The 'rise of the South' and what it means

While there is much talk about the 'rise of the South', there is little clarity as to what this phrase means. Attempts to forecast the future development of the developing countries on the basis of the distinctive trends of the last decade are somewhat misplaced, says a senior UN economist.

Richard Kozul-Wright

THE rise of the South over the past decade in both economic and political terms has been a defining feature of the new millennium. It has encouraged a lot of people to make projections based upon what has happened over the last decade, projecting 10, 20 years forward, and defining a very different type of international economic order with clearly very extensive opportunities for increased South-South cooperation. And that is very encouraging for us. There is however, I think, the danger of endorsing the trends that occurred over the past decade and even perhaps encouraging a kind of return to business-as-usual thinking, which we need to be careful about. There is a need, within the context of thinking about the rise of the South, to present a more nuanced developmental agenda.

Economic convergence

What we do know about the last decade is that the combination of slower per capita growth in advanced countries and faster growth in the South meant that the first decade of the new millennium was one of what economists refer to as economic convergence. If you listen to the World Bank or the International Monetary Fund (IMF), this is somehow seen as an endorsement of their interpretation of their promotion of globalisation and an endorsement of the kind of fundamentals that they have been promoting over the course of the last few decades. That is not a position that we in UNCTAD (the United Nations Conference on Trade and Development) would find very satisfactory. A lot of that convergence has to do with the ongoing success story of East Asia. And that is not a success story that can be squeezed into a Washington Consensus view of economic policy.

The per capita income growth in sub-Saharan Africa over the last decade was also higher than the per capita income growth in the United States. This was the first time that sub-Saharan Africa did grow faster than the richest countries for a sustained period of time. In fact, looking at the figures, something like four out of five developing countries over the past decade grew faster than the United States on a per capita basis, compared, for example, to the period between 1960 and 2000 when only one in three developing countries was actually growing faster than the US. So the convergence story in the last decade is certainly a tangible and important feature of what has been happening in the global economy.

It is however the case that the rise of the South has taken place in the context of persistent global and maximal economic imbalances. Boom-bust development cycles have been a persistent feature of the background against which the developing countries have risen. It is also the case that  the past decade saw not only a failure of most developed countries to accelerate in terms of their growth performance but a failure of many developing countries to improve their investment performance. There was a failure of developed countries to deal with growing inequalities within their countries, although that was also a feature of many developing countries. It was also a period of growing indebtedness in many advanced countries. All those features of global and national imbalances are of course in one way or another linked to the dominant role of international finance in shaping globalisation over the course of the last two decades.

This is the context in which the new growth poles in the South have emerged. This was not simply an emergence of the smaller developing countries growing rapidly but it was a period in which a number of very large developing countries have been growing and sustaining rapid rates of economic growth. Even if you look at a larger group of large developing countries - Brazil, China, Indonesia, Pakistan, South Africa - then it is certainly the case that as a group these countries have been growing very quickly and to some extent this distinguishes the last decade from the 1970s, which was also a period of economic convergence. It was a period when the advanced countries slowed down and when many developing countries were able to sustain very rapid periods of economic growth. But the driving forces of growth predominantly in that period did not come from the very large developing countries. It came from the East Asian economies. It came from the oil-exporting economies. So the emergence of very large growth poles in the South does seem to be an important feature of the past decade of successful economic growth.

Despite that fact and despite this combination of slowdown in the North and rapid growth in the South, this is not a period in which the South successfully decoupled from the North. There is a lot of talk in the literature about decoupling of emerging economies from the North. However, there is very little evidence, with the exception perhaps of East Asia, that in fact, growth in the South has become decoupled from growth in the North. Nor is this a period of convergence within the South itself. There is very little evidence that within the South there has been a narrowing of income gaps. If anything, divergence within the South was a prominent feature of the past decade.

