ENHANCING SOUTH-SOUTH TRADE SOUTH CENTRE

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1 ENHANCING SOUTH-SOUTH TRADE SOUTH CENTRE GENEVA

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3 THE SOUTH CENTRE In August 1995, the South Centre became a permanent intergovernmental organization of developing countries. In pursuing its objectives of promoting South solidarity, South-South co-operation, and coordinated participation by developing countries in international fora, the South Centre has full intellectual independence. It prepares, publishes and distributes information, strategic analyses and recommendations on international economic, social and political matters of concern to the South. The South Centre enjoys support and co-operation from the governments of the countries of the South and is in regular working contact with the Non-Aligned Movement and the Group of 77. Its studies and position papers are prepared by drawing on the technical and intellectual capacities existing within South governments and institutions and among individuals of the South. Through working group sessions and wide consultations which involve experts from different parts of the South, and sometimes from the North, common problems of the South are studied and experience and knowledge are shared.

4 Enhancing South-South Trade was first published in February 1996 by the South Centre, Chemin du Champ-d'Anier 17, 1211 Geneva 19, Switzerland in association with the Government of Indonesia, as the Chair Country of the Non- Aligned Movement, The whole or any part of the text may be reproduced without prior permission. However, clear acknowledgment of the South Centre's authorship and NAM sponsorship is requested, and the Centre should be advised of any such reproduction. South Centre 1996 ISBN Paperback South Centre 2004 This in-house edition of Enhancing South-South Trade differs from the original only in its layout.

5 CONTENTS LIST OF ABBREVIATIONS... EXECUTIVE SUMMARY AND PROPOSALS FOR ACTION... vii xi I. INTRODUCTION... 1 II. SOUTH-SOUTH TRADE AND INTEGRATION: A BRIEF HISTORICAL OVERVIEW... 5 The early efforts... 5 The crisis of the early 1980s... 8 The resurgence of intra-regional South-South trade in recent years. 10 III. SOUTH-SOUTH CO-OPERATION IN TRADE IN THE 1990S AND BEYOND: A STRENGTHENED RATIONALE The new setting A strengthened rationale Changing North-South economic relations The potential for growth in South-South trade The South and global trade negotiations IV. A FRAMEWORK FOR SOUTH-SOUTH CO-OPERATION IN TRADE Trade co-operation and integration arrangements Promoting inter-regional South-South trade Fostering developing country co-operation on global trade issues The South and the formation of North-South trade blocs V. CONCLUSIONS ANNEXES REFERENCES... 75

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7 LIST OF ABBREVIATIONS ACC APEC ASEAN CACM CARICOM CEAO COMESA ECCAS ECOWAS EU FONDAD GATT GCC GSTP IFIs ILO LAIA MERCOSUR MFA MFN NAFTA NAM OAU OECD OPEC PPP PTA SAARC SADC SADCC SAFTA Arab Co-operation Council Asia Pacific Economic Co-operation (Council) Association of South-East Asian Nations Central America Common Market Caribbean Community Communauté des Etats de l Afrique de l Ouest (West African Economic Community) Community of Eastern and Southern African States Economic Community of Central African States Economic Community of West African States European Union Forum on Debt and Development General Agreement on Tariffs and Trade Gulf Co-operation Council Global System of Trade Preferences International Financial Institutions International Labour Organization Latin America Integration Association Southern Cone Common Market Multi-Fibre Agreement most-favoured-nation North American Free Trade Agreement Non-Aligned Movement Organization of African Unity Organization for Economic Co-operation and Development Organization of Petroleum Exporting Countries purchasing power parity Preferential Area for Eastern and Southern African States South Asian Association for Regional Co-operation Southern African Development Community Southern African Development Co-ordination Conference South Asia Free Trade Area

8 viii SITTDEC STOs TAFTA TNCs UDEAC UMA UNCTAD UN-ECLAC WTO South Investment, Trade, and Technology Data Exchange Centre state trading organizations Trans-Atlantic Free Trade Area transnational corporations Union Douanière des Etats de l Afrique Centrale (Customs Union of Central African States) Union du Maghreb arabe (Arab Maghreb Union) United Nations Conference on Trade and Development United Nations Economic Commission for Latin America and the Caribbean World Trade Organization

9 FOREWORD This policy-oriented study is part of the programme of work carried out by the South Centre as a contribution to the Economic Agenda for Priority Action of the Non-Aligned Movement, at the request of, and with the financial support of, Indonesia which chaired the Movement during this period. Pre-publication copies of this and other studies prepared for NAM were made available to NAM Member States taking part in the Eleventh NAM Summit, held in Cartagena, Colombia, October, 1995.

