Trade between developing countries is largely within regions, spurs manufacturing, leaves economies less vulnerable to shocks
Geneva, 2 April 2008 — Businesses know that it´s better to have a variety of customers rather than just one or two. Developing countries seek a similar advantage with their exports. Traditionally, the bulk of what they have sold on world markets -- much of it raw materials and agricultural commodities -- has gone to industrialized nations. But in recent years they have found a new and rapidly growing group of customers: each other. This "new geography" of world trade is one of the major features of the recent globalization process and is caused primarily by economic and market factors.
So-called South-South trade not only more than tripled between 1996 and 2006, reaching a total of more than US$2 trillion, but displayed an encouraging pattern: these commercial exchanges were most extensive between neighbours -- that is, within the same geographic regions (the only exception relates to African countries) -- and featured a higher percentage of manufactured products than traditional flows of merchandise exports from developing countries to industrialized nations.
The encouraging growth and prospects of South-South trade will be major topics of discussion at the 20-25 April UNCTAD XII conference in Accra, Ghana. A 23 April roundtable debate with ministerial participation will focus on the "Emergence of a new South and South-South trade as a vehicle for regional and interregional integration and development." There and elsewhere at the conference, ministers, other government officials, economists, and civil society representatives are expected to seek ways to expand the volume of and extend the benefits of South-South trade.
It is clear there is great room for additional growth: although increasing rapidly, South-South exchanges made up only 17% of global exports in 2005. And it is hoped that as developing nations provide larger markets for each other´s goods, they will be less vulnerable to economic downturns in the industrialized West.
The expanded manufacturing that appears to result from intra-regional and inter-regional exports and investment in the developing world is healthy for economies there: profits from manufactured goods tend to be higher than those for exported raw materials. Industrial production tends to create more and better-paying jobs. And manufacturing generally creates these jobs in cities, where developing-country populations are growing rapidly and where formal-sector jobs often are in short supply.
In addition, there are indications that South-South trade encourages the creation and growth of small- and medium-sized enterprises (SMEs). These, too, are vital for healthy economies: they lead to higher employment, to innovation, to linkages between economic sectors, to vibrant financial and banking environments, and to growing demand for domestically made products. Economists note that developing countries frequently lack SMEs, a syndrome referred to as "the missing middle."
South-South trade is currently dominated by developing Asia and obviously driven by the large and expanding economies of China and India. In 2006, Asia´s exports to neighbouring developing countries accounted for 78% of the global value of South-South trade. Manufactured goods and parts -- such as electrical/electronic goods and computer and telecom equipment -- make up a substantial portion of intra-Asian trade. It is clear that the growing middle class in the region is creating demand for these higher-end goods. There also is a rising tide of Asian manufactured products arriving in Africa; low-priced imports from the South have enabled many Africans to become first-time owners of household goods such as refrigerators.
Another significant flow in South-South trade is exports of natural resources to developing Asia from other developing regions, particularly Africa. Since 1995, African exports of industrial raw materials and fuels have climbed steeply; the Asian market now receives more than a quarter of Africa´s exported ores and minerals, and 20% of its exported fuel. African international sales to developing countries overall quadrupled between 1995 and 2005.
One challenge -- perhaps to be discussed at UNCTAD XII´s 21 April "high-level segment" on "Trade and development for Africa´s prosperity: action and direction" -- is to find ways to enable African countries to use climbing demand for raw materials and the higher foreign investment it attracts to diversify their economies into greater manufacturing and services output.