So in a way, despite the optimistic signs, this was a period of non-inclusive and non-sustainable growth amongst developing countries. And particularly as the advanced countries enter a period of difficult adjustment and slower growth, it is very important now to ask whether South-South links can fill the gap that will be vacated by the slow-growing advanced countries and whether South-South links will be able to sustain the kind of faster economic growth and economic dynamism and convergence of the past decade. This question is an old question. It is a question that the economist Arthur Lewis asked at the end of the 1970s. It is the kind of question that is very much on our minds in UNCTAD. We will be looking at whether South-South links can actually sustain the kind of growth dynamic that we have seen in the South over the course of the past decade and a half. Or whether there are still major gaps amongst those links that will lead to problems moving forward and will make some of the simplistic projections that you read about in the press something to be a little bit wary about.

South-South cooperation

In terms of the South-South links that we have seen over the course of the last decade, I think it is very important to understand that there has been a hierarchy within the South. The rise of South-South cooperation has very much been a trade-driven process. South-South trade has been rising on a very steady basis since the early part of this millennium. South-South trade now exceeds 20% of world trade. And it is estimated that something like 50% of total developing-country trade is trade amongst each other. So it has become a prominent part of the global trading system and has in many respects been the leading engine of South-South cooperation.

This is followed by investment flows - foreign direct investment (FDI) flows - which have also grown particularly quickly since around 2000-02. But South-South links are not as prominent within total FDI flows as they are within trade flows. On our estimates, something like 8-9% of global foreign direct investment is accounted for by South-South FDI flows. And although there are emerging signs of growing South-South financial flows, these are a very small component of global financial flows. South-South financial flows remain a very small part of the South-South cooperation story and changing that situation is a major challenge for the South-South agenda moving forward.

One thing that worries us in this discussion is the extent to which South-South cooperation has remained an East Asian story. When you look at the figures on South-South linkages and cooperation, the prominence of East Asia within that is unavoidable. In terms of trade flows, in terms of investment flows, they dominate the picture of South-South cooperation. And there is little doubt that the dominance of the Asian story in that context is linked intimately to the successful industrialisation of the East Asian region over the past three or four decades. This does raise the troubling issue of the different types and patterns of South-South links that have been evolving over the course of the last decade or two and the development implications of those different types of linkages.

UNCTAD has insisted for a long, long time that what you trade does matter to your development prospects. And what you trade on a South-South basis will matter as much to your development prospects as traditional types of trade relationships. We know that the regional dynamic has been very important in the context of the success of the East Asian story. We talked for a long time in UNCTAD about the type of 'flying geese' pattern that emerged in East Asia and the recycling of the industrial capacities that was an important part of that regional growth dynamic and an important reason why a number of countries in that region began to catch up in the 1970s and 1980s.

We know that China has reinforced many of those regional dynamics and has maintained many of the patterns that were familiar from an earlier generation of successful developing countries from that region. We are also aware, however, that there are concerns. There is this worry that many of the elements of this pattern of development still rely not so much on final markets in developing countries as on Northern markets. It is also the case that within this type of development story there are still enclaves of development rather than an inclusive pattern of development. And that is particularly true of some countries at the lower levels of the regional integration story.

Within the context of this regional pattern of development, middle-income countries appear to have become trapped within a particular pattern of industrial development which seems to lock them into a level of development from which it is going to be very difficult to move to the next stage. Countries that have already built industrial capacity successfully through the regional development story now find it difficult to move to the next stage of development where they would have more capital-intensive and technologically sophisticated activities and products. This middle-income trap is something that worries us in UNCTAD; we are attempting to see whether stronger South-South cooperation can somehow break this trap for countries that do face it.

The final element in the picture that we want to present when it comes to examining South-South cooperation is the issue of how the successful, productive integration stories  seen for example in East Asia can be married to complementary trade arrangements and, just as importantly, complementary monetary and financial cooperation arrangements which, working in a consistent and complementary manner, can maintain a cumulative and interactive growth story. This type of growth will be pivotal in determining whether the rise of the South that we have seen over the last decade and a half indeed does produce the catch-up and convergence process that many people are predicting, avoiding along the way the possible inconsistencies and traps that could easily derail that kind of successful development picture.

Richard Kozul-Wright is a senior economist at UNCTAD. The above is the text of a presentation made at the South Centre Workshop on Global Economy, Climate Change and Sustainable Development held in Geneva on 26 January. It earlier appeared in the South Bulletin (Issue 53, 15 March 2011) published by the South Centre.

*Third World Resurgence No. 248, April 2011, pp 5-7