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11 EXECUTIVE SUMMARY AND PROPOSALS FOR ACTION BY THE NON-ALIGNED MOVEMENT Introduction The attached document examines a number of issues related to South- South co-operation in trade. A brief review of past measures taken to increase trade between developing countries and an examination of the new challenges that developing countries now face -- and are likely to face -- suggests that they should further reinforce their efforts to expand their co-operation in trade, as well as enhance their current integration endeavours. A framework for such co-operation is presented in the document. In this executive summary, the rationale for promoting South-South trade is summarized, and the elements of a NAM action programme for promoting South-South co-operation -- one that draws on the framework presented in the document -- is suggested. South-South trade and integration arrangements Institutional structures and mechanisms to promote trade among developing countries were first established in the late 1950s and early 1960s and since then have continued to multiply and evolve. The original rationale for South-South trade co-operation emanated from the conviction that developing countries needed to pursue a policy of rapid industrialization in order to overcome their economic backwardness. Since the small size of individual domestic markets limited the scope for industrialization through import substitution, efforts were made to create trade preference areas and to promote subregional and regional cooperation and integration among developing countries. In the 1970s, following the successful lead given by OPEC, a number of measures were taken to strengthen regional and subregional

12 xii Enhancing South-South Trade economic co-operation arrangements. By the end of the 1970s, virtually all developing countries belonged to one or more subregional or regional groupings. While many of these regional arrangements experienced setbacks in the early 1980s, new efforts have been made in the last ten years to revive them. Important recent developments, in this regard, have included the strengthening of preferential trade areas, and the establishment of subregional free trade areas by several groups of developing countries. These measures were complemented by efforts to broaden the scope of South-South trade through the establishment of the Global System of Trade Preferences among Developing Countries (GSTP), and by the promotion of co-operation among state trading organizations of developing countries. Partly as a result of these arrangements and partly due to underlying economic trends, trade among developing countries over the past three decades has grown substantially, though at an uneven pace. South-South trade, and in particular intra-subregional trade, now accounts for a much higher -- and a significant -- proportion of the total trade of developing countries. South-South co-operation in trade in the 1990s and beyond: A strengthened rationale The global environment that now faces developing countries is much changed compared with that prevailing when initiatives to promote South-South trade were first taken in the 1950s and 1960s. On the political level, the countries of the North currently wield unparalleled power in global political and economic affairs. In matters pertaining to world trade, this power has been used to expand the multilateral rules that govern world trade, largely, it would appear, to serve the interests and needs of the industrialized countries. On the economic front, global economic relations and the interdependence of national economies have dramatically grown, in part spurred by rapid technological change and, in part, due to liberalization measures affecting trade, finance and investment.

13 Executive Summary and Proposal for Action xiii These developments have also brought about important changes in the role of the South in the global economy. An increasing number of developing countries have now succeeded in industrializing their economies and have, in the process, become important producers and exporters of manufactured goods. In view of the considerable changes in global economic relations, the growth in South-South trade, and the significant trade policy reforms undertaken by many developing countries, the question arises whether there is any need for the countries of the South to take special measures to promote such trade. Three basic factors suggest that developing countries should indeed take steps to achieve greater co-operation in trade matters. These are: a. the fundamental changes that have taken place and continue to take place in North-South economic relations -- changes which will make it unlikely that North-South trade will continue to act as an engine of growth for the economies of the South, and the clear limit to the extent to which such trade will act as such for the whole of the South; b. the substantial scope for the further expansion of inter-regional South-South trade which has the potential to act as an important source of growth for the economies of the South as a whole: this is particularly the case given the considerable degree of industrialization in a number of countries, and the growing complementarity among the economies of the South; and c. the need for co-operation and solidarity among the countries of South to safeguard their common development interests in the follow-up to the Uruguay Round of trade agreements and in subsequent global trade negotiations, when efforts may be made to expand multilateral discipline to other trade-related areas, such as labour standards and the environment. Changing North-South economic relations. The economic growth in the industrialized economies of the North has traditionally acted as an engine

14 xiv Enhancing South-South Trade of growth for the economies of the South, and the industrialized countries continue to dominate the global economy, accounting for over half of global output, and about three quarters of world trade. Nonetheless, the countries of the South, in the design and formulation of their economic development and external trade strategies, need to take into account the implications of certain key changes in North-South economic relations, in particular: a. the slowdown in the trend growth rates of the economies of the North and the impact this can be expected to have on North- South trade relations; b. the significant structural impact on Northern economies that rapidly growing volumes of exports from the South are likely to have, and the probable pressure that this will generate for the adoption of new types of protectionist measures by governments in the North; c. the impact on export prices and revenues that increased competition among exporters from the South for markets in the North is likely to have; and the growth/trade effects on the North of economic growth in the South. The potential for rapid growth in South-South trade. As North-South trade may fail to provide the same degree of stimulus for economic growth that it provided in the past for a number of developing countries, the countries of the South will need to rely on the expansion of South-South trade to provide the necessary impulse. This may well become a strategic necessity for the countries of the South in their effort to maintain economic growth in the rapidly growing regions, and to promote higher rates of growth in the others. The prospects for the further rapid expansion of intra-south trade and, in particular, inter-regional trade would appear to be promising for a number of reasons. These include, inter alia:

