2013 Human Development Report Office OCCASIONAL PAPER The Challenge of the South Khalil Hamdani∗ Introduction A prominent feature of our changing world is the increasing role that developing countries are playing in the global economy of the twenty-first century. They are reshaping North-South relationships towards greater balance, and are creating new South-South linkages that open untapped opportunities for growth and development. China, India and Brazil are ubiquitous but other developing countries too are fast catching up. The rise of the South is not unprecedented: all geographic regions have hosted economic growth poles at some point in history. But the rise of the ‘New’ South is particularly timely, providing a much-needed boost to the global economy at a dismal juncture, and sustaining progress in the developing world which otherwise faces an uncertain prospect. This paper examines the rise of the ‘New’ South and its potential to contribute towards more equitable and sustainable human development. We trace its origins, which go back several decades but now are the most dynamic part of trade and investment flows, and world economic growth. We next highlight the enabling role that new technologies are playing in facilitating the rise; it is a familiar story of catch up through cross-border exchange and learning but the impact is proving transformational: increasing numbers of entrepreneurs innovating through assimilation and adaptation to meet the needs of an expanding middle class, sustaining rapid growth in sub- regional markets. We conclude with policy implications, among which the major challenge is to the South itself: to seize the momentum for accelerating human development. Nearly all of the fastest-growing economies in this century are in the South and many have an opportunity to rise from their low rankings on human development. The Rise of the ‘New’ South Investment, trade and economic growth in this century have been more rapid in the South than in the developed world. A global rebalancing – a new geography – is emerging: the share of ∗ Former Director of the Division on Investment, Technology and Enterprise Development, UNCTAD, 2006-2007, and Special Adviser, South Centre, 2007-2009. 1 developing countries in world trade increased from 22 percent in 1965 to 42 percent in 2010.1 Their share in world exports of services rose from 18 percent in 1990 to 30 percent in 2010. Their share of world exports of information and communication technology (ICT) goods rose from 43 percent in 2000 to 67 percent in 2010. Their participation in foreign direct investment also increased: their share of global FDI inflows jumped from 18 percent in 2000 to 46 percent in 2010, while their share of FDI outflows rose from 8 percent to 25 percent. Their share in world manufacturing value added (MVA) grew from 17 percent in 1980 to 32 percent in 2010.2 They account for two-thirds of all new researchers in 2002-2007,3 and for more than 70 percent of the expansion in trade of intermediate products, the most dynamic component of world trade.4 Their contribution to world output rose from 33 percent in 1980 to 43 percent in 2010, and they currently account for two-thirds of global growth.5 These realignments in North-South trade, investment and production have also been accompanied by greater economic activity among the developing countries. They increased their intra-trade by 12 per cent and their intra-investment by 20 percent, annually, during 1996-2009.6 South-South trade now comprises a fifth of world trade, and is the largest component of the exports and imports of least developed countries.7 South-South FDI comprises a tenth of global FDI and is a particularly important source of capital for the least developed countries.8 Overall, economic growth in developing countries – whether low- or middle-income, or oil-exporter – is more dependent on the South than the North.9 Trade Trade among developing countries has increased steadily over the past fifty years, initially within their respective regions and later across continents. The share of intra-trade in their total exports rose from 25 percent in 1965 to 55 percent in 2010 (see Figure 1). Today, developing countries export more merchandise (and manufactures) to each other than they do to developed countries. Moreover, their manufactured exports to each other are more skill and technology intensive than those to developed countries (see Figure 2). South-South exports in 2010 were 62 percent manufactured, and half of these were high skill- and technology-intensive products (such as 1 The expression ‘new geography’ was used by UNCTAD Secretary-General Rubens Ricupero in 2004; ‘rebalancing’ was used by World Bank President Robert Zoellick in 2010. Trade, investment and ICT data are available on-line from UNCTAD: http://unctadstat.unctad.org. 2 UNIDO database. 3 OCED (2010). 4 Athukorala and Menon (2010), p.8. 5 World output and growth refers to gross domestic product measured in terms of purchasing power parity (PPP), as compiled by World Bank and IMF. 6 UNCTAD (2011b). 7 UNCTAD (2011a), chapter 2. 