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UNCTAD Policy Brief No. 2/2011: South-south Integration is Key to Rebalancing the Global Economy

Policy brief by UNCTAD, 2011

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The world economy is seriously out of kilter. Over the last 30 years finance-led globalization has distorted developments in the real economy, triggered a series of boom-bust cycles and fuelled the most regressive redistribution of income in the modern era. These trends culminated in a financial meltdown spreading out from the advanced countries in late 2008, and producing the most severe worldwide slowdown since 1945. Imbalances continue to haunt the recovery process, which has been slow and erratic especially in the most heavily financialized and indebted economies, and in the most vulnerable countries in the South, where the economic shocks were compounded by food and energy insecurity and climate variability.

N° 22, February 2011


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South-South Integration
is Key to Rebalancing the Global Economy
The world economy is seriously out of kilter. Over the last 30 years finance-led globalization has
distorted developments in the real economy, triggered a series of boom-bust cycles and fuelled the
most regressive redistribution of income in the modern era (see graphs). These trends culminated
in a financial meltdown spreading out from the advanced countries in late 2008, and producing
the most severe worldwide slowdown since 1945. Imbalances continue to haunt the recovery
process, which has been slow and erratic especially in the most heavily financialized and indebted
economies, and in the most vulnerable countries in the South, where the economic shocks were
compounded by food and energy insecurity and climate variability.


If history is any guide, the adjustment process in key
advanced economies will be prolonged and there is
a danger that, without a change in policy direction,
slow growth, high unemployment and expanding
pockets of deprivation will become a more permanent
feature of these economies with damaging global
implications, including the threat of protectionism.
Fiscal pressures may also lead the major donor
countries to further reduce their aid disbursements.
If this comes to pass, the markets, resources and
foreign exchange needed to support the growth of
the South may not be found in the North.


On the brighter side, solid economic performance in
Brazil, China and India, which were less impacted by
the global crisis than most advanced economies, has
fuelled speculation that the South can drive global
growth, and that these economies can introduce a


new global agenda around foreign trade, investment
and aid. China, for example, is emerging from the
crisis as a leading actor in international financial
markets: the country has become the largest holder
of United States government securities, and it
controls 29 per cent of global reserves.


Faster growth and increasing economic sophistication
in the South has shifted the axis on which the global
economy turns. For a simple example, the GDP of
the seven largest developing economies, adjusted
for purchasing power parities, has grown from 10.5
per cent of the GDP of the OECD member countries
in 1980 to 21 per cent in 2010. Recent growth has
also involved a tighter integration across these
economies, their regional partners, and the LDCs.
Between 1996 and 2009, South-South trade grew,
on average, 12 per cent per year (50 per cent faster
than North-South trade), and it now accounts for 20
per cent of global trade. South-South FDI has also
become increasingly relevant; it has grown 20 per
cent per annum between 1996 and 2009, albeit from
a low base, and now accounts for 10 per cent of
total FDI flows. This involves not only the extraction
of unprocessed resources but, often, vertical and
horizontal linkages which can create manufacturing
and export capacity, along with better jobs, in the
South.


Unlike the period of convergence during the 1970s,
which involved rapid but uncoordinated growth
across several economies, the ongoing restructuring
of the global economy has been driven by the largest
developing countries, and has been articulated
across other economies in the South. The world
economy has become irreversibly more complex
and more integrated: we have moved beyond the
‘early’ neoliberal globalization, driven by the North,
and entered a new phase of globalization in which
the South plays a determining and dynamic role.
The recent news that China is now the world’s
second largest economy, and may catch up with the
US within a decade, is symbolic of the depth and
significance of this shift.


Despite these fundamental changes, talk of a
“switchover” in global growth dynamics is premature.




In per capita terms, even the largest Southern economies are likely
to remain considerably poorer than the US, EU and Japan for
decades, and few Southern economies have managed to escape
from the global asymmetry which renders them vulnerable to
fluctuations and shocks in the North. This is due to their differential
patterns of exports, capital flows and ownership of productive
assets, commodity dependence, and the lack of industrial dynamic
in many lower income countries. Moreover, it is likely that several
economies may have fallen into a “middle-income trap” which can
seriously slow down their further advance. There is also a tendency
for over-optimistic prognostications of the “rise of the South” to
conflate the entire region with the dynamism, the trading patterns
and the economic uniqueness of China. Hasty speculations about
the ability of the South to drive the world economy could also shift
attention away from the responsibility of the advanced countries
for driving the recovery and rebalancing the global economy in a
more inclusive and sustainable direction, preserving stability and
securing a fair distribution of wealth between countries and across
regions.


