The Future of South-South Economic Relations 9781350223141, 9781780323923

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FIGURES AND TABLES

Figures 1.1 1.2 2.1 2.2 2.3 3.1 4.1 4.2 4.3 4.4 5.1

Number of regional trade agreements (RTAs) in effect by year . . . . Spaghetti bowl of PTAs in the Western hemisphere . . . . . . . . . Dynamics of intra-African exports by region, 1980–2008 . . . . . . Dynamics of intra-African imports by region, 1980–2008 . . . . . . African South–South exports, 1980–2008 . . . . . . . . . . . . . An emerging East Asian community . . . . . . . . . . . . . . . . The SAARC–SAPTA/SAFTA interface. . . . . . . . . . . . . . . . Tariff reductions across regions (1986–2002) . . . . . . . . . . . . Stability index. . . . . . . . . . . . . . . . . . . . . . . . . . The process in reverse . . . . . . . . . . . . . . . . . . . . . . Developed and developing countries’ involvement in WTO panels (1995–2010) . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 Composition of WTO panels according to country member category (1995–2012) . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1 Evolution of outward foreign direct investment by group of origin . . 6.2 Selected South countries’ OFDI flows, 1980–2008 . . . . . . . . . 6.3 Indian OFDI stock: main South destinations . . . . . . . . . . . . 7.a1 Brazilian trade balance, 1990–2011. . . . . . . . . . . . . . . . . 7.a2 Brazilian trade balance with developing countries, 1990–2011 . . . . 7.a3 Brazilian trade balance with developing countries, 1990–2011 . . . . 7.a4 Brazilian trade balance with G20 members, 1990–2011 . . . . . . . 7.a5 Brazilian trade balance with G20 members, 1990–2011 . . . . . . . 7.a6 Brazilian trade balance with BRICs (incl. South Africa), 1990–2011 . . 7.a7 Brazilian trade balance with BRICs (incl. South Africa), 1990–2011 . . 7.a8 China’s contribution to Brazilian exports to developing countries, 1990–2011. . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.a9 China’s contribution to Brazilian imports from developing countries, 1990–2011. . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.a10 Individual contributions to Brazilian exports to BRICS, 1990–2011 . . 7.a11 Individual contribution to Brazilian imports from BRICs, 1990–2011. . 7.a12 Brazilian trade balance with BRICs in relation to developing countries, 1990–2011. . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.a13 Brazilian trade balance with developed countries, 1990–2011. . . . . 7.a14 Brazilian trade balance with developed countries, 1990–2011. . . . . 7.a15 Brazilian exports, developing versus developed countries, 1990–2011 . 7.a16 Brazilian imports, developing versus developed countries, 1990–2011 . 7.a17 Brazilian export balance with selected countries (1990–2011) . . . .

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. 15 . 16 . 44 . 44 . 47 . 61 . 75 . 78 . 81 . 82

. . . 103 . . . . . . . . . . .

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104 . 113 . 113 . 115 147 148 148 149 149 150 150

. . . . 151 . . . .152 . . . .153 . . . 154 . . . . . .

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.155 .155 156 156 .157 158

figures and tables | vii 7.a18 Brazilian import balance with selected countries (1990–2011) . . . . . . 7.a19 Brazilian FDI, 2001–08 . . . . . . . . . . . . . . . . . . . . . . . . 7.a20 Brazilian direct investment abroad, 2001–08 . . . . . . . . . . . . . . 8.1 Volume of trade between Brazil and its CAN neighbours, 1992–2009 . . . 8.2 Volume of trade between Brazil and its Mercosur neighbours, 1992–2008 . 8.3 Brazil’s total trade with India, South Africa and Argentina, 1992–2008 . . 9.1 Manufacturing exports, billions of current dollars . . . . . . . . . . . 10.1 GCC trade with India . . . . . . . . . . . . . . . . . . . . . . . . 10.2 GCC trade with China . . . . . . . . . . . . . . . . . . . . . . . . 10.3 India’s trade with GCC countries . . . . . . . . . . . . . . . . . . . 10.4 China’s trade with GCC countries . . . . . . . . . . . . . . . . . . . 10.5 Shares of India and China in Saudi Arabian imports . . . . . . . . . . . 10.6 Shares of India and China in UAE imports . . . . . . . . . . . . . . . 10.7 Shares of India and China in Saudi Arabian exports . . . . . . . . . . . 10.8 Shares of India and China in UAE exports . . . . . . . . . . . . . . .

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159 160 160 170 . 171 .175 192 203 203 204 204 205 205 206 206

