Forum Kajian Pembangunan Jakarta, Thursday 18 August 2011 South-South Cooperation: changes in economic architecture Peter McCawley SEADI USAID Project, Jakarta Paper prepared in cooperation with Shikha Jha, Economics and Research Department (ERD), Asian Development Bank, Manila
Outline: Ringkasan and Introduction 1.The growth of S-S links 2.Drivers of change 3.Policy package 4.Main messages 2
Outline: Ringkasan and Introduction 1.The growth of S-S links 2.Drivers of change 3.Policy package 4.Main messages 3
Ringkasan: The idea of a S-S model of growth Changing balances: growth of S-S links is now changing the balance of economic relationships across the world. S-S links have grown quickly since 1990. Regionalism is important: ASEAN. Policy packages are needed to support the growth of S-S links. 4
Idea of a S-S model of growth Why talk about South-South? (Table 1) Models of growth: 1970s Export-oriented industrialisation (EOI). Previously ISI (Importsubstituting industrialisation). EOI worked well until 1990s. Problems with EOI?: (a) Dependency? (b) Unreliable? (1998-97, and current GFC?) (c) Middle-income trap? S-S seen as part of an alternative model which is beyond EOI. 5
Outline: Ringkasan and Introduction 1.The growth of S-S links 2.Drivers of change 3.Policy package 4.Main messages 6
1. The Growth of S-S links The new global agenda of connectivity is reflected in discussions of S-S links in (a) Trade (b) Investment & financial cooperation (c) Labour movements (incl remittances) (d) New patterns of S-S cooperation (e) Regional institutions 7
(a) Trade S-S trade links are steadily improving Policy support for trade reform is strong the broad direction of change is clear Tariffs in ASEAN are now low; the push for reforms is moving on to other areas ( behind the border issues) World Bank: S-S trade has grown by an average of 13% pa since 1995, accounting for 20% of world trade in 2007. Asia accounts for over 75% of such trade. 8
(b) Investment and financial cooperation Growth of S-S investment flows rapid but hard to get reliable data Nature of the flows is mixed (an interesting zoo): -- FDI (resources, manufacturing, etc) -- portfolio I (both equities and bonds) -- bank loans (commercial, MDBs, others) -- official flows (various.. aid and export credits) -- others (private flows) Hard to track all of this! 9
(b) Investment some interesting points The South is emerging as an important exporter of capital (eg., China to Africa) Some is state-driven (China) but quite a bit is private sector-driven (Indian outward FDI) Surges of capital from Mid-East have been important for Africa, and Islamic countries China foreign aid (Table 2) S-S investment is often less capital-intensive (and more attuned to local conditions) than FDI from the North might be more suitable 10
(b) Financial cooperation Many steps to strengthen financial cooperation in recent years Two features of the change have been: (a) caution (which is paying off at present!) (b) deliberate moves towards stronger links (and thus the direction of change is clear) 11
(b) Financial cooperation Initiatives have included: ASEAN surveillance process Chiang Mai Initiative Asian Bonds Markets Initiative Asian Bond Fund Nevertheless, Asian financial markets remain more integrated with global markets than with each other. And capital is still flowing uphill. Q: Towards an Asian currency??. 12
Towards a currency?? The Jakarta Post, Sat 13 August 2011 ASEAN and China have agreed to utilize a bilateral currency swap arrangement to facilitate the direct use of renminbi and other local ASEAN currencies for trading so that trade between them did not depend on a third currency (the US dollar). We are discussing the possibility of increasing the effectiveness of what has already been agreed upon by some members of ASEAN with the government of China in utilizing a bilateral currency swop, Indonesian Deputy Trade Minister Mahendra Siregar said after the ASEAN Economic Ministerial meeting in Manado. [emphasis added]
(c) Labour movements incl. remittances With globalisation, people are on the move! Remittances (a large flow of finance) show the trends (Table 3). -- large, and -- growing quickly But there are various policy strains Importance of remittances (in BoP) varies greatly (Table 4). Lesson: there are pros and cons, but globalisation of labour movement is expanding quickly 14
(d) New patterns of S-S cooperation S-S development cooperation (not aid ) has been growing quickly. Countries with programs: -- China -- India -- South Africa -- Thailand -- Middle East -- Singapore -- Brazil -- Mexico World Bank: No fewer than 25 countries have robust S-S cooperation agendas 15
(d) New patterns of S-S cooperation China and India are large players. Main features of China s program: Supports PRC national goals and interests Hard to get data (reporting is not clear) Wide geographical coverage In Asia: Viet Nam and Indonesia have had support Aid effectiveness is an issue Infrastructure is important Wide variation in forms (grants, loans) of cooperation Official report on China s Foreign Aid recently issued 16
(d) New patterns of S-S cooperation There are many sectors of technical cooperation: extremely varied Some examples: agriculture, education, science, energy, transport, health, forestry, fisheries, environment Total flows: est at $17 billion (end 2009), up by over 60% between 2006 to 2008. 17
(e) Regional institutions The growth of regionalism has encouraged S-S cooperation ASEAN is a leader Other key groups in Asia are ASEAN + 3, East Asian Summit (EAS), APEC, and numerous regional trade arrangements In other parts of Asia: SAARC (Sth Asia) and CAREC (Central Asia) Q: What is the optimum number of organisations? 18
Outline: Ringkasan and Introduction 1.The growth of S-S links 2.Drivers of change 3.Policy package 4.Main messages 19
2. Drivers of change Q: What factors underpin the expansion in S-S links? Broad development goals Economic security Response to crises Connectivity 20
Drivers of change -- Development Learning from each other understanding of local development challenges: Infrastructure: extreme shortages Factor endowments: labour and capital Climate: tropics Informal (and micro) sectors Consumer needs (also micro) 21
Drivers of change Economic security Considerations of stability and economic security are important for S-S links -- in ASEAN; in SAARC. Example: concerns in South Asia: Risk of economic marginalisation cf North (& ASEAN?) Unequal negotiating power China!! Risks to regional stability from poverty, inequalities, regional political issues 22
Drivers of change Economic crisis 1997-98 Financial Crisis was a very difficult event in Asia. Led to a loss of confidence in traditional multilateral institutions and growth of interest in regional institutions. 2008 (and current situation) show the advantages of diversifying economic linkages. Three recent lessons -- Need to tackle capital flowing uphill -- Liberalise very carefully (capital, infrastructure, labour) -- Difficulties of regional integration (cf EU s problems!!) 23
Drivers of change -- Connectivity Connectivity relates to globalisation and new technologies Despite caution, policy-makers accept the need to connect Physical connectivity = hard infrastructure Soft connectivity = laws, regulations, customs, and human networks of all kinds (networks for government, private sector, and other groups are all important for building S-S links) 24
Outline: Ringkasan and Introduction 1.The growth of S-S links 2.Drivers of change 3.Policy package 4.Main messages 25
3. Policy package for S-S connectivity: Clear commitment at country level Policies which support the overall economic diplomacy of the nation Pro-market, not anti-market Coordination across government (with a lead agency?) Adequate resources Cooperate with regional and multilateral partners 26
Outline: Ringkasan and Introduction 1.The growth of S-S links 2.Drivers of change 3.Policy package 4.Main messages 27
4. Main messages The global economic architecture is changing: S-S links are expanding quickly Beyond EOI: There are significant benefits to developing countries from expanding S-S links Regional institutions are important in strengthening S-S links (ASEAN) Appropriate policy packages are needed to support the South-South model --- end --- 28