The Rising Role of South-South Integration

24 may 2018

Yaroslav Lissovolik - Programme Director of the Foundation for Development and Support of the Valdai Discussion Club, Chief Economist of the Eurasian Development Bank.

Resume: In the past several decades global trade experienced notable fluctuations, with the post-2007 period in particular exhibiting negative trends amid rising protectionist pressures.

In the past several decades global trade experienced notable fluctuations, with the post-2007 period in particular exhibiting negative trends amid rising protectionist pressures. The recent protectionist measures coming from the US appear to be particularly adverse for the developing countries and in seeking ways to neutralize the effects of such protectionism the developing world has achieved important progress. 

One venue that has already proven to be instrumental in boosting growth and modernization has been the rise in the South-South trade and the prioritization of South-South cooperation in trade and investment spheres. 

The rising prominence of South-South trade and economic integration is borne out in the figures covering trade dynamics since the 1980s – these show that up until the current decade the volume of exports from the developing world has risen nearly 5-fold, while the corresponding world growth figure amounted to a three-fold rise. More than half of total exports from the South were accounted for by South-South trade flows (T. Bernhardt 2011, UNCTAD 2016). By 2014 the value of South-South trade reached nearly USD 5.5 trn, which is close to the scale of North-North trade (UNCTAD 2016). The higher potential residing in South-South trade rests on a number of factors: 

  • higher growth performance and future growth potential

  • greater scope for trade liberalization, given that import tariffs remain elevated in the developing world

  • greater scope for production-sharing given the similarity of levels of development and competitiveness

  • strong complementarity in production and resource endowments between various segments of the developing world, including between the BRICs economies and low-income countries (as argued in IMF (2011) and T. Bernhardt (2016) - see T. Bernhardt, “South-South trade and South-North trade: which contributes more to development in Asia and South America? Insights from estimating income elasticities of import demand”, CEPAL review 118, 2016). 

The higher growth potential of the developing countries that may in turn feed the higher growth in trade is reflected in the forecasts of the international organizations. According to the WTO GDP growth in the developing world is set to accelerate from 4.3% in 2017 to 4.6% in 2019, while the corresponding figures for developed economies point to a deceleration in growth from 2.3% to 2.2%, leading to a widening of the projected growth differential in the 2017-2019 period from 2 percentage points to 2.4 percentage points. With respect exports, developing countries are expected to exceed developed countries’ growth trajectory by around 2 percentage points, with Asia being the main growth locomotive in terms of trade flows at over 5 per annum in 2017-2019. 

Most recently, South-South cooperation started to receive more of a boost from the BRICS economies as the growth in all BRICS economies entered into positive territory last year. In particular, despite occasional bilateral tensions, India and China staged a nearly 20% rise in trade turnover in 2017 to an all-time record of USD 84.4 bn. India’s exports to China grew by 40% last year, while China for its part significantly increased its outward investment into India’s economy. The trade turnover between Russia and China grew by 21% in 2017 and reached USD 84 bn, with this year’s growth of more than 20% in January-April 2018 putting mutual trade turnover on course to exceeding USD 100 bn in 2018. 

Along with the acceleration in South-South trade, regional integration is progressing further in the developing world against the backdrop of reversals in Europe and North America. In this respect the activism of the Eurasian Economic Union in forging alliances with South East Asian countries such as Vietnam, the agreement between Mercosur and SACU (the first on a scale of “integration of integrations”) as well as the creation of a platform such as BRICS+ (potentially the most extensive South-South integration platform) point to an important trend in economic integration that could serve to sustain world’s economic growth. UNCTAD’s analysis of India’s and ASEAN’s RTAs with other Asian developing economies reveals expanded opportunities for exports and economic growth. At the same time UNCTAD notes that for the South-South economic alliances to be effective they need to be accompanied by infrastructure development as well as the lifting of non-tariff barriers (UNCTAD 2008).

The growth observed in recent periods in South-South trade as well as continued South-South trade integration despite the challenges of global protectionism lay a firmer foundation for building the integration platforms across the developing world (see Valdai Club’s article: “The Integration platforms of the global South”, April 30, 2018). These may range from the standard FTAs to investment platforms between national and regional development banks as well as sovereign wealth funds. For Russia this is also an important trend to take into account in shaping its foreign economic strategy – the so-called strategic “turn to the East” needs to be part of a broader strategy of partnership with the entire developing world. The scope for forging such alliances in the global South is enormous as is the potential growth and trade impulses emanating from mutual openness and inclusive development. Inter pares amicitia.

Valdai International Discussion Club

} Page 1 of 5