The ‘new regionalism’ in the Americas . . . . . . . . . . . . . . . . . . ‘Post-liberal’ regional blocs . . . . . . . . . . . . . . . . . . . . . . . Evolution of intra-regional trade flows . . . . . . . . . . . . . . . . . . RTAs in the Americas . . . . . . . . . . . . . . . . . . . . . . . . . Major regional economic communities in Africa . . . . . . . . . . . . . Intra-African trade by RECs, percentage of total trade. . . . . . . . . . . African South–South aggregate trade, percentage of total trade . . . . . . African South–South trade by country, percentage of total country trade . . Proposed East Asian Community in relation to the EU and NAFTA in 2008 . Intra-regional trade comparisons . . . . . . . . . . . . . . . . . . . . Proliferation of developing country coalitions in the GATT/WTO, 1973–2007 Top OFDI sources in terms of stock, 2008 . . . . . . . . . . . . . . . . Indian OFDI stock, 1976–86. . . . . . . . . . . . . . . . . . . . . . . Indian OFDI stock, 1996–2009 . . . . . . . . . . . . . . . . . . . . . 1986 Brazilian OFDI accumulated flows by destination . . . . . . . . . . Brazilian OFDI stock, 2001 and 2008 . . . . . . . . . . . . . . . . . . Major acquisitions, 1993–2000, by value . . . . . . . . . . . . . . . . . Largest greenfield FDI projects, 2002–04 . . . . . . . . . . . . . . . . Major acquisitions by Indian companies, 2001–June 2009 . . . . . . . . . Major acquisitions by Brazilian companies, 2000–08 . . . . . . . . . . . Comparative outcomes for the emerging powers and the OECD . . . . . . Growth and reform in China and LAC, 1980–2010 . . . . . . . . . . . . . Five countries, eight sectors, dominate LAC trade to China (2009) . . . . . Share of China exports in selected countries and sectors, 2008 . . . . . . Chinese FDI in Latin America: major projects and motivations . . . . . . . Selected major Chinese services contracts in LAC . . . . . . . . . . . .

. 13 . 19 . 24 . 28 . 40 . 45 . 47 . 48 . 63 . 80 . 96 .114 .116 . 117 120 122 .123 124 129 129 164 180 182 183 184 188

Tables 1.1 1.2 1.3 1.a1 2.1 2.2 2.3 2.4 3.1 4.1 5.1 6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.a1 6.a2 8.1 9.1 9.2 9.3 9.4 9.5

viii | figures and tables 9.6 China: taking away the (manufacturing) ladder? Percentage of world manufacturing exports . . . . . . . . . . . . . . . . . . . . . . 9.7 Exports to the world, percentage under ‘threat’ from China . . . . . 10.1 Bilateral investment treaties . . . . . . . . . . . . . . . . . . . 10.2 Estimates of total foreign assets in December 2006. . . . . . . . .

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194 196 207 208

ABBREVIATIONS

ACP ADB AEC AfDB ALBA AMU ASEAN ASEAN+3 AU BASIC BIMSTEC BIT BNDES BRIC/S CACM CAN CARICOM CBERS CEPEA CMA COMESA DSB DSM EAC EAS EC ECA ECCAS ECOWAS EKC EMDEV EU FDI FOCAC FTA FTAA

African, Caribbean and Pacific Asian Development Bank African Economic Community African Development Bank Bolivarian Alliance for the Americas Arab Maghreb Union Association of Southeast Asian Nations Association of Southeast Asian Nations plus Japan, China and South Korea African Union Brazil, South Africa, India and China Bay of Bengal Initiative for Multisectoral Techno Economic Cooperation Bilateral Investment Treaty Brazilian National Development Bank Brazil, Russia, India, China/South Africa Central American Common Market Andean Community Caribbean Common Market China–Brazil Earth Resources Satellite Comprehensive Economic Partnership of East Asia Common Monetary Area (SACU) Common Market for Eastern and Southern Africa Dispute Settlement Body dispute settlement mechanism East African Community East Asia Summit European Community ‘economic complementation’ agreement/Economic Commission for Africa Economic Community of Central African States Economic Community of West African States environmental ‘Kuznets curve’ emerging and developing economies European Union foreign direct investment Forum for China–Africa Cooperation free trade area Free Trade Area of the Americas

x | abbreviations GATT General Agreement on Tariffs and Trade GCC Gulf Cooperation Council GDP gross domestic product IBSA India, Brazil, South Africa IFI international financial institution IIRSA Integration of Regional Infrastructure in South America IMF International Monetary Fund ISI import substitution industrialization IT information technology LAC Latin America and the Caribbean LDC least developed country M&As mergers and acquisitions MENA Middle East and North Africa MERCOSUR Southern Cone Common Market MFN most favoured nation NAFTA North American Free Trade Agreement NAMA Non-Agricultural Market Access OAU Organization for African Unity OECD Organisation for Economic Co-operation and Development OFC offshore financial centre OFDI outward foreign direct investment PDR People’s Democratic Republic PPP purchasing power parity PTA preferential trade agreement R&D research and development REC regional economic community RTA regional trade agreement SAARC South Asian Association for Regional Cooperation SACN South American Community of Nations SACU Southern African Customs Union SADC Southern African Development Community SAFTA South Asian Free Trade Area SAPTA South Asian Preferential Trading Agreement SINOPEC China Petroleum & Chemicals Corporation SUCRE Unified System for Regional Compensation TNC transnational corporation UAE United Arab Emirates UEMOA West African Economic and Monetary Union UNASUR Union of South American Nations UNCTAD United Nations Conference on Trade and Development VAT value added tax WAEMU West Africa Economic and Monetary Union WTO World Trade Organization