15 Executive Summary and Proposal for Action xv a. the high economic growth rates and the good prospects for their continuation in many parts of the South, and, consequently, rapidly rising demand for imports; b. major transformations in production structures in significant parts of the South, allowing an increasing number of countries to supply a wide range of both consumer and capital goods; c. the greater availability of finance for trade and trade-related investment; d. the implementation of trade policy reforms by an increasing number of countries in the South, and e. the emergence of major new Southern transnational corporations with integrated production and marketing structures. Nevertheless, actual levels of South-South trade are considerably below the levels warranted by recent developments. While substantial gains have been made in intra-subregional trade, intra-regional and interregional trade have yet to be firmly established. Concerted action by the countries of the South is thus required to realize this potential more fully. The South and global trade negotiations. Co-operation among developing countries would also be highly beneficial in relation to global trade issues. The agreements reached under the Uruguay Round of trade negotiations -- including the establishment of the World Trade Organization (WTO) -- will clearly bring about a big change in the way that developing countries conduct their trade, and in the type of development strategies that they will follow. Although agreed to by all signatories, the new global trade rules will, however, be applied among unequal partners. In most cases, individual developing countries will not have the necessary institutional capacity, expert knowledge and skills to tackle satisfactorily all the new issues that are likely to come up before the WTO. Co-

16 xvi Enhancing South-South Trade operation, coordination, and mutual support among developing countries as a group thus become extremely important if developing countries are to make a significant impact on the activities of the WTO, and to safeguard fully their interests within the new framework. Although fairly clear agreements have been reached on various trade issues, it will be necessary to engage in supplementary negotiations, under the aegis of the WTO, in order to spell out in greater detail the various framework agreements reached. Moreover, the North is likely to press for negotiations in new areas such as labour standards, trade-related environmental conditions, and competition policy. In all these areas, it is essential that the countries of the South pool their resources and collaborate effectively in order to safeguard and advance their vital and common interests. A NAM PROGRAMME OF ACTION TO ENHANCE SOUTH-SOUTH TRADE AND INTEGRATION The Non-Aligned Movement at its 10th Summit in Jakarta in 1992 affirmed the importance of continued co-operation among the countries of the South in trade and other economic matters. It also called on all member countries to take the required steps to enhance such relations. In addition, the resolutions of the Summit called on NAM to undertake a number of measures to promote economic co-operation in a number of areas. 1 Many of the initiatives for improving South-South trade relations must necessarily come from individual countries of the South and their various regional and subregional groupings. Nevertheless, the Non- Aligned Movement can also promote and enhance such co-operative efforts, by serving as an indispensable forum for strengthening intraregional cohesion as well as inter-regional interaction. The priority areas for co-operation that should be considered by NAM in matters pertaining to trade are outlined below. 1. See the Summit declaration The Jakarta Message: A Call for Collective Action and the Democratization of International Relations, Jakarta, September 1992.

17 Executive Summary and Proposal for Action xvii Enhancing Intra-Regional and Subregional Integration Regional and subregional trade blocs will remain, for the foreseeable future, the basic organizational units for trade co-operation among the countries of the South. As such, developing countries should take a number of measures to strengthen these organizations and thus enhance trade relations among themselves. The NAM, for its part, should seek to encourage greater contacts and relations between the various regional and subregional groupings so as to promote more formal trade and economic relations between these groups. The exchange of views and experience on integration matters and the creation of new intra-group linkages could prove useful in strengthening further the various regional groupings, particularly those that have yet to reach more advanced forms of integration. Promoting Inter-Regional South-South Trade and Trade-Related Investment As well as taking additional measures to strengthen regional and subregional co-operative arrangements, the countries of the South should take measures to promote the growth of inter-regional South-South trade. A number of measures could be proposed by the Non-Aligned Movement towards this end: a. NAM should propose that developing countries use the framework of the second round of negotiations under the Global System of Trade Preferences (GSTP) to carry out a substantial across-the-board reduction of barriers to trade among themselves, and to consider bringing new areas such as trade in services and trade-related investments within the scope of the GSTP. Clear overall targets for the reduction of tariffs and steps towards the elimination of non-tariff barriers should be set. In this context, the more advanced developing countries should be encouraged to extend special preferences to the least developed countries in the framework of the GSTP, or along the lines of the Generalized System of Preferences currently applied by the developed countries.

