Navigating the Global South’s new world order

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September 17, 2023 1:29 am 0 comment 2.1K views

Dr. Nihal Pitigala

The Global South is rising. Recent upheavals—from the financial fallout of the Covid-19 crisis, the ongoing US-China trade spat and threats of de-coupling, the War in Ukraine, and the ensuing economic contagion—have turned back the clock on developing countries and have led to calls for an equitable global governance architecture through development cooperation and trade. As the leading “Voice of the South,” India is spearheading the calls to address what it sees as an imbalanced distribution of production centres and international commerce rules.

The G20, established after the 2008 financial crisis, was the first attempt to bring in the voice of the Global South to reshape the international economic order through more diversified and inclusive re-globalisation. After several rounds of talks last week in New Delhi, under India’s leadership, the G20 advanced its commitment to the Global South. From the inclusion of the African Union (AU) to the acceptance of India’s digital public infrastructure (Universal Payment Interface or UPI) to food security and the implementation of the Black Sea Grain (BSG) Initiative to a recognition that combatting the Climate Change crisis cannot come at the cost of extreme poverty – there was a tacit engagement of the Global South and a renewed commitment to engage advanced economies in resolving persistent development challenges.

Meanwhile, the BRICS (Brazil, China, India, Russia, and South Africa) have solidified their position as an influential voice representing the Global South. Its impacts are being felt in new and growing coalitions, which may soon expand beyond its original members. On Purchasing Power Parity (PPP), the BRICS is slightly larger than the G7 and much lower than G20 in formality. The BRICS has announced that it will add six more countries – Argentina, Egypt, Ethiopia, Iran, Saudi Arabia, and the United Arab Emirates (UAE)- and the expanded BRICS would account for 44 percent of the global economy by 2040 — far outrivaling the G7’s GDP predicted share of 21 percent (Bloomberg Economics, 2023).

BRICS flexes its muscles

While the G20 Summit laid the foundation for reforming the World Trade Organization (WTO) dispute settlement system by 2024 and several trilateral and plurilateral agreements to forge closer economic cooperation, the economic size and diversity of the BRICS countries and the growth trajectories confer significant market power, resource influence, investment attractiveness, and global governance impactstrategically aligning critical resources and technology. As these nations continue to collaborate and evolve, their role in shaping international trade and economic fundamentals is poised to become increasingly consequential, challenging established economic paradigms and fostering new dimensions of global economic dynamics, which may begin to constrain the actions of the great powers and provoke them to respond to at least some of the Global South’s demands.

Even without a formal agreement, the BRICS nations are exercising their market power, signalling the enormity of their collective strength. This BRICS spirit is already manifesting through individual activities or commodity affiliations, such as energy with Russia and Saudi Arabia and grain and fertiliser deals, all contributing to global exchanges via bilateral agreements, and India’s ban on non-basmati rice that affects the developing South as it grapples with inflation.

Notably, these nations employ subsidies akin to some advanced countries but stand out in their use of licensing and export restrictions. These measures serve dual purposes: consumer-centric equality objectives and a re-industrialis-ation strategy.

A similar trend is observed in Saudi Arabia’s push to establish a Green Hydrogen industry and India’s drive to attract electronics manufacturing. This pragmatic experimentation with hybrid economic models represents a shift from ideology to practicality.

Interdependence a Reality

The world’s trading system, flawed though it may be, is deeply ingrained through intricate supply chains where flows of commodities, intermediate and final goods straddle across geographies far and wide. Their disruption or dislocation will likely come at a price of industrial inefficiencies, high inflation, and reduced wealth, further exacerbating the recovery of both advanced economies and the South, directly and indirectly. For many industries, China remains at the centre of the network.

Even as US imports from China are diverted, they are primarily being replaced by large developing countries like Vietnam, which is still backward- linked to Chinese industry. Sri Lanka, for example, is tied to BRICS nations (India and China) as its top sources of imports, crucial for sustaining Sri Lanka’s industrial competitiveness and low inflation but is also indelibly linked with advanced economy export markets (EU and US), reinforcing the inter-related dependence dichotomy of the prevailing order.

Although the Financial and Economic cooperation pillar exists, BRICS has yet to formulate a coherent trade regime. However, the core group of BRICS countries currently operate a distinct commercial and industrial policy-driven model through subsidies and licensing, already signaling alternative commercial approaches to the status quo. If it prevails, such a regime poses challenges for the smaller countries of the South.

Given the limited fiscal space, only a few developing countries can finance industrial policies on a comparable scale. It will also create a tendency for industrial clustering around sub-regions, i.e. “Make-in-India”and “Made in China 2025” including a potential third, Middle East-centric cluster, with the rest of the South at the periphery.

How this eventually plays out for individual developing countries remains to be seen. An expanding BRICS, with relatively higher growth trajectories and sizeable purchasing power, will strengthen pre-existing trends poised to provide market opportunities for the Global South.

Whether or not Sri Lanka remains in or out of the new bloc, it is at the centre of the BRICS geo-economic space. The onus of exploiting its core comparative advantage as a maritime-based logistics, financial, and services hub will be contingent upon what it does to enhance and improve its physical and digital infrastructure, airconnectivity, multi-modal transport, financial transactions, Preferential Trade Arrangements (PTAs), and associated favourable regulatory changes—including better inter-institutional integration with reduced bureaucracy.

Sri Lanka has missed several pivotal opportunities to address these weaknesses, leaving it in a vulnerable position that contributed to the recent macroeconomic crisis. It is time Sri Lanka takes thoughtful and decisive action that will allow the economy to adapt to this significant shift in the global economy.

– Nihal Pitigala, a Consultant to the World Bank, is a Senior Trade Economist with over 20 years of experience providing analysis and policy advice on trade competitiveness.

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