INTRODUCTION

Rachel Thrasher and Adil Najam

This book considers the future of economic relations between developing countries. It seeks to draw a picture of the many facets of South–South economic relations and how those relationships will shape the global economy in the next thirty to fifty years. Internationally, economic cooperation is shifting. Prior to the current Doha Round, a few developed countries drove the world economy through trade, lending and aid. Since 2001, however, groups of developing countries are joining together to face their economic challenges collectively. This approach is not entirely new. The phrase ‘South–South cooperation’ gained popularity in the 1970s as developing countries negotiated agreements aimed at narrowing the  development gap with the North (UNDP 2004). More recently, however, the term has taken on new importance in the face of the global financial downturn and stalled multilateral trade negotiations. The surprising resilience of certain emerging economies and regional integration trends indicate that the global South may yet sit in the driver’s seat of the world economy. In 2010, the Frederick S. Pardee Center at Boston University convened a conference of experts from all over the world to provide a broad perspective on the future of South–South economic relations. The authors draw from their diverse backgrounds to discuss the ways in which developing countries have collaborated and what shape that collaboration might take in the future. The discussion reveals three key insights into the nature and future of economic collaboration in the global South. First, and perhaps most transparently, the nature of South–South economic relations extends far beyond simple trade relationships. It involves investment and finance, labour and workforce movement, as well as cooperation in global economic governance. Secondly, the ‘South’, while a helpful category for some analyses, is far from homogeneous. Indeed, a gap seems to be widening between those countries designated ‘emerging economies’ and those which are not. Finally, existing collaboration among Southern countries has had both distinctly positive and negative impacts thus far. Undoubtedly, South–South economic relations have potential for harm and for good. In the absence of directed policies and intentional market and government actors, imbalances of power and growing gaps in development will persist. With the right policies in place and the right incentives in the market, however, these relationships

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could forge a new global order with greater economic and political equality. We begin by providing an overview of the history and new developments in South–South economic relations. We then introduce each chapter in the context of the aforementioned insights, concluding with questions about what further research might advance this discussion constructively for the years to come. South–South economic cooperation: historical understanding

The theme of cooperation between developing countries has maintained a cult following since the end of the Second World War and the formation of the Bretton Woods institutions. However, as a solution for development, South–South economic collaboration has not gained much traction. In the 1970s, when the concept gained popularity, many arguments were put forth to defend South–South economic relations. Analysts reasoned that developing countries needed to form trade pacts in order to attain economies of scale and to make up for their small domestic markets. Furthermore, access to Northern markets was limited, and thus relying on North–South trade arrangements had created vulnerabilities and dependency in developing country economies (Agatiello 2007). Despite these arguments, the global North retained its position as driver of world economic affairs. A few principal players led negotiations in successive rounds of the General Agreement on Tariffs and Trade (GATT). The IMF and the World Bank created the ground rules for countries recovering from economic crises and establishing new economic policies. Economic aid came from the developed world with conditions attached. Even the newer mantra ‘Trade not Aid’ reinforces the idea that trade with the global North will ultimately bring development to the global South. Not all of these historical arguments remain valid. Access to Northern markets has improved significantly in the past forty or fifty years, and regionalism among developing countries has not necessarily delivered on its promise of increased trade flows (De Melo and Panagariya 1993). Still, practitioners and academics alike view South–South economic relations as more development friendly than their North–South counterparts. One commonality among some South–South cooperation agreements is the presence of policy space for domestic development measures. A review of South–South investment treaties revealed that they generally contain ‘a different set of rules … which allow them flexibility to pursue developmental concerns to a greater extent than North–South [agreements]’ (Poulsen 2009: 18). Since the global financial crisis, many of the emerging economies seem to have benefited from this space, allowing them to bounce back more quickly from the adverse effects of the economic downturn (Poulsen and Hufbauer 2011). Furthermore, since developing countries share a common lack of financial resources (to varying degrees, of course), they can cooperate economically

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at a level more appropriate to their development and financial capacity. The Organization of Islamic Cooperation (OIC), for example, established a forum in 2009 to promote local technology transfer in engineering, medicine and energy, among other sectors. The forum encourages private sector investment and allows member countries to access appropriate, cost-effective technology aimed at poverty reduction (Sawahel 2009). Admittedly, OIC members have been forced to focus on more urgent political concerns since the beginning of the ‘Arab Spring’ in early 2011, but the Organization still manages to support humanitarian efforts across the Arab world. In January 2012, OIC representatives reviewed drilling sites for 680 wells in Somalia – a step towards resolving the water crisis there (OIC 2012). Recent trends in South–South economic cooperation

Recent events and global trends have begun to change how people view the role of the South in its own development. Globalization, for example, through advances in trade, travel and communications, has increased global access to foreign products and services, as well as different cultures and experiences. Even knowledge has become more widely available through access to the Internet and other media outlets. In addition, while populations in the developing world grow younger and more numerous, populations in the North are ageing and stabilizing. As developing countries consume increasingly more of the world’s resources, they are poised to have a greater impact on global trade. The World Trade Organization, both in its inception and in the perceived failures of the current Doha Round, has propelled the South into more global leadership. At the creation of the WTO, a few developing countries gained greater influence in international rule-making. Since the close of the Uruguay Round in 1994, more developing countries have joined and begun to negotiate with a common agenda. Now that multilateral trade negotiations have stalled, developing regions are pursuing an alternative global trade regime, establishing free trade agreements, customs unions and other economic arrangements. The increased importance of the South in the global economy has proved itself even under challenging circumstances. During the 2008 global financial crisis, the developing world showed both resilience and the potential for leadership. While the credit crisis in the United States and Europe has had an undoubtedly negative impact worldwide, many developing nations are recovering more quickly than initially expected. Growth rates in the developing world, by some accounts, have begun to diverge from those in the North, owing, in part, to better governance and improved macroeconomic management across the developing world. For example, the Asian financial crisis in 1998 forced many developing countries to improve bank supervision and financial sector regulation. These measures seem to have shielded these economies from the full impact of the crisis (Naudé 2009).