18 xviii Enhancing South-South Trade b. NAM should also take measures to promote closer linkages between various regions, and in particular between East and South-East Asia and other regions; such linkages should seek to promote closer investment and trade links through arrangements for regular dialogue and consultation between governments and the private sectors. Regional and subregional trade fairs are one useful way of promoting trade links and relations. c. NAM should encourage the more advanced developing countries to consider establishing special programmes of assistance for the less advanced countries of the South. Technical assistance programmes, which would make available to the poorer countries the rich development experience of the more advanced developing countries, could be of particular importance. d. NAM should also consider creating fora for consultations among governments in order to agree on practical measures to reduce structural constraints affecting trade including transport, financial, informational, and technical barriers. NAM could, for example, consider ways in which more countries could be encouraged to participate in South Investment, Trade, and Technology Data Exchange (SITTDEC) as a practical way to promote South-South trade. e. NAM should consider commissioning a special study by a team of experts from the South on the implications for regional and subregional groupings in particular, and on South-South cooperation in trade in general, of the emergence of mega trade blocs involving countries from the North and South. South-South co-operation on global trade issues In view of the establishment of the new multilateral framework for global trade, it is essential that the countries of the South should consult regularly, set their own agenda and priorities, and also develop common

19 Executive Summary and Proposal for Action xix positions on forthcoming trade issues to ensure that their interests are safeguarded and that their growth prospects are not jeopardized. For these purposes, NAM should consider the following measures to enhance the South s capacity to negotiate on global trade matters: a. the provision of a more regular mechanism within which developing countries would be able to co-operate and provide mutual support in respect of the activities of the World Trade Organization including, inter alia, settlement of disputes, the drafting of texts interpreting the provisions of the various agreements administered by WTO, the elaboration of framework agreements, the accession of countries which were not members of GATT. One possibility would be to organize periodic Ministerial Meetings of developing countries under the auspices of NAM to consider such issues. b. the establishment of various technical advisory groups consisting of experts from the South to provide assistance to individual developing countries, as well as regional groupings, on issues that arise out of the Uruguay Round and the establishment of the WTO. Such groups would be expected to provide technical assistance in the adaptation of national laws and regional agreements to conform with the provisions of the Uruguay Round -- while endeavouring to ensure to the fullest extent that such legislation promotes developing countries national and regional development efforts. Such assistance will also be required in the event of disputes with the industrialized countries over trade matters. As important, an expert group of the South should provide advice to developing countries on the joint negotiating stance that they should adopt with respect to the foreseeable trade-related negotiations on labour standards, environmental considerations, and competition policy.

20 xx Enhancing South-South Trade A NAM Ministerial Conference on South-South Co-operation in Trade The Non-Aligned Movement should consider convening a Ministerial Conference on trade matters to provide a forum for an exchange of views on South-South co-operation in trade and, in general, on developments in the global system for world trade. Such a conference would discuss some of the issues raised and a number of the proposals made in this document. The conference would also be expected to decide on the concrete steps and measures that should be taken by the countries of the South to promote the expansion of South-South trade, as well as the measures they should take to protect the interests of developing countries in the evolving multilateral system of world trade. The preparatory work for such a conference should include, inter alia, (i) a report on the current situation of GSTP and the progress, (ii) a review of the current situation and functioning of commodity agreements, and (iii) a paper on the ramifications of the rise and growth of mega blocs.

21 I. INTRODUCTION Economic co-operation arrangements, and, in particular, arrangements for promoting intra-south trade, have been a long-standing feature of relations among the countries of the South. After the end of the Second World War, when most developing countries achieved independence, various regional and subregional arrangements were formed to promote such co-operation. These sought to encourage stronger ties in various fields -- such as trade, investment, and science and technology -- with a view to promoting the economic growth and development of member countries. Underlying these co-operative efforts was the belief that the countries of the South had to forge closer economic and, as important, political ties if they were to succeed in their common endeavor of transforming the production structures of their economies and thereby improving the population s standard of living. The need for co-operation and solidarity among the developing countries was strongly felt in the light of the continued dominance of the global polity and economy by the powerful -- and some erstwhile colonial -- countries of the North. The institutional mechanisms that the countries of the South created to promote co-operation among them were largely subregional and regional in scope. However, other arrangements which sought to promote stronger relations among all the countries of the South evolved, not least the Non-Aligned Movement (NAM) itself. 2 While the regional and subregional arrangements that were established covered many areas of economic activity, they often gave priority, however, to promoting trade among the member countries of the regional and subregional groupings in question. For this purpose, the co-operative arrangements sought to establish preferential trade areas and supporting institutional mechanisms to facilitate increased trade among member countries. Partly as a result of the subregional and regional trade co-operation arrangements, and partly in response to other underlying economic 2. See The South Commission, The Challenge to the South, ch. 4, (Oxford University Press, Oxford, 1990) for a discussion of South-South co-operation efforts.

