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South-South Trade is the Answer

Otaviano Canuto's picture

Istanbul is now at the center of the development action. In this splendorous city—where West and East converge—leaders from all over the globe have gotten together this week to assess the development results and challenges of the world’s poorest countries.

One of the goals of the 4th United Nations Conference on Least Developed Countries is to reduce the number of these nations from the current 48 to 24 over the next decade. And one of the things we can do to ensure this is to increase trade, and South-South trade in particular.

Some skeptics point out that the overdependence of low income countries on commodities and natural resources has limited their economic prospects. Or that it was precisely through trade and financial integration that the 2008 financial crisis was transmitted to many emerging markets, while poorer and less integrated economies remained isolated from the worst impact of the crisis. But the reality is that in the recovery from the crisis, trade is becoming a powerful engine for economic opportunity. And not in the traditional way. South-South trade is becoming increasingly important.

World Bank data shows that while demand in developed countries remains stagnant, trade among developing nations is growing. Between 1996 and 2006, South-South trade tripled—nearly half of imports to low- and middle-income countries now come from other countries like them. China is leading much of the recovery. While the OECD, a group of the wealthy nations, still accounts for most imports, its share has dropped from 69 percent to 59 percent in only 8 years. China’s share, on the other hand, has increased from 8 to 14 percent.

The least developed countries can benefit from the South-South trend because countries like China, India, Brazil and other leading emerging economies are becoming new markets for their products. Beyond volume, poor countries often face significant non-price barriers to breaking into markets in high income countries—like meeting technical standards—so the barriers to entry to developing countries may be lower. And even if traditional barriers tend to be higher in the South than in the North, lowering these would provide an incredible boost to the exports of the least developed countries. In addition, South-South trade can promote diversification, which is key to offset the overreliance on natural resource exports that many of the poorest countries face.

But no matter what they do—whether they continue exporting to high income countries or diversify their exports by finding new markets in the South—the least developed countries need to reduce their trade costs. How? By improving trade logistics—the capacity to efficiently move goods and connect manufacturers and consumers with international markets—and trade facilitation, which goes from better infrastructure (like in ports and transportation corridors) to faster border agencies.

It might sound daunting but it is possible. Development agencies like the World Bank are increasing their work on Aid for Trade and trade facilitation. High income countries have a lot to do too. In addition to keeping their markets open to the exports of poor countries, they should help pay for the infrastructure and other trade facilitation improvements in the South. If everyone recognizes that trade increases are at the core of the economic recovery from the global crisis, the benefits will also be global.