4 | introduction Understanding the future of South–South economic relations In light of recent events, this book represents a variety of interesting approaches to answer the question: What is the future of South–South economic relations? The following four chapters discuss the question in the context of three key regions of the world: Latin America (1), Africa (2) and the Asia-Pacific (3–4). On the tails of that discussion, the chapters explore the important role of the ‘emerging economies’. Chapters 5 and 6 cover the role of the emerging South in global negotiation coalitions and foreign direct investment, respectively. Chapters 7 and 8 highlight Brazil as a leader in regional and global governance (7) and analyse the environmental impacts of its leadership (8). Finally, Chapters 9 and 10 look to the rising role of China as an economic actor in Latin America (9) and the Middle East (10). The perspectives and conclusions elicited here are far from homogeneous. Still, as mentioned above, some common insights emerge – South–South economic relations as much broader than trade, a growing gap between two ‘Souths’, and the reality of both positive and negative consequences resulting from these relationships. We hope, too, that the diverse perspectives represented here will give rise to future research exploring the role of the South in the global economy, addressing the weaknesses and capitalizing on the strengths in South–South economic cooperation.

South–South regional integration Chapters 1, 2, 3 and 4 analyse the role of regional integration in South–South economic relations. In Chapter 1, Laura Gómez-Mera addresses two main questions: (1) why has Latin America been so eager to engage in regional trade and economic cooperation initiatives, and (2) what are the political and economic consequences of such unfettered engagement? She points out that much of Latin American economic integration can be attributed to either ‘bandwagoning’ or reacting against the asymmetrical North–South agreements prevalent in the region. This results in a multiplicity of trade and economic regimes with divergent goals and interests. It can also create new asymmetries within the region in which some actors emerge as a ‘second’ South compared to countries like Brazil, Mexico and Argentina. The implementation challenges, political obstacles and resultant lack of private sector support within such a fragmented trade landscape render the future prospects for coherent region-wide cooperation quite bleak. Africa, arguably a region facing greater obstacles to development than Latin America, exhibits similar characteristics in its regional integration efforts. Chapter 2, however, not only emphasizes the need for coherent region-wide cooperation, but expresses optimism for the future of such cooperation. First describing the nature and trends of economic integration in Africa, Eric K. Ogunleye addresses the challenges that the continent faces in integration – lack of political will, overlapping and weak regional institutions, inability to enforce and implement agreements, and general political and economic instability.

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He then lays out some positive long-range prospects for both regional and extra-regional economic integration for Africa. Many efforts are under way to address the very challenges that plague African regional economic cooperation. The African Union, for example, is working together with some of the principal regional communities to harmonize their policies and coordinate their activities – working together rather than competing against one another. National and regional initiatives for infrastructure development are also under way. If these and other initiatives are carried through, Ogunleye argues, the future of Africa’s South–South relationships may yet bring development to the continent. In Chapter 3, Nagesh Kumar takes a similar approach to economic cooperation in the Asia-Pacific region. Multiple, overlapping subregional and bilateral approaches face obstacles that keep the region from exploiting the full potential of regional economic integration. Still, Kumar argues that this current phase of integration, brought on in part by the global financial crisis, will likely be broader and deeper than previous regional cooperation efforts. Deeper integration, he asserts, will allow the Asia-Pacific region to assume its proper role in global economic governance more broadly. As a step towards such a goal, Kumar centres his proposal for an Asia-Pacific regional integration scheme on the existing (though incomplete) East Asia Summit (EAS) framework. He then specifies which sectors and approaches will be vital to the scheme and allow the region to reach its full potential, including trade, transportation, monetary and financial cooperation, specific cooperation aimed at development for the lesser developed members, and coordinated global economic governance. As a further note on Asian integration, Shaheen Rafi Khan tackles one of the most fundamental challenges facing the region: inter- and intra-state conflict. Chapter 4 explores the complex relationship between trade integration and conflict in South Asia. Khan asks first whether regional trade agreements promote peace in the region and, secondly, whether conflict in the region constrains trade. Despite obvious trade complementarities and multiple attempts to unify countries through economic agreements, intra-regional trade flows are minuscule and the region has been plagued with ongoing conflict and instability. Furthermore, since trade demands some level of political and institutional stability between states, conflict is a primary contributor to the lack of trade within the region. Interestingly, Khan argues that India’s self-defined role as regional leader and emerging nation in the global economy has contributed to the region’s fragmentation. The ongoing conflict between India and Pakistan has polarized the region and paralysed economic integration. The four chapters on regional economic cooperation draw some similar conclusions. Subregional economic arrangements proliferate throughout the developing world. While an understandable response to failed multilateral attempts at the WTO and asymmetric North–South relationships, these smaller-

6 | introduction

scale agreements tend to muddy the waters. They face challenges of implementation and enforcement, overlapping institutions and regulatory inconsistency, and political viability in the long term. In each region, economic integration attempts have covered many diverse areas – trade, finance, monetary policy, global economic governance – without overall coherence. Furthermore, larger members of the regions tend to dominate the economic landscape, creating new asymmetric relationships and even aggravating conflict there. Still, these chapters also manage to highlight some of the more successful regional initiatives and propose both domestic policies and regional cooperation schemes that could breathe life into South–South economic integration.