22 2 Enhancing South-South Trade trends, trade among developing countries over the past three decades has shown substantial growth. There have been three distinct phases in the growth of such trade. After the establishment of regional and subregional trading groups in the late 1950s and the 1960s, there was a gradual but steady increase in intra-south trade in the 1960s. This was followed by a very pronounced expansion in the 1970s, which was accounted for by the rise in the price of oil (in consequence of the establishment of OPEC), the increased availability of financing for development and trade, and the substantial enlargement of the domestic markets of the oil-exporting countries. The promising growth in South- South trade came to a halt in the first half of the 1980s, owing to the severe economic crisis affecting a large number of developing countries, particularly in Latin America and Africa. The crisis was largely caused by the sharp contraction of the global economy, attributable to the deflationary policies pursued at the time by the industrialized countries. Since the second half of the 1980s, there has been a return to rapid growth in South-South trade. Dramatic increases have been registered, particularly in subregional intra-south trade, such trade now accounting for a much higher -- and a significant -- proportion of the total trade of these regions. The resurgence of South-South trade in the last decade, and fresh attempts to enhance it, face a global environment in the 1990s very different from that prevailing when such initiatives were first taken in the 1950s and 1960s. On the political level, the end of the Cold War has resulted in a major re-alignment of global political relations, such that the countries of the North now wield unparalleled power in global political and economic matters. One consequence of this development has been the ascendancy of neo-liberal thought, and the enormous pressure that is currently put on the countries of the South to adopt the political, economic, and social values associated with it. 3 In global trade matters, the North has used its dominant position in order to expand the rules that govern world trade, largely, it would appear, to serve the interests and needs of the industrialized countries. Nonetheless, the change in global political relations and the weakening of the once dominant East- 3. The doctrine of `free trade is ostensibly part of this school of thought; actually industrialized countries have often resorted to `managed trade in the last decade in order to protect their industries.

23 Introduction 3 West ideological rivalry have brought into sharper relief the principal divide in the global community -- that between the rich and economically powerful North and the still largely poor and economically weak South. On the economic front, global economic relations, in part spurred by rapid technological change and, in part, by the implementation of measures to liberalize world trade, have grown and intensified dramatically. The increasing globalization of production and the enormous flow of capital between regions have led to a growing interdependence of national economies. These developments have also brought about important changes in the role of the South in the global economy. Many developing countries have succeeded in industrializing their economies and have now become important producers and exporters of manufactured goods. As a result, these countries are now important poles of growth for the global economy. And thanks to their sustained growth, as well as their accumulation of capital over the last three decades, some of them have also become -- in addition to the oil exporters of the Middle East -- major sources of capital for investment in other developing countries. 4 Despite the growing interdependence of national economies, an important development that has occurred in the global economy in the last decade is the trend towards regionalism, associated with attempts to build large and powerful trading blocs. As these blocs become fully established, they will undoubtedly begin to have a major impact on the functioning of the global economy and also on the development prospects of the countries of the South. Among these trade blocs are: an expanded European Union (EU); and the recently established North America Free Trade Area (NAFTA). Agreements have also been reached in principle to establish other similar trading blocs. 5 One 4. This development has become particularly noticeable in East and South-East Asia, where intra-regional investment has grown rapidly. As of the end of 1993, the stock of intra-regional direct foreign investment is estimated to have reached $132 billion, with 71.1 per cent of this total directed at China. Four sources accounted for nearly all (96.5 per cent) of the investment (see Annexe Table 6). 5. Some of the agreements include: that reached at the 1994 Summit of the Americas to create a free trade area covering the whole of the Americas; and the agreement reached in Bogor, Indonesia, to convert the Asia Pacific Economic

