The Rise of South-South Relations

February 25, 2014

AEInvestor

The economic awakening of the Southern Hemisphere has altered the economic and trade patterns that govern the global economy.

Economic growth has focused on developing economies, driven by a commodities boom, low labor costs and the development of middle-class populations.[1] Meanwhile, advanced economies are experiencing a slow recovery process. In 2012, the gross domestic product of developing countries surpassed for the first time that of developed countries. Moreover, developing countries, especially in Africa, are expected to grow three times faster than developed countries in the coming decades.

From trade standpoint, 2012 confirmed the good health of southern countries. Developing economies showed strong trade growth, close to 5%, aligned with the average growth experienced by world trade in the last 20 years. At the same time, global trade and trade from developed economies grew 2% and 1%, respectively. This reflects a new trend of trade expansion in developed and developing economies diverging. This tendency appeared to consolidate in 2013: World Trade Organization projections forecast a mild recovery of world trade with growth close to 3.3%, stagnation of trade in developed economies around 1%, and a solid growth of emerging economies at around 5%.

In this context, South-South relationships are thriving. Trade flows within the Southern Hemisphere have become key drivers of international trade, going from just 6% of the total international trade turnover in the 80s to 15% now.[2] Asia is playing an important role as a consequence of the huge success of intraregional flows that have expanded in three decades from accounting for 20% of South-South trade to 40% in 2012. Also note the growing prominence of trade relationships of the BRICs with Africa, from US$22.9 billion in imports and exports in 2001 to US$267.9 billion in 2011. The strong presence of China in Africa is also important, reaching 62% of the whole trade between BRICs and Africa. The Economic Commission for Latin America and the Caribbean (ECLAC) forecasts that in 2018 South-South trade will surpass North-North trade, and the WTO predicts that in 2020 South-South trade will represent more than one-third of total world trade.

South-South investment flows have shown similar behavior.[3] According to the UNCTAD, between 1980 and 2010 southern countries increased their participation in the world’s FDI to 30%. Going from insignificant figures of inward and outward flows of FDI from the South in the 80s to nearly US$400 billion in outward flows and US$700 billion in inward flows in 2010. In this same line, the World Investment Report, published recently by the UNCTAD, confirms the shift in economic power toward the South, noting that in 2012, for the first time, developing countries received more FDI (more than US$700 billion) than developed countries (around US$561 billion), which now attract just 42% of the global flows.

The role played by regional banks and in fostering South-South cooperation has modified the traditional architecture of the programs intended to aid development. This has helped to improve the social conditions of the countries of the south, but forced developed countries to pay more attention to the needs of developing economies.

The predictions of international organizations invite to be optimistic with regards to potential South-South relationships. But for South-South relationships to continue to expand, southern countries will have to face major challenges, such as increasing the added value of their exports, redirection of FDI flows toward technology-intensive sectors, and elimination of tariff barriers.

Author Biography

Tomás Guerrero is Researcher at ESADEgeo-Center for Global Economy and Geopolitics of ESADE Business School and SovereigNET Research Affiliate at Tufts University’s Fletcher School. Mr. Gerrero specializes in frontier markets, sovereign wealth funds and entrepreneurship. http://www.esadegeo.com/

[1]The UN forecasts that for 2030 3.000 millions of people will have been incorporated to the middle class. The vast majority will come from developing economies.

[2]According to the BBVA Research, for this same period trade flows North-North have decreased from a 61% to a 40%.

[3]According to Ocampo (2010) between 1996 and 2009 FDI’s flows increased a 20% per year.

Tags:
Posted in Africa, Wealth Management