South-South cooperation offers new opportunities for transforming African economies, report says

Growing trade, finance, and investment with other developing countries is opportunity to diversify production, acquire technology, and develop regional markets, study notes

Geneva, 18 June 2010 -- Africa should take steps to ensure that its growing economic interactions with large developing countries, including China, India, and Brazil, result in economic diversification rather than simply the sale of African commodities and raw materials -- the traditional pattern of the continent´s relations with the industrialized North, an UNCTAD report recommends.

New, increasingly important economic partners in the "South" can help this African transformation along not only through growing trade and financial flows but by supporting regional infrastructure projects and transferring knowledge and technology, notes the Economic Development in Africa Report 2010 (1) (EDAR ´10).

The study warns that so far, trade and investment flows with the South are reinforcing a longstanding trend in which African countries export farm produce, minerals, ores, and crude oil, and import manufactured goods. It says this situation should be reversed while the South-South trend is still in its early stages. A repeat of the traditional pattern will not help African countries to reduce their traditional dependence on exports of commodities and low-value-added goods.

Emerging trends

Subtitled "South-South cooperation: Africa and the new forms of development partnership," the study shows there has been a significant increase in the number and nature of Africa-South cooperation arrangements since 2000. The Forum on China-Africa Cooperation (FOCAC) is the best-known and most elaborate. But there are also new institutions linking Africa with India, Brazil, the Republic of Korea, and Turkey, among others. And there are new intercontinental strategic partnerships (see figure 1).

Trade, investment and official financial flows are the key vectors of these new partnerships, with trade paramount.

• Africa´s total merchandise trade with non-African developing countries increased from US$ 34 billion in 1995 to $97 billion in 2004 and then jumped to $283 billion in 2008.
• The number of "greenfield" foreign direct investment (FDI) projects by investors from non-African developing countries climbed from 52 in 2004 to 184 in 2008. (A "greenfield" investment is an investment in a manufacturing, office, or other physical company-related venture where no previous facilities exist.)
• While data availability does not permit a comprehensive and reliable estimate of the scale of official flows to Africa from developing countries, it is estimated that official aid to the region from developing countries was US$ 2.8 billion in 2006. And it has risen substantially since, as China, which is estimated to contribute over 83% of that aid, committed to double its assistance to Africa by 2009.

In 2008, Africa´s total trade with developing countries, including African countries, exceeded Africa´s total trade with the EU, traditionally its major trading partner, for the first time ever (see figure 2).

With the continuing growth of large developing countries, together with weaker growth prospects in advanced economies, the economic relationships linking Africa to other developing regions can be expected to grow in relative importance.

The report finds that flows of official development assistance (ODA) from developing countries are increasingly channelled into the infrastructure and production sectors of African economies. This has increased the resources available to the region as well as diversifying Africa´s financing options. In 2006, traditional donors allocated only 22% of their ODA flows to production sectors and infrastructure.

In terms of scale, China is becoming the most significant bilateral source of support to Africa in the infrastructure and production sectors. Available evidence suggests that Chinese infrastructure finance commitments in sub-Saharan Africa soared from $470 million in 2001 to $4.5 billion in 2007. An estimated 54% of China´s support to Africa over the period 2002-2007 went to infrastructure and public works.

However, an important message of the report is that the new trends should not be seen as simply a China-Africa story. The increasing economic relationships between China and Africa are, rather, part of a broader trend towards intensifying Africa-South economic relationships, particularly with large and dynamic emerging economies.

While Africa´s total merchandise trade with China increased from $25 billion in 2004 to $93 billion in 2008, Africa´s total merchandise trade with India increased over the same period from $9 billion to $31 billion, and its trade with Brazil increased from $8 billion to $23 billion.

What should be done to seize the opportunity?

The EDAR ´10 urges African nations to take "Africa-South" trends into account in their planning for long-term economic progress. It says these governments should be assertive when negotiating cooperation with other developing countries, so that domestic concerns are addressed. A pro-active approach by African governments and a sharing of experiences with developing-country partners will accelerate mutual policy learning, which should enhance the effectiveness of interactions for all.

The overall aim, the study says, should be to build Africa´s "productive capacities" -- that is, the abilities of the continent´s economies to produce a greater variety of goods, and more sophisticated goods.

Developing-country partners can support this process by broadening the scope of engagement beyond extractive sectors and by enhancing technology transfer and learning. The availability of concessional loans from developing-country partners has increased access to finance for several countries in the region and should be welcomed, says the new UNCTAD report. But it recommends that African countries ensure that new borrowing from such partners is used to finance projects that enhance domestic capacities to repay.

Cooperation with the South should also ensure that gains are better distributed across countries, the EDAR says. In 2008, the five largest African exporters to developing countries accounted for 68% of the region´s total exports, and the top five African countries accounted for 57% of the region´s imports from other developing countries.

African countries should also play a more active role in coordinating and managing support from developing and developed countries to reduce transaction costs and ensure better development outcomes, the EDAR says. It recommends that African countries should set or strengthen existing national aid management and coordination frameworks to enhance local ownership of aid processes and outcomes. The report suggests that the Development Cooperation Forum of the United Nations Economic and Social Council could be used to share national experiences in the effective use of aid.

The report recommends that African countries adopt a developmental approach in seeking foreign direct investment. The focus of African countries should not be on attracting Southern FDI per se, it says, but on creating linkages between FDI and domestic economies and on directing these investments to sectors where they can catalyse domestic investment, create jobs, spur regional economic integration, and boost productive capacity. The use of targeted incentives to encourage foreign investors to source inputs locally is one way to promote linkages between Southern FDI and African economies. The promotion of joint ventures between African and Southern firms also could boost the diffusion of knowledge to local entrepreneurs and contribute to the structural transformation of African economies.

The report notes that despite advances in Africa-South cooperation, traditional donors are, and will remain for a long time, the main providers of aid to the region and also its major trading partners. The report thus recommends that Africa-South cooperation should be seen as a complement to, and not a substitute for, relations with traditional partners in the North.

ANNEX

Tables and figures

Figure 1: Patterns of Africa´s cooperation with the South


Source: UNCTAD

Figure 2: Share of Africa´s total trade accounted for by selected partners, 1980-2008


Source: Computed using IMF Direction of Trade data.