24 4 Enhancing South-South Trade important feature of some of these emerging blocs is the association of countries from both North and South within the new blocs -- a trend started with the establishment of NAFTA, and which has clear ramifications for South-South co-operation in trade. 6 Issues related to efforts to promote South-South co-operation in trade and integration are examined in this document, in view of the calls made by the Non-Aligned Movement at its 10th Summit held in Jakarta in 1992 to promote and enhance such trade. Chapter II contains a brief historical review of South-South co-operation in trade and recapitulates the rationale advanced in the past for such co-operative efforts. Chapter III considers the relevance of, and the need for, such co-operative efforts in the light of the new challenges that developing countries are facing now and are likely to face in the coming years. Here, it is argued that although considerable changes have taken place in economic relations between North and South and, as important, in economic relations among the countries of the South, there are strong grounds -- largely because of the recent developments in the global economy -- for intensifying and strengthening South-South co-operation efforts in trade. Indeed, the enhancement of South-South trade relations may increasingly become a strategic necessity for the sustained growth and development of the countries of the South. Co-operation and solidarity among developing countries will also be required, it is argued, in forthcoming trade negotiations that will aim at widening the multilateral rules and disciplines that govern world trade. Such co-operation is necessary to ensure that the South is in a position to set its own agenda and, no less important, that it has adequate bargaining power to promote and safeguard its interests. In Chapter IV a framework to enhance South- South co-operation and integration efforts is presented. In the concluding chapter, the principal arguments and findings of the paper are summarized. Co-operation forum (APEC) into a free trade area by In addition, suggestions have been floated to establish a Trans-Atlantic Free Trade Area (TAFTA), comprising North America and the European Union, and also to establish an Indian Ocean States free trade area. 6. This issue is discussed in greater detail below (see section IV).

25 II. SOUTH-SOUTH CO-OPERATION IN TRADE: A BRIEF HISTORICAL OVERVIEW Institutional structures and mechanisms to promote trade among developing countries were first established in the late 1950s and early 1960s and have, since then, continued to develop and evolve. The countries of Latin America and the Caribbean led the way in the 1960s by establishing various regional and subregional organizations. Similar organizations soon followed in Africa and Asia in the ensuing years. And in the 1970s, following the success and lead of OPEC, virtually all regional groupings took additional measures to strengthen further regional and subregional economic co-operation arrangements. While many of these regional arrangements experienced set-backs in the early 1980s, new initiatives have been undertaken in the last ten years to revive them. Important recent developments, in this regard, have included the strengthening of preferential trade areas, and the establishment of subregional free trade areas (FTAs) by several groups of developing countries. The early efforts The original rationale for South-South trade co-operation was the conviction of the leaders of the developing world that their countries needed to pursue a policy of rapid industrialization if they were to overcome their economic backwardness. The governments of most developing countries believed that they had to adopt an import substitution industrialization strategy -- one that would necessarily be supported by appropriate protective tariff structures -- if the goal of the structural transformation of their economies was indeed to be achieved In the case of Latin America, the adoption of such trade and industrialization policies was in part a reflection of the difficult conditions the region experienced during the inter-war and wartime periods. The involuntary economic cut-offs from the rest of the world, as a consequence, first, of global recessionary conditions and, later, by wartime conditions, brought home the need to develop

26 6 Enhancing South-South Trade It was also felt at the time that adopting a more liberal trade regime would condemn these countries forever to the production of low-valued primary commodities and, consequently, to low incomes. In particular, it was believed that specialization based on the existing (static) balance of comparative advantage between the industrialized countries and the primary goods producing countries of the South would not lead to the rapid economic growth and expansion of the latter. This belief was reinforced by awareness of the secular deterioration in the terms of trade for primary products, in relation to manufactured goods. 8 Most developing countries undertook import-substitution industrialization efforts between the 1950s and the 1970s. Often such efforts were state-led, as governments played a major role in mobilizing resources, selecting the industrial enterprises to be established, and providing tariff protection for the newly-established infant industries. This strategy enabled many countries, particularly the large ones -- and including, significantly, those which were later to adopt export-oriented development strategies -- to build an industrial base, encompassing both light and heavy industry. However, with the establishment and growth of such industries, the limitations of the size of domestic markets soon became apparent, for these prevented the new industries from reaping the benefits of economies of scale. As a result, the costs of production of industrial goods remained high, and limited progress was made in improving the quality of the goods produced. The mounting problems faced by new industries in many countries -- arising largely from the small size of protected domestic markets -- led to the search for policies to enlarge the size of markets and permit industrial expansion. 9 domestic industrial capacity. Paradoxically, the potential for industrial growth was demonstrated by the imposed isolation which had had the effect of stimulating the growth of domestic industry. 8. The early research work on deteriorating terms of trade was undertaken in the 1950s and the 1960s by the UN Economic Commission for Latin America and the Caribbean, under the leadership of Raul Prebisch. The emphasis that the early leaders of developing countries placed on industrialization has been amply vindicated by the observed close association between industrialization and economic growth (see M. Syrquin and H. Chenery, Three Decades of Industrialization, The World Bank Economic Review, vol. 3, No. 2, May 1989). 9. See R. Prebisch, Towards a Dynamic Development Policy for Latin America, (United Nations, New York, 1964), for an elaboration of this argument.