There can be no dispute that the current crisis is due to a
systemic, policy-driven environment of financialization and
speculation originating in the North, which was, often, foisted upon
reluctant developing countries through misguided advice and
aid conditionality. The crisis must be resolved primarily through
intervention at those levels, rather than through stimuli generated
in the South.


Moreover, while faster growth in the South has helped to shift
global wealth distribution, there has also been a significant
variation of performance within the South. Most LDCs have grown
more slowly than the leading economies, and these countries
accounted for less than one per cent of world GDP in 2009. Despite
the recent growth of Brazil, Latin America’s share of global output
has remained unchanged since the 1970s. In addition to this, there
has been a significant deterioration in the distribution of income in
numerous countries, including in China. In sum, although faster
growth in the South points to global convergence at an aggregate
level, this process includes a considerable diversity of experiences,
and it has fostered heterogeneity and even disappointment in
many countries.


A realistic South-South cooperation agenda can help to rebalance
the world economy at two levels. First, it can support multilateral
arrangements channelling into productive use resources that are
currently trapped in speculative financial circuits. Second, it can
promote more even, dense and egalitarian global trading relations,
which will help developing countries escape from poverty traps.


The emergence of this trading pattern, underpinned by deeper
regional trade relationships, builds upon the achievements of the
UNCTAD-sponsored GSTP negotiations. It can be enhanced by a
global commitment to the development of employment, technology
and skill-intensive productive capacities in the South, particularly in
manufacturing. These are essential underpinnings for a “high road”
of (converging) development based on increasing sophistication
of production and South-South integration, supported by regional
policy coordination, global trade and investment agreements and
the expansion of regional infrastructure.


These policy choices will place a heavy burden upon policymakers
in the South, especially in the most resource-constrained LDCs.
Confronting this task will require more than individual determination
to succeed: it also depends upon bold leadership, focused
collective initiatives and a more stable and inclusive model of global
interdependence. This is, precisely, at the core of UNCTAD’s vision


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of development-led globalization. This new stage of globalization
should transcend the current pattern of financial over-expansion
and speculation, and foster a better regulated, more equal, and
more resilient world economy.


The transition to a new model of interdependence must recognise
the structural differences in South-South trade compared to
North-South trade, as well as in South-South FDI compared to
North-South FDI. For example, North-South economic relations
are usually narrowly market-driven, and the ensuing economic
asymmetries are reproduced by the power asymmetries between
these states. In contrast, South-South economic relations are,
generally, not purely or primarily market-driven, and relations
between Southern states and firms hold out the potential for more
constructive integration.


In order to resource this transition, it is centrally important that
Southern balance of payments surpluses are recycled within
the South. This can take place through regional and national
development banks but more innovative mechanisms may also
be needed. This is realistic, since there are multiple opportunities
for investment in the South. It is also imperative, because of the
insufficiencies which continue to plague conventional sources of
funds, including aid, debt, the international financial institutions
and Northern FDI. Recycling Southern surpluses within the South
could help to stabilize the global economy, remove the financial and
balance of payments constraints to growth in the poor countries,
build productive capacities in line with national development
priorities, support the expansion of domestic policy space, and
reinforce the links between economies in the South.


Strengthening South-South economic and political relations can
give a significant contribution towards global convergence within a
development-led process of globalization. It can also foster a less
financialized, better regulated and more resilient world economy.
Despite the appeal of this alternative model of globalization, there
are no guarantees that a more balanced global growth pattern will
secure the elimination of poverty, decent labour standards or the
incremental equalisation of the distribution of income and assets
within countries. In this respect there is the greatest scope for
internal variation, and the greatest need for policy direction.


Development-led globalization depends centrally on the flourishing
of national development paths across all the countries of the South,
and, in order to implement the required macroeconomic, financial,
trade and industrial policies, developing country governments
need additional policy space. However, this will not be given by
others. Policy space is constructed domestically, and it responds
to internal imperatives. UNCTAD is ready to assist in this process.
In order to support the exchange of experiences especially around
issues where the international community has fallen short, such as
industrial policy, UNCTAD is proposing to establish a network of
policy-makers across the South.


The agenda of development-led globalization is evocative of firmly-
grounded UNCTAD themes around global rebalancing, economic
diversification, inclusiveness, and the need for policy space. If
South-South trade and financial relations can help to dislocate
the most severe constraints to growth in the poorest economies,
the ongoing rebalancing of the world economy can leverage the
construction of a more sustainable and socially legitimate pattern
of development. This new modality of inclusive, cooperative and
South-centred global development is sorely needed by a world
distorted by a regressive model of growth launched over three
decades ago, and currently mired in a crisis which victimises
disproportionately the poor, and the poorest countries.




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