supports exchange of experiences and is proposing to establish a network of policymakers across the South.

These interventions are vital to strengthening the links across developing countries that can stimulate political as well as economic cohesion. However, more radical global reforms are needed if we are to prevent a recurrence of the crisis and to ensure inclusiveness and sustainability. As the dust begins to settle on the recent financial turmoil, it is increasingly apparent that a return to business-as-usual is a road to disaster.

What is needed now is a greater collective effort to address the underlying causes of the crisis. The world is more integrated and more interdependent than ever before, thus a more encompassing global economic governance regime is required in order to ensure its smooth functioning.

The current market structure was formed under the efficient market hypothesis, which is now widely known to be flawed. It lacks the appropriate institutions and mechanisms to regulate international financial flows and manage global macroeconomic imbalances. The current crisis-laden world requires global coordination that goes beyond the recent efforts by the G20.

 

UNCTAD XIII

In April 2012, the thirteenth session of the UN Conference on Trade and Development will take place in Doha. The theme of the conference is Development-centred globalization: Towards inclusive and sustainable growth and development. At this week-long event, representatives from member States as well as the private sector and non-governmental organizations will come together to discuss and formulate global trade policy to enhance economic and social development. South-South trade and cooperation will be a key component and we expect to make considerable progress in moving towards a new global agenda.

The recent economic chaos, while a source of great instability, has created an opportunity for major change. UNCTAD XIII will provide a forum to design major reforms to the global economic framework and to devise strategies for inclusive and sustainable global trade and development. Crucially, we need to shift our focus so that inclusive development is at the forefront of the policy agenda with responses integrated across sectors, communities and countries. With the right principles, partnerships and policies, we have an opportunity to rebalance the world economy, to turn recent growth spurts into rising living standards for all, and to secure a healthy environment for future generations.