27 A Brief Historical Overview 7 Endeavours to overcome the constraints posed by the small size of domestic markets gave a strong impetus to South-South co-operation in trade. Initially, such efforts were directed towards integrating the highly protected markets of neighboring countries. Opening-up domestic markets at the subregional and regional level was thought to have the potential of providing a basis for an efficient region-based import substitution industrialization. The larger markets, it was felt, would make it worthwhile and profitable for local and foreign capital to invest in industrial expansion and would make it possible to realize the benefits of economies of scale. 10 The assumption that regional co-operation efforts and, in particular, the creation of trade preference areas would lead to industrial development and economic growth had a major influence on the creation of subregional and regional co-operation and integration groupings of developing countries in Latin America, Africa, and Asia in the 1960s and the 1970s. By the end of the 1970s, virtually all developing countries belonged to one or more of the subregional or regional groupings (see Annexe I). The same logic led to efforts to broaden the concept of collective import substitution industrialization to the whole of the South. Accordingly, a number of South-South co-operation efforts were undertaken to promote inter-regional trade. These included: the establishment of the Global System of Trade Preferences among Developing Countries (GSTP); the promotion of co-operation among state trading organizations (STOs) of developing countries; and the establishment of southern-based multinational marketing enterprises. 11 The regional and subregional co-operative arrangements and the trade preference areas that they created contributed to a significant increase in intra-south trade during the 1960s and 1970s. Data on the volume of intra-regional trade within the subregional trade groupings, and the share of such trade as a percentage of the total exports of these groupings, are given in Table 1.A. As these data show, intra-subregional trade, after starting at relatively low levels at the beginning of 1960s, 10. An early forceful argument for regional integration on these grounds was made by R. Prebisch. See The Economic Development of Latin America and its Principal Problems, UN-ECLA, New York, See, S. Folke et al., South-South Trade and Development, St. Martin s Press, New York, 1993, p. 26.

28 8 Enhancing South-South Trade registered significant gains in the 1960s and expanded dramatically in the 1970s. In the latter decade, intra-subregional trade in Asia increased by a factor of ten, in Latin America by a factor of seven, and in Africa it increased nearly two and a half times. These gains were in large part due to the rapid increases in the trade of some of the larger groupings such as the Andean Group in Latin America, ECOWAS in Africa, the Gulf Cooperation Council in West Asia, and ASEAN in South-East Asia. The volume of intra-regional trade also became quite significant, particularly in Asia and Latin America, reaching $18.3 and $17.2 billion respectively in these two regions. The crisis of the early 1980s The promising growth in intra-regional South-South trade came to a halt in the early 1980s, owing to the sharp contraction of the global economy during the period. The industrialized countries, in an effort to reduce inflationary pressures in their own economies, adopted a severely deflationary policy, which had a devastating impact on the economies of the South, particularly on those of Latin America and Africa. 12 The effects of these policies on developing countries included inter alia: a sharp contraction in the demand for their export commodities and, in particular, primary commodities -- leading to a fall in their prices; high real international interest rates, due to the tight monetary policy of the central banks of the industrialized countries, which caused great difficulties for developing countries in servicing their external debts; and an abrupt cessation of private capital flows from commercial banks to developing countries. The cumulative impact of these policies was to create an enormous external shock for the economies of developing countries, causing, in turn, a sharp fall-off in the growth of their economies. 13 Economic 12. As a consequence of these policies, the average growth rate for the economies of the industrialized countries fell to 1.5 per cent during from the average of 3.1 per cent for (UNCTAD, Handbook of International Trade and Development Statistics, 1993). 13. The size of the terms-of-trade and interest shock for the economies of Sub- Saharan Africa during the period has, for example, been estimated to