8 UNCTAD (2006a). 9 Garroway et al (2010), p. 18. 2 cathode valves and tubes, telecommunication equipment, automatic data processing machines, parts and accessories, optical instruments and complex chemical products). South-South trade is largely driven by Asia, where 84 percent originates, 82 percent is marketed and 74 percent is entirely within Asia. Latin America and Africa account, respectively, for 10 percent and 6 percent of South-South exports. The regional market is important in Latin America, particularly for its manufactured exports, while Africa’s South-South trade is largely interregional (70 per cent). Figure 1. South-South Trade (Percentage share of total exports of developing countries) 60 50 40 30 20 10 0 1965 1975 1985 1995 2000 2005 20010 Source: http://unctadstat.unctad.org 3 Figure 2. Technology in the manufactured exports of the South ($ billion, 2010) 1,200 1,000 800 600 South to South South to North 400 200 0 High technology Medium Low technology Resource based technology Source: http://unctadstat.unctad.org Although concentrated in Asia, South-South trade is nevertheless important for the other developing regions as well, accounting for 41 percent of Africa’s total exports and 39 percent of Latin America’s exports in 2010. It is also important for the least developed countries, which in 2010 marketed 54 percent of their total exports (mainly primary commodities) in developing countries and sourced 66 percent of their total imports (mainly manufactures) from the South. Indeed, primary products account for the bulk of the imports of Asian developing countries from Africa and Latin America (up from 59 percent in 1990 to 80 percent in 2010), which has revived the trade and growth prospects of commodity producers. Sub-Saharan Africa is presently sustaining real GDP growth above 5 percent, with the lower-income commodity exporters growing 50 percent faster than their middle-income neighbors.10 Hopefully, governments have learnt the lesson of “Dutch disease” and will recall that commodity booms are short-lived, and can leave economies and peoples worse off in the aftermath without smart policies.11 Investment Sizeable investment flows to a greater number of developing countries in the past quarter century – expanding at a 16 percent compound annual growth rate in 1985-2010 – have facilitated capital 10 IMF (2011b). 11 This issue is taken up again in the next section under growth spillovers, and also in the final policy section. Farooki (2009) suggests that the current commodity boom will be long lived. 4 accumulation, technology transfer, industrialization and economic growth. FDI is not necessary or sufficient for development but it has been catalytic in many developing countries.12 Whatever their development strategy – export- or inward-oriented, state-led or market-driven – all large or fast-growing developing countries have attracted and benefited from FDI.13 Investment has also flowed to resource-abundant economies but there the impact has been uneven.14 FDI has specially served as a trade wind to propel the entry of developing countries into world markets, diversify their exports and raise their share in global trade. A hallmark of globalization is the link between trade and investment: two-thirds of world trade involves transnational corporations and half of their trade is intra-firm, occurring entirely within their corporate networks between parent-affiliate and among affiliates.15 In this way, export-oriented FDI in developing countries has expanded their global exports and also nurtured South-South trade with affiliates in neighboring countries (see Box 1). Intra-industry trade in manufactures (such as components for motor vehicles, electronics and electrical goods) within Asia was largely an outgrowth of industrial specialization and the regional spread of international production integrated through transnational corporations.16 Initially, manufacturing in affiliates involved standardized production and assembly operations but over time it has involved more sophisticated process technologies. One estimate of the impact is illustrative: “The surge of integrated international production networks in electronics within East Asia resulted in a high- technology export boom of nearly $320 billion between 1995 and 2005.”17 Box 1. Production sharing through regional networks of transnational corporations In the 1980s, Toyota established a regional network of affiliates in Indonesia, Malaysia, Thailand and the Philippines to manufacture specific and different automobile components (i.e., transmissions, engines, electrical equipment, stamped parts and steering assemblies) which were then traded among the affiliates or with the parent for assembly and sale in local and global markets, all coordinated from regional headquarters in Singapore. Later, in 2005, Toyota opened an R&D centre in Thailand. Production-­‐sharing networks are popular in the automobile, electrical and electronic industries, and are not unique to developing countries (e.g., Ford 12 There is a vast literature on this subject.