February 8, 2009 / 7:59 AM / 9 years ago

Developing countries turn to South-South trade

By Jonathan Lynn - Analysis

A stock broker looks at a terminal while trading at a stock brokerage firm in Mumbai, November 17, 2008. REUTERS/Arko Datta

GENEVA (Reuters) - Developing countries hoping to compensate for slumping demand in rich countries and falling commodity prices are looking at ways to bolster one of the most dynamic parts of their economies -- South-South trade.

In its latest economic forecast last month, the International Monetary Fund said developing countries would grow by 3.3 percent this year, while advanced economies would shrink by 2 percent, with the world economy as a whole stagnating.

The U.N. Conference on Trade and Development (UNCTAD) forecasts exports from developing countries, many of whose economic strategies are predicated on strong export growth, could fall by 9.2 percent in 2009. South-South trade is likely to be the only bright spot.

UNCTAD Secretary-General Supachai Panitchpakdi said the financial crisis had shaken the economic foundations of the North and was threatening to shatter the growth and development aspirations of the South.

“The timing, therefore, is right to explore how greater South-South cooperation can help developing countries to cope with the crisis,” Supachai, a former head of the World Trade Organization (WTO) and deputy Thai prime minister, told an UNCTAD meeting on South-South trade last week.

POWER SHIFT

The attempt by developing countries, especially big emerging markets such as China, India and Brazil, to rely more on each other is a further sign of a shift in global power away from the United States and Europe as the world tackles the economic crisis.

Brazil’s Foreign Minister Celso Amorim met Indian Commerce Minister Kamal Nath and South African Trade Minister Mandisi Mpahlwa on the sidelines of the World Economic Forum in Davos on January 31 to discuss how to boost their mutual trade.

Amorim told reporters they had agreed that South Africa would host a meeting in the near future to discuss a trade agreement between the Latin American trade bloc Mercosur, the South African Customs Union (SACU) and India.

“We also want to study mechanisms that will somehow permit our trade to continue to flow in a way that is not affected by what happens in the financial markets,” Amorim said, touching on a key concern of developing countries which have seen credit dry up because of the financial crisis.

Amorim said it was too soon to give details but gave the example of trade between Brazil and Argentina which is settled in local currency.

Such cooperation will not always be easy as the economic slowdown tempts developing and rich countries to create barriers to each other’s exports.

India raised duties on steel last year, a move trade experts say was directed at imports from China, and has banned imports of toys from China for six months, which may prompt Beijing to launch a dispute through the WTO.

Developments in recent years are a platform to build on. Trade among developing countries has been increasing, as a share of developing countries’ total trade and as a share of global commerce.

WTO figures show that South-South trade accounted for 16.4 percent of the $14 trillion in total world exports in 2007, up from 11.5 percent of the total in 2000.

“South-South trade has been one of the most dynamic components of international trade generally for the last 10 years or so,” said Bonapas Onguglo, a senior economist at UNCTAD working on South-South trade.

“Our expectation is that it’s likely to continue (to grow) but it will slow down. The outlook is we are optimistic about the growth of South-South trade being a more dynamic component of international trade.”

One reason South-South trade is like to continue to expand is that, as emerging markets grow they will need food, energy and semi-finished products from other developing countries.

That could encourage emerging nations to invest in developing countries as China is doing in Africa.

“They need consumers with purchasing power to continue to buy their products, which they are producing to sell ultimately in the global market but also in the Southern market,” Onguglo said. “In the end commercial interest prevails.”

Options to strengthen South-South trade included increasing financing from regional development banks to compensate for loss of aid and regional stimulus packages focusing on improvements to infrastructure, Supachai suggested.

Developing countries could diversify their foreign exchange reserves by buying each other’s debt, or provide each other with liquidity through swap arrangements, as Asian currencies did after the 1997-98 Asian crisis in the Chiang Main initiative, he said.

Greater reliance on South-South trade does not mean developing countries will turn away from trade with industrialized countries or pursue economic self-sufficiency as many advocated in the 1970s and 1980s.

The increased links, including transport, built up in recent years, are an opportunity to cope with the crisis.

“South-South trade is one avenue. We’ve not used it fully -- now is the time,” Onguglo said.

Editing by Andrew Dobbie

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