SOUTH-SOUTH TRADE BENEFITS EXPORTERS AND IMPORTERS.

Jan 11, 1986

SOUTH-SOUTH TRADE BENEFITS EXPORTERS AND IMPORTERS.

GENEVA, JANUARY 9 (IFDA/CHAKRAVARTHI RAGHAVAN)— While promotion of south-south trade would benefit both exporting and importing countries, and strengthen position of south as a whole, many institutional constraints to such trade need to be tackled, according to economist Sanjay Lall.

In an article in the UNCTAD review, "trade and development", Lall, a senior research officer at institute of economics and Statistics (U.K.), warns however against "over-promotion" of southern trade, if it detracts from the capability to compete in the north or if it involves a costly process of protecting inefficient activities in the south.

Lall notes that the continuing stagnation in demand by the north, and widespread protectionist pressures against manufactures of major export interest to the south has stimulated policy interest in south-south trade.

South-south trade, as the basis for self-sustaining growth, has to be promoted by a deliberate process of efficient import substitution for products purchased from the north.

The growth of capital goods production, with its need for specialisation and scale, could best be promoted by increasing south-south trade.

But apart from this general case for promotion of south-south trade, there are also other major grounds, in Lall’s view.

South-south trade reflects to a greater degree the dynamic comparative advantage of industrialising countries: their newly acquired skills, technologies and organisational abilities reflect themselves far more in exports to the south than to the north.

On the importing front, south-south trade has a significant role to play, and can provide more "appropriate" technologies and products than normal sources of supply in the north.

The increasing industrialisation of the third world would create increasing scope for trade in primary products within the south, since many of the fastest growing third world countries have to rely heavily on imports of a wide range of raw materials and minerals, mainly from other third world countries.

While further empirical research is needed on linkages between south-south and north-south trade, and the determinants of south-south trade, available evidence appears to suggest that intra-south trade has a momentum of its own, based on the distinct features of such trade, Lall suggests.

Critics of the economic nature and benefits of south-south trade, Lall suggests, have based their conclusions on a neo-classical framework and misleading models, while neglecting such trade determinants as technology, scale, product differentiation, demand differences and interventions of TNCS.

New trade theories or south-south trade, incorporating some of these elements, are more favourable to south-south trade, and see it as yielding special benefits at several levels.

South-south trade will represent and promote the leading edge of industrial transformation, while south-north trade will embody the more stable and diffused determinants of export success.

The demand patterns for goods, both consumer and producer will differ between the north and the south.

Consumer goods in the south will be less sophisticated, more functional and of lesser variety, while capital goods will be less specialised, less automated and more rugged.

Technology efforts in the south are directed to "productionising" technologies from the north, which are inappropriate in their original form.

Thus, south-south trade will tend to be based, to a significant extent, on "minor" innovations and will promote further learning in the exporting countries.

The combination of dynamic skill and technology accumulation with different demand patterns in the context of south-south trade provides benefits both to the exporting and importing countries.

Since there are linkages between "learning" in exports to the north and the south, the promotion of south-south trade can in fact strengthen, rather than detract from competitiveness in the south-north trade.

But south-south trade, Lall warns, should not be pushed too far to the detriment of exports to the north and of a country’s own technological and industrial progress.

Strengthening south-south trade will also permit greater diversification and stability in export earnings to the countries involved, and would thus enable the south as a whole to extract better terms of trade from the north.

As regards trade in technology and services, the dynamic learning, adaptive and innovative processes in acquiring technology from the north and adapting it to domestic markets, give the more industrialised third world countries a competitive edge in selling technologies and services to the south, according to Lall.

In recent years, the export of manufacturing technology by the more industrialised third world countries has made impressive strides.

Mostly locally owned enterprises in India, Argentina, Brazil, Mexico, South Korea and Taiwan, are setting up turnkey plants in other third world countries spanning a broad range of activities and technologies.

The leader in this activity appeared to be India, which, according to a World Bank study, has won well over 200 contracts of two to 2.5 billion dollars in the past 7-8 years.

The main industry involved has been power generation 23 percent of Indian projects have involved design, supply and erection of power stations.

But other important industries - power distribution, cement, textiles, steel mills, machine tools and sugar - ranging from simple, well-diffused technologies to complex, advanced ones.

Other newly industrialised countries have been behind India in this activity, with a more narrow base in the range of their technologies.

The volume of exports of consultancy services - detailed engineering, project supervision, feasibility studies and similar services - have also grown rapidly in south-south trade.

But there are no instances of third world countries winning contracts for basic design services, though many of them have such design experiences at home.

In the area of foreign private investments, Lall notes the rise of a number of "third world multinationals", investing primarily in other third world countries in manufacturing, primary marketing, banking, retailing and other service activities.

Apart from the oil-rich countries, Hong Kong appears to be the largest single direct investor in the third world, with 1.5 to 2.0 billion of direct equity stock overseas, mostly in manufacturing industry.

However, a substantial portion of this by "expatriate" British firms operating out of Hong Kong, with investment by indigenous Chinese firms between 600-800 million dollars.

Brazil appears to be next largest overall investor, with some one billion of overseas equity stock, followed by Singapore, with most of activities concentrated in manufacturing in Malaysia.

South Korea, Taiwan, Mexico and Argentina also appear to be involved with overseas investments of between 50-100 million dollars each, and with manufacturing investments ranging between 30-60 million.

Argentina leads this group, with affiliates active in food processing, pharmaceuticals and light engineering, and with Argentinean enterprises firmly rooted in home-based technology and capital equipment.

Outside of these middle-income countries, India has a signify overseas investment of about 100 million dollars, with some 85 percent in manufacturing.

But the surprising thing about Indian foreign investment is not its absolute size, but the fact that during the 1970’s, net investments abroad exceeded new foreign investments into the country.

Another feature of Indian foreign investments, has been that Indian TNCS are involved in a wide range of activities - from simple, traditional ones like textiles or food processing to large, sophisticated ones like, giants paper and pulp mills, palm oil fractionation, truck and jeep assembly, precision tools for electronics industries, rayon, carbon black, etc.

Apart from industrial technologies, third world enterprises are also emerging as competitive sellers of services in other fields.

South Korea, with more than 40 billion of contracts so far, is the leader in construction, followed far behind by India with six billions, and Brazil with 3.6 billions.

Several hotel chains, banks, insurance companies and traders from the newly industrialising countries also are active abroad, with Singapore and Hong Kong particularly active in trading and financial services.

In the export of skills and know-how, these third world countries appear to be providing various categories: competitive technologies, either slightly adapted to local needs or identical to that in industrialised countries, technologies complementary to those provided by industrial countries, and non-overlapping technologies that are wholly specific to the particular third world country concerned.

However there appear to be limits to technology selling by these countries, limits set by the "learning conditions" at home.

Very large-scale activities, very expensive or very advanced R and D based technologies, very sophisticated consumer goods, and very fast changing technologies appear to be beyond the capabilities of the southern countries for some time to come.

But in more stables, mature technologies, amenable to descaling and simplification, increased market penetration could be expected from third world firms.

Local enterprises in the technology-buying countries would also replace suppliers from other southern countries, and south-south interaction would lead to a faster growth of these capabilities.