For example, who would ever have thought that Botswana, an example of a fast-growing economy known for the good macro-economic management of the mineral rents generated by the ultimate in gem stones, diamonds, would find itself in economic difficulties and a need to resort to foreign borrowing? Also, in southern African the dominant economy, South Africa, has sharply dipped into recession with two consecutive quarters of negative growth with no return to positive growth anticipated in the immediate future, and all of this largely because of the pernicious impact of the global recession on the demand for and financing of exports.
In the these circumstances it is not surprising that re-newed calls are made in official circles for more emphasis to be placed on South-South cooperation, away for the North-South axis, in developing a fairer system of international trade and financial management. Since the current difficulties have their origin in the developed North this change in orientation would seem to be a logical option.
But is this really a magic bullet? Perhaps not.
The first point to consider is the heterogeneity of the South. How, for example, can one compare the large economies of Brazil, China and India and their substantial degree of economic diversification and sophisticated manufacturing sectors with the predominantly primary-producing small African economies? Even South Africa, the industrial powerhouse of Africa, is small in size compared to these economies and lacks their diversified manufacturing capacity. Considering trade and development interests there is not much qualitative and size difference between a typical African LDC and Brazil on the one hand and between the LDC and Germany on the other.
This heterogeneity leads to the next point. African economies require diversifying economic growth to escape their current hub-and-spoke trade patterns of exporting a limited range of primary commodities while importing manufactured goods from a few industrialised countries. A South-South perspective propagates expanding trade with economies in the South as growth engine. But can this have a real impact if note is taken of the fact that the larger, more industrialised economies of the South have a competitive advantage in precisely those goods that would be the prime candidates for export-oriented African industrialization? Can any African country, for example, compete with the capacity and ability of India and China to produce low-cost, labour-intensive goods? Even if nominal wage levels are lower in the African economy, productivity enters the equation in determining much lower levels of unit labour cost in India and China that will severely impede exports to these markets.
South Africa, a middle-income economy with substantial industrial capacity, provides a good example of the problem in building trade relations on a South-South axis. South Africa’s manufactured exports have grown on the basis of exports to the rest of Africa, primarily because of geography and the ability to produce tradable goods competitively for these markets. However, the African market is too small to allow a quantum change in industrial growth. But can South Africa, under current conditions, really compete in the likes of China’s, India’s and Brazil’s markets? Apart from niche markets it is difficult to think of South African manufactured products that can compete in these markets, where in some instances domestic producers also derive benefits from extensive government support. And if South Africa will face problems, how much more difficult will the situation be for an African LDC?
Calling for expanding South-South trade relations should not be based on a perception that it is a magic bullet. If there is one truth that the theory of comparative conveys it is that in the end each economy’s comparative advantage exists in trade with the rest of the world, including the South and North. Furthermore, comparative advantage can be interpreted in a dynamic sense that provides for diversifying economic growth.
By Colin McCarthy - Tralac
http://www.tralac.org/cgi-bin/giga.cgi?cmd=cause_dir_cause&cause_id=1694
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