Why developed economies benefit from South-South cooperation?

One of the developments in recent years has been the rising intensity of South-South cooperation, whether in the sphere of mutual trade, investment or policy coordination on key issues on the global agenda such as climate change. These trends are welcome as they address some of the key imbalances in the global economy. For developing countries greater economic cooperation across the Global South should be conducive to a more diversified pattern of external trade and investment across sectors and regions. There are also the benefits of improved regional integration frameworks that should raise the quality of the investment climate and increase the intensity of intra-regional trade. Developed economies also stand to benefit from greater South-South cooperation as these trends relieve some of the pressures experienced in the developed world (in trade, investment and migration) that are having sweeping political effects via the electoral cycle. Rather than apprehensively looking at greater South-South cooperation through the “zero-sum” prism of how such trends could benefit China, there needs to be a deeper realization of the benefits of South-South economic trade and investment for the broader global community, including advanced economies.  

In the trade sphere, greater South-South trade is one of the ways to reduce imbalances in trade flows across the global economy and attenuate the competitive pressures on advanced economies emanating from the Global South. Growing market demand in the developing world for China’s exports relieves the competitive pressure on European producers – a pattern that is observed in sectors such as exports of electric cars or solar panels[1]. More generally, greater South-South trade liberalization harbors significant scope to reduce the still high import barriers across the developing world, with important spillover effects of such market openness (including via regional integration initiatives) likely to materialize for developed economies.

South-South cooperation via regional economic integration could also improve the conditions for capital from advanced economies to finance projects in the developing world with better transparency and supra-national regulations improving the regional investment climate. A successful regional integration project such as ASEAN creates reliable platforms for FDI investment flows into the region from developed economies to the benefit of stronger North-South economic ties. Regional integration could also address the important imbalances related to under-trading among regional partners in the developing world (as indicated by the gravity model), a pattern observed in Africa, Latin America as well as South Asia. Furthermore, in the investment sphere the implementation of large-scale investment projects in areas such as transportation connectivity via the Belt and Road (BRI) and other South-South integration projects improves the conditions for capital and technology from advanced economies to be invested productively in developing economies.

With respect to debt sustainability and financial development, the emergence of South-South institutions and platforms such as the New Development Bank may lower the burden placed on the Bretton Woods institutions and such channels as official development assistance (ODA) from advanced economies that are experiencing increasing fiscal constraints themselves. The reversal of the “Lucas paradox”, with more of the capital from the developing world financing projects in low-income economies, may moderate the financing requirements from the developed world to support low-income economies.

Closer economic cooperation among the economies of the Global South via greater trade and investment should also raise the scope for more of the migration flows from the developing economies to be redirected into the South-South track. While income differentials will continue to account for the bulk of migration flows, greater optionality to work in the relatively more successful and affluent developing economies may attenuate the intensity of migration flows into advanced economies, most notably in Europe. It should be noted that there are already important migration routes that have emerged within the Global South such as the migration of workers from South Asia and Africa to United Arab Emirates and Saudi Arabia. The more diverse the network of such South-South migration routes, the lower the migration spillovers into the advanced economies.

As regards the all-important environmental agenda, a more coordinated approach from the Global South improves the prospects for action on the attainment of key de-carbonization objectives. A fragmented Global South space is fraught with contradictions and lack of an emphatic and well-timed response to exigencies that call for coordinated action at the regional and global level. Developed economies could make use of the mechanisms of economic cooperation elaborated at the level of regional blocs to advance the environmental agenda in a coordinated way – some of the examples include the EU-MERCOSUR trade discussions related to environmental policy, the EU-African Union cooperation on climate agenda as well as the EU-ASEAN Strategic Partnership that among other objectives seeks to enhance cooperation between the two blocs on protecting the environment and mitigating climate change.

The picture that emerges then is that across a wide array of issues ranging from debt sustainability to environmental issues and further to migration, developed economies would benefit from a higher level of South-South economic cooperation. The changes wrought by electoral cycles across the developed world partly in response to migration waves and competitive pressures from the Global South have brought about a sharp rise in populism. Voting that is still in the pipeline in the most “electoral year” for the world community in history is likely to further amplify these trends with Trump poised to win the US presidential race.

The conclusion is that some of the tension points faced by the advanced economies could be resolved not via outright protectionism and populism but via higher South-South trade and South-South trade liberalization. At the level of the world economy, with more of the challenges facing individual economies becoming global, the capability of the international community to cope with such challenges is constrained by the fragmentation in the political and economic space, most notably in the developing world. A more consolidated Global South may render the global response to such challenges more expeditious and effective.

And then there is the inevitable question of China – would greater South-South economic cooperation not result in a “disproportionate” rise of China on the global stage? Recent trends, including with respect to BRICS expansion point to the rise of other key players in the Global South such as India and Brazil. Both economies are increasingly active in global fora and international platforms such as the G20, including in bridging the divides between the Global North and the Global South on key global issues. There is also greater activism and ambition coming from the “middle powers” of the Global South that is increasingly intermediated at the global level via regional blocs and platforms. China itself has led the creation of platforms such as the Regional Comprehensive Economic Partnership (RCEP) that include a number of key participants from the developed world. Lastly and most importantly, a stable and a prosperous China that works closely with its partners from the Global South and the advanced economies is a key ingredient of the “equilibration” of the world economy away from the imbalances of the past.

[1] https://www.reuters.com/markets/commodities/china-steers-solar-module-export-stream-towards-asia-2024-02-28/



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