The ‘emerging’ South: impacts on South–South economic relations For obvious reasons, larger, more stable developing countries have a greater impact on the global economy than their smaller counterparts. Known generally as ‘emerging economies’, countries including Brazil, India, China, Russia and South Africa lead the developing world in day-to-day goods, services and capital flows, and in broader efforts to restructure global economic governance. The remaining chapters examine these countries in the contexts of WTO negotiations and global economic governance, cross-border investment flows, environmental trade impacts and cross-regional development strategies. In Chapter 5, Haroldo Ramanzini Jr and Manuela Trindade Viana show how South–South coalitions, led by Brazil and India as key ‘intermediate countries’, have changed the structure of the WTO and made space to air the interests and concerns of the developing world. They note that a significant characteristic of the global South is its increasing stratification – between those countries with high levels of economic growth and industrialization and those with extreme poverty and political instability. This characteristic features prominently in their chapter as they emphasize the role of Brazil and India, in particular, in the developing G20 during the WTO’s Doha Round of negotiations. The authors acknowledge that coalitions have costs as well as benefits, and that coalition members often have differing preferences with respect to the negotiated issues. This problem is exacerbated by the leadership of certain large coalition members. When it comes down to the wire and Brazil or India negotiates on behalf of other members, ultimately national interests come first, resulting in outcomes more favourable to the emerging nations than to the rest. Still, Ramanzini and Viana are quite hopeful for the future of South–South negotiation coalitions. They look to the G20, its history and its evolution to show how such groupings can formalize into longer-lasting institutions making longer-lasting change. WTO negotiations happen largely on a diplomatic and political level. Investment flows, by contrast, are operated primarily by private actors with private interests. Chapter 6 asks what the future of South–South investment flows holds, examining the trends of Brazil and India as top-ranked Southern

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investors. Author Mariana Rangel selected these case studies because of their tradition of investing broadly, their rank among the top nations of the global South in terms of investment outflows, and their explicit commitment to South–South dialogue, cooperation and development as members of the India, Brazil, South Africa (IBSA) Dialogue Forum. Despite this commitment, Rangel found that trends in both India and Brazil undeniably point towards increased investment in the global North and offshore financial centres, rather than in their Southern neighbours. Historically, Southern-based firms were more willing to accept joint ventures and share technologies with local partners. At the time, intellectual property restrictions on reverse engineering were much rarer and technology transfer between firms cost less. Today, however, where South–South investment exists, we know little about its effect on development. Some evidence suggests that Indian companies are more sensitive to employees and communities than their Northern counterparts. On the other hand, emerging nations investing in Africa tend to replicate the asymmetrical relationships in traditional North–South investing – exchanging Africa’s natural resources for Indian or Brazilian manufactured goods. Chapters 5 and 6 reveal a fundamental inconsistency. How can emerging nations play a leading role in promoting development concerns at the level of international institutions and yet virtually ignore the lesser developed nations when it comes to capital flows and foreign direct investment? Chapter 7 addresses this apparent contradiction by taking a closer look at Brazil’s South– South economic relations. Alcides Costa Vaz argues that, since 2003, Brazil has been driven by political imperatives to direct economic relations towards the rest of the developing world. Beginning with President Lula’s administration, Brazil has reacted against US economic hegemony in the region, focusing instead on relations with China, India and the rest of South America. Despite this, Vaz concurs with Rangel that such a political position has had little or no effect on the direction of outward investment flows. Indeed, even in trade flows and economic cooperation Brazil has targeted only the larger emerging economies and a few select neighbours within the region. Lesser developed countries are targeted for aid rather than trade. Vaz speaks optimistically of Brazil’s potential for leadership in global economic governance, but he warns against a growing trend of disassociation between the emerging economies and the lesser developed ones. Left unchecked, these unbalanced South–South relations could undercut the ability of the global South to act collectively to shape the global economy. Brazil’s foreign and trade policy has had indirect as well as direct effects on development in the global South. Kathryn Hochstetler, in Chapter 8, discusses the environmental spillovers of increased South–South economic integration, focusing specifically on Brazil’s trading relationships. She overlays three Brazilian case studies with an analysis of scale, composition and technique – traditionally, three mechanisms linking trade to the environment. In