29 A Brief Historical Overview 9 growth rates, which had averaged 5.5 per cent during for the developing countries as a whole, now fell to an average of 1.9 per cent during The crisis had other economic ramifications. For many countries, it brought on the debt crisis of the 1980s, when an increasing number of countries began to face severe difficulties in servicing their external debt. 15 The impact on the trade of developing countries -- both North-South and South-South -- was also profound. Countries were forced to adopt a policy of import compression as export earnings were sharply reduced and capital inflows to finance imports were cut off. In addition, under the terms of agreements with the international financial institutions and creditor banks, countries had to accept stringent stabilization and structural adjustment programmes. An important component of these programmes was the substantial devaluation of national currencies in an effort to stimulate exports and increase foreign exchange receipts, with the primary goal of raising sufficient resources to service the mushrooming external debt. One important outcome of these policies were sharp falls in import demand: annual growth rates of imports, which had averaged 4.5, 7.7, and 10.1 per cent for the Americas, Africa, and Asia respectively during , fell to - 8.4, -6.1, and -0.3 per cent, respectively, during the period. 16 As an increasing number of countries (with the major exception of some Asian countries) were forced to adopt such restrictive programmes and policies, South-South trade suffered, as the primary objective of many countries now became the expansion of exports to the North (in amount to 14.1 per cent of the region s GDP. See, I.A. Elbadawi, World Bank Adjustment Lending and Economic Performance in Sub-Saharan Africa: Some Indicative Results, Eastern Africa Social Science Research Review, vol X., No. 1., January Data from UNCTAD, Handbook of International Trade and Development Statistics (various issues) -- see Table 2 below. The above data on growth rates does not include countries that UNCTAD classifies as the `developing socialist countries of Asia. 15. Although the debt crisis is often thought of as being over, this is not the case for the poor countries whose debt overhang has continued to grow over the last decade and a half. See, NAM, The Continuing Debt Crisis of the Developing Countries, Jakarta, See Table 3 below.

30 10 Enhancing South-South Trade order to service Northern-held debt), while curbing imports from all sources. The adoption of such trade policies by an increasing number of countries did not create an environment favouring the continued expansion of South-South trade. In addition, the economic crisis, along with the severe fiscal crisis that many governments faced, forced countries to reduce the support and funding they had earlier provided to the various facilities and mechanisms required to sustain intra-south trade. The effect of these policies on intra-regional trade was immediate. In virtually every subregional group the growth of intra-regional trade either stagnated or was reversed. The impact was particularly felt in the Latin American and Caribbean region where intra-regional trade fell by 37 per cent; in Asia and Africa, on the other hand, the crisis was reflected in the virtual stagnation of intra-regional trade during the first half of the 1980s (Table 1.A). The resurgence of intra-regional South-South trade in recent years With the beginnings of global economic recovery in the mid-1980s, and the stabilization of the larger economies of the South which soon followed, the decline in intra-regional South-South trade began to be reversed, with substantial gains in the volume of such trade being registered in almost all the subregional groupings during the period. In the Americas, intra-regional trade increased by 75 per cent during this period; in Africa, by 60 per cent, and in Asia, it doubled (see Table 1.A). The high growth trend in intra-regional trade has continued in the 1990s, with a 50 per cent increase in Latin America, a 14 per cent increase in Asia, and a 9 per cent increase in Africa registered during The rapid expansion in trade among some of the larger subregional trading groups is particularly noteworthy. Between 1985 and 1992, trade among the countries belonging to MERCOSUR (Argentina, Brazil, Paraguay and Uruguay) tripled, and intra-regional trade among the countries belonging to ASEAN (Singapore, Thailand, Indonesia, Malaysia, Brunei) increased two and half times. As a result of these high rates of growth, the value of intra-subregional trade (in nominal terms) is now two to three times higher than the peaks reached at the end of the 1970s. And for most groups, intra-regional trade now accounts for a

31 A Brief Historical Overview 11 much higher proportion of the exports of each group than was the case at the end of the 1980s (see Table 1.B). It is worth exploring further the factors accounting for the upsurge of intra-regional South-South trade in recent years. These include: sustained high rates of economic growth in some regions of the South, particularly in East Asia, and the resumption of growth in parts of Latin America and Africa; the rapid growth in the production of manufactures by an increasing number of countries in the South, which enhanced the complementarity of the economies of developing countries; the restructuring and reduction of the external debt of the middle-income developing countries, on a scale sufficient to encourage the resumption of private capital inflows and direct foreign investment; the implementation of economic reforms in a large number of countries which aim at giving the private sector, as well as both domestic and foreign capital, a much greater role in production and trade; the reform and rationalization of trade regimes, and the adoption of export-oriented development strategies by an increasing number of countries in the South; 17 and the strengthening of the institutions for subregional economic co-operation groupings. 17. See UNCTAD, Trade and Development Report, 1991 (United Nations, New York), ch. III, for a discussion of the trade reforms of developing countries over the last decade.

32 12 Enhancing South-South Trade Table 1.A Intra-regional trade by subregion Value of intra-regional trade (millions $) Region/Groupi ng Growth Growth Growth AMERICAS LAIA Andean Group CACM MERCOSUR CARICOM Total AFRICA UMA UDEAC ECCAS ECOWAS CEAO PTA SADCC/SADC Total ASIA ACC GCC ASEAN Bangkok Agreement SAARC Total Note: Growth calculated as change between the periods divided by initial value. See Annexe I for a listing of the subregional groupings. Source: UNCTAD, Handbook on International Trade and Development Statistics, 1993.