Going South: What’s in it for development?

This post comes to us from Annalisa Prizzon of the OECD Development Centre

The rapid growth of emerging economies has led to a shift in economic power from West to East and South. According to Perspectives on Global Development, a new annual thematic publication by the OECD Development Centre, developing and emerging countries now account for nearly half of world GDP in purchasing power parity (PPP) terms. This is expected to rise to nearly 60 percent of global GDP by 2030.

The growing dynamism of economic activity between developing and emerging countries is one of the factors underpinning this new economic and power landscape for the global economy.

Not so long ago, few people would have expected China to become the leading trade partner of Brazil, India and South Africa. In 2009 that became a reality. Likewise, the Indian multinational Tata is now the second most active investor in sub-Saharan Africa.

But what is the development potential arising from these South-South flows?  South-South trade – which represented 19% of global trade in 2008, compared to around 8% in 1990 –  could be one of the main engines of growth over the coming decade, especially if the right policies are pursued.

Trade between southern partners can provide opportunities for learning-by-doing in less competitive market environments. It can also give access to cheaper intermediate inputs and facilitate integration into value chains supplying southern markets, which are often much less standards-intensive than comparable northern markets.

OECD Development Centre simulations suggest that there is a large potential for welfare improvements through  the reduction of trade barriers and trade costs on South-South trade. Were developing countries to reduce their tariffs on South-South trade to the levels applied on trade between northern countries, they would secure  static welfare gains of  $59 billion (gains that do not take into account cumulative benefits over time).

This is worth almost twice as much as a similar reduction in tariffs on their trade with the North. The dynamic gains, in terms of greater competition and technology acquisition are likely to be much larger.

Moreover, these results are not contingent on the outcome of ongoing multilateral negotiations – they are measures which developing countries themselves can implement. Some are already acting to realise these gains. In December 2009, 22 developing countries (including Egypt, Morocco and Nigeria) participating in the São Paulo round agreed to cuts of at least 20% on tariffs that apply to some 70% of the goods exported within this group of nations. A timeline was set for intensive negotiations to conclude the agreement by the end of September 2010.

South-South foreign direct investment (FDI) also has enormous untapped potential for low-income countries. Southern multinationals, for example, may be more likely to invest in countries with a similar or lower level of development since they often have technology and business practices tailored to developing country. Technology acquisition and up-grading is thus potentially easier.

Another dimension is the emergence of new aid donors.  Emerging economies – aid recipients themselves – contributed the equivalent of about 15 percent of the aid flows of OECD DAC donors in 2009. Official development assistance from donors who are not members of the OECD Development Assistance Committee (DAC) but who report to the DAC amounted to almost $9.1 billion in 2008. The real figure is likely to be much higher. What is crucial at this stage is to leverage the resources and experience of these new development actors to maximise aid effectiveness.

The impact on development of trade, foreign direct investment and aid flows between developing and emerging economies has only recently started to be monitored and analysed in a systematic way. The picture is still rather incomplete. Yet one thing is clear: emerging and developing countries are currently driving global growth while the high-income countries struggle to shake off the impact of the global financial and economic crisis. In the future, we will need to  capitalise on these trends if the global economy is to be successfully rebalanced.  

Useful links

OECD work on development issues

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