8 | introduction

general, Hochstetler finds that increased amounts of South–South trade with Brazil carry mixed results for the environment. Trade with China, for example, seems to have negative technique effects on the environment, especially to the extent that Brazil is replacing its trade relationships with the USA and other developed countries. Within its own region, increased trade may not have many direct environmental effects, but the regional infrastructure projects built to support such trade have the potential to greatly harm local ecosystems. Brazil’s relationships with India and South Africa, while mostly aspirational in trade, have exerted influence on global trade rules and climate change negotiations, resulting in both positive and negative outcomes for the global environment. Hochstetler expresses some hope that certain nascent efforts towards greater environmental protection in the global South will eventually make a difference, but she also acknowledges that these initiatives are currently overshadowed by a ‘greater urge for conventional economic growth’ in these regions. Much of the headway made towards greater influence by Southern countries will be undercut if these countries do not prioritize sustainability along with economic development. China, though mentioned in brief above, deserves more concentrated attention in light of its relatively recent entrance on the global economic stage and its unprecedented growth rate in the past ten years. The final two chapters address China’s relationships with two key Southern regions: Latin America and the Caribbean (LAC) (9) and the Middle East (10). In Chapter 9, Kevin P. Gallagher examines China–LAC economic relations, comparing the two approaches to integration in world markets and describing the short- and long-term impacts of the relationship. Latin America, for example, has largely pursued a neoliberal economic model (acknowledging Brazil and others as important exceptions to this rule), allowing markets to determine trade and investment patterns, as well as their long-term path to development. China’s growth, on the other hand, has been strategic, driven in part by a neo-developmental state, building domestic capabilities as its priority. The relationship between the two, therefore, is somewhat unbalanced. In the short run, Latin America benefits greatly from increased Chinese demand for commodities, and China enjoys Latin America as a growing market for its manufactured goods. In the long run, however, China’s increased demand for commodities could cause exchange rate appreciation and environmental degradation. Likewise, if China outcompetes LAC in the global manufactures markets, LAC could very well face some measure of deindustrialization. In this dismal scenario, the growing gap between China and Latin America could be a prime example of the creation of two ‘Souths’. In light of these possibilities, Gallagher suggests that Latin America as a whole should pursue a more strategic approach to development. If the region looks to China as an example, rather than as simply a trade partner, then both could benefit in the long run from a mutually productive economic relationship.

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The final chapter visits a region of the world not yet touched by earlier essays in the book. Chapter 10 explores the relatively recent relationship between certain Middle Eastern countries and Asia (specifically China and India). Nader Habibi focuses on the six oil-rich countries that make up the Gulf Cooperation Council (GCC), as they have taken the lead in developing economic ties with Asia. For economic and geopolitical reasons, since 2001 the GCC has developed a ‘Look East’ policy for trade and investment. Concurrently, Asian demand for oil and natural gas has skyrocketed, forcing China and India (‘Chindia’) to look for stable, long-term sources of such resources. The burgeoning relationship has provided each partner with long-term oil contracts and opportunities to invest in fast-growing industries and economies. The GCC has also benefited from low-cost Asian exports of manufactured goods, and Chindia relies heavily on remittances from migrant Asian workers in GCC countries. Still, not every spillover effect is positive. International human rights groups have spoken out about the treatment of Asian migrant workers in the Middle East, a step that their home countries have been reluctant to take given their reliance on remittances. Also, while the GCC as a whole has reaped economic rewards from trade and investment from Chindia, those rewards have been concentrated in just a couple of the members. If these imbalances continue, this could drive a wider gap between the countries of the region. As has been noted above, the Southern countries involved will need to address these obstacles before these economic relationships provide sustainable, long-term growth. Conclusion

Broad speculation about the true picture of development and global economic governance reveals the relative novelty of today’s South–South economic relations. Our authors concur on some central (uncontroversial) points, giving rise to our three insights: the broad nature of these relationships extending beyond trade, the widening gap between two distinct ‘Souths’ with divergent paths and interests, and the reality of both positive and negative impacts from South–South cooperation. Still, there are many questions left unanswered. What characteristics should South–South economic relations have in order to be sustainable over the long term? Should governments or private actors take the lead? The global financial crisis has undermined traditional confidence in the markets to distribute growth and development efficiently, but should markets be ignored altogether? Some types of economic integration, such as investment flows, have been more resistant to political influence, giving us a glimpse into what private citizens around the world really think about the locus of economic growth – even those from the largest neo-developmental states. Given that, will market forces ultimately determine which states succeed and which fail? On the other hand, China’s unprecedented success at managed growth could provide a model on which the future of the global economic order is built.

10 | introduction

Time may reveal the answers to some of these questions. Others may require some tinkering by public and private actors to determine the most effective way for developing countries to cooperate economically. We hope this book will continue the discussion, leading the way for more research and an enduring interest in the future of South–South economic relations. References Agatiello, O. R. (2007) ‘Is South–South trade the answer to bringing the poor into the export process?’, Paper presented to the  UNCTAD Expert Meeting on Participation of Developing Countries in New and Dynamic Sectors of World Trade: The South–South Dimension, Geneva, October. De Melo, J. and A. Panagariya (eds) (1993) New Dimensions in Regional Integration, Centre for Economic Policy Research, Cambridge: Cambridge University Press. Naudé, W. (2009) ‘The financial crisis of 2008 and the developing countries’, Discussion Paper no. 2009/01, United Nations University – World Institute for Development Economics Research (UNU-WIDER), www. wider.unu.edu/publications/workingpapers/discussion-papers/2009/en_GB/ dp2009-01/, accessed 16 June 2010. OIC (Organization of Islamic Cooperation) (2012) ‘OIC reviews drilling sites for 680 wells to resolve water crisis in Somalia’, OIC

Journal, 20: 19, April, issuu.com/oic-journal/ docs/oic_journal_issue_20_english/19, accessed 1 May 2012. Poulsen, L. S. (2009) ‘The significance of South–South BITS’, Paper presented at the ISA’s 50th Annual Convention, ‘Exploring the past, anticipating the future’, New York, February. Poulsen, L. S. and G. C. Hufbauer (2011) ‘Foreign direct investment in times of crisis’, Transnational Corporations, 20(1): 19–38, United Nations Conference on Trade and Development, April. Sawahel, W. (2009) ‘Islamic countries establish tech-sharing forum’, April, www.digitalopp ortunity.org/news/islamic-countriesestablish-tech-sharing-forum/, accessed 15 June 2010. UNDP (United Nations Development Programme) (2004) ‘Forging a global South’, United Nations Day for South–South Cooperation, 19 December, ch.undp.org.cn/ downloads/ssc/forgingaglobalsouth.pdf.

1 | LATIN AMERICAN ECONOMIC COOPERATION: CAUSES AND CONSEQUENCES OF REGIME COMPLEXIT Y

Laura Gómez-Mera

The past three decades have witnessed a revival of regional economic cooperation in world politics. Nowhere has this resurgence of regional trade and economic agreements been as dynamic and vigorous as in the Western hemisphere. Since the 1990s, Latin American and Caribbean countries have pursued a multi-tier strategy of trade liberalization, resulting in a complex web of overlapping trade and economic agreements. Moreover, changes in the international economic and domestic political environments in the last decade have led to important transformations in the current landscape of trade relations in the Americas. The ‘open regionalism’ initiatives launched in the early 1990s now coexist with a mosaic of bilateral trade agreements signed with intra- and extra-regional partners. In addition, the last few years have seen the emergence of broader political and economic initiatives that go beyond commercial integration to include cooperation in money, finance, energy and infrastructure. This chapter addresses two main questions. First, what explains the recent evolution of regional trade and economic cooperation initiatives in the Americas? Why have Latin American countries been so eager to participate in such diverse forms of economic and political collaboration? Secondly, what are the economic and political consequences of the proliferation of overlapping economic agreements in the region? Economists and policy-makers have repeatedly cautioned about the potential economic costs of the emerging ‘spaghetti bowl’ of trade rules and arrangements in the Western hemisphere and beyond (e.g. Bhagwati 2008). Less attention has been paid to the international and domestic political impact of this increasing regime complexity characterizing regional economic relations in the Americas. In what ways has the increasing density of regional agreements affected the strategies and decision-making processes in Latin American countries? More importantly, have institutional proliferation and overlap worked to facilitate or to undermine regional unity and collaboration efforts? The chapter is organized as follows. The next section briefly describes the evolution of regional economic cooperation attempts in the Americas since the early 1990s. I show that the current landscape of regional economic cooperation in the Western hemisphere is characterized by increasing complexity and

12 | one

overlap of different types of trade and economic agreements. The following section seeks to account for this increasing regime complexity, considering the role of global economic pressures, power asymmetries and domestic political factors. In the fourth section, I focus on the consequences of the overlap of competing and complementary trade and economic commitments in the Americas. In the conclusion, I summarize the main arguments and discuss their implications for the longer-term evolution of South–South cooperation in the Americas. The changing landscape of regional trade and economic cooperation in the Americas

Regionalism has a long history in the Americas. Indeed, as early as the 1820s, Latin American countries sought to strengthen regional ties through the creation of regional institutions. Building on the Bolivarian ideal of hemispheric unity, the Organization of American States was created in 1948. In the 1950s and 1960s, countries in the region pursued regional economic integration in support of the prevailing development strategy of import substitution (Devlin and Ffrench-Davis 1998). The Latin American Free Trade Association, the Andean Pact and the Caribbean Free Trade Association date from this period. Despite their ambitious objectives, these initiatives had limited results, falling short of the objective of promoting regional interdependence and economic growth. The late 1980s and early 1990s witnessed a resurgence of efforts at regional economic integration triggered by a combination of security, domestic political and economic considerations. In the early and mid-1990s, countries in the region signed a series of preferential or ‘economic complementation’ agreements (ECAs) within the framework of the Latin American Integration Association (ALADI). Four aspiring common markets or economic communities were also created during this period: the Southern Cone Common Market (MERCOSUR), the Andean Community of Nations (ACN), the Central American Common Market (CACM) and the Caribbean Common Market (CARICOM). The creation of a customs union – a free trade area with a common external tariff vis-à-vis imports from third countries – was thus a necessary step in that direction. However, the four Latin American regional groupings established in the 1990s have made limited progress in this direction, and continue to be characterized by important imperfections and perforations in their common external tariffs.1 The revival of regional cooperation in the 1990s was initially welcomed in policy-making and academic circles (IDB 2002). In particular, analysts emphasized the differences between this new wave of ‘open’ regionalism and the inward-oriented regional integration projects of the 1950s and 1960s (Devlin and Estevadeordal 2001). As a report by the Inter-American Development Bank put it, ‘[t]he new regionalism is an integral part of an overall, structural

Members

Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua

Bolivia, Colombia, Ecuador, Peru, Venezuela (until 2006)

Antigua & Barbuda, Bahamas, Barbados, Belize, Dominica, Granada, Guyana, Haiti, Jamaica, St Kitts & Nevis, St Lucia, St Vincent & the Grenadines, Suriname, Trinidad & Tobago, Montserrat

Argentina, Brazil, Paraguay, Uruguay

Regional trade bloc

CACM

Andean Community

CARICOM

MERCOSUR

table 1.1 The ‘new regionalism’ in the Americas

Common Market Group Common Market Council Trade Commission Parliament Economic and Social Consulting Forum Secretariat Permanent Review Tribunal

Conference of the Heads of Government Community Council of Ministers Caribbean Court of Justice Secretariat

Treaty of Chaguaramas, 1973. Revised in 2001, creating the CARICOM Single Market and Economy (CSME)

Treaty of Asunción, 1991

Andean Presidential Council Andean Foreign Relations Ministers Council Commission Andean Court of Justice Andean Parliament General Secretariat

Meeting of Presidents Council of Ministers Inter-Sectorial Council of Economic Integration Ministers Sectorial Council of Economic Integration Ministers Executive Committee of Economic Integration

Main organs

Cartagena Agreement (Bolivia, Chile, Colombia, Ecuador and Peru), 1969 (Venezuela acceded in 1973, and Chile withdrew in 1976). Trujillo Protocol, 1996

General Treaty on Central American Economic Integration, 1960 (Costa Rica acceded in July 1962). Guatemala Protocol, 1993

Establishment

13

14 | one

policy shift in Latin America toward more open, market-based economies operating in a democratic setting’ (ibid.: 3). The strategy of regional trade liberalization, pursued in tandem with unilateral and multilateral opening, resulted in an unprecedented expansion in intra-regional trade levels. This initial success seemed to lend credence to the early optimistic assessments of the ‘new regionalism’. However, towards the end of the 1990s, the Latin American subregional trade blocs seemed to be running out of steam. Much like their predecessors, the new regional integration agreements confronted serious implementation and compliance problems. Moreover, the deterioration of international economic conditions in the late 1990s severely disrupted trade relations among Latin American countries. Domestic macroeconomic and political instability in several South American countries further depressed trade levels within MERCOSUR and the Andean Community (Rosales 2009). The early 2000s also witnessed gradual but progressive stagnation in the process of hemispheric trade cooperation, including the suspension and eventual termination of Free Trade Area of the Americas (FTAA) negotiations. The collapse of the FTAA, when combined with the stalemate in multilateral trade negotiations and the growing disillusion with neoliberal reforms throughout Latin America, significantly affected patterns of regional economic cooperation in the Western hemisphere in the 2000s. In fact, these important changes at the international, regional and domestic levels contributed to the emergence of two distinct – but coexisting – new models of trade and economic agreements in the region: (i) the rise and proliferation of bilateral trade agreements with intra- and extra-regional partners; and (ii) the emergence of the broader projects of ‘post-liberal’ regionalism that seek to go beyond trade to include cooperation in monetary, financial, energy and other noncommercial issues (Da Motta Veiga and Rios 2007). These two new strategies of regionalism have evolved side by side with the customs unions and deeper integration agreements created in the 1990s, thus resulting in an increasingly complex mosaic of overlapping institutions.

Proliferation of overlapping preferential trade agreements Some Latin American countries – most notably Chile and Mexico – began relying on bilateral trade agreements with intra- and extra-regional partners in the second half of the 1990s. However, as Figure 1.1 illustrates, the number of bilateral preferential trade agreements (PTAs) signed by Latin American countries experienced a dramatic surge after 2003. Frustration with the slow pace and eventual breakdown of the FTAA negotiations in the early 2000s led the USA to negotiate separate agreements with ‘can-do’ countries, which were prepared to undertake regulatory reforms in exchange for preferential access to the US market (Shadlen 2008; Quiliconi and Wise 2009; Phillips 2010). Between 2004 and 2007, the USA concluded agreements with Chile, Central America

gómez-mera | 15 70 60

Free trade agreements

50 40 Partial scope agreements

30 20 10 0

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

1.1 Number of RTAs in effect by year (total) (source: SICE)

and the Dominican Republic, Colombia, Ecuador, Peru and the Caribbean countries. Also during this period, Latin American countries expanded their web of bilateral links. An agreement between Chile and Central American countries came into effect in 2002. Most notably, after long and protracted negotiations, an ‘economic complementarity agreement’ was signed in 2004 between MERCOSUR and the Andean Community. Another novel feature of the more recent landscape of trade agreements in the Western hemisphere is that the rise of intra-regional bilateral trade agreements has been complemented by an accelerating trend of South–South ‘transcontinentalism’ (Estevadeordal and Suominen 2009). Mexico and Chile are leaders in this respect, signing free trade agreements with developing and emerging countries all over the world. Since then, Chile has entered agreements with Korea (2004), China (2006), New Zealand, Singapore and Brunei (2006), Japan (2007) and Australia (2008). Mexico, in turn, has concluded negotiations with Israel (2000) and Japan (2004). Peru has also been active on this front, recently establishing regional trade arrangements (RTAs) with Thailand (2005), China (2009) and Singapore (2008). Although some of this activity was definitively North–South in character, South–South arrangements are also increasing. In 2004, MERCOSUR signed a preferential agreement with the Southern African Customs Union (SACU). The South American bloc also has agreements with India (2004) and Israel (2007). The rapid spread of bilateral deals has undoubtedly increased the complexity of the spaghetti bowl of regional trade agreements in the Western hemisphere (see Figure 2.1). This growing institutional density has been exacerbated

Australia

Singapore

Thailand

China

South Korea

Japan

Brunei

Trans-Pacific SEP

ACE 58 ACE 35

ACE 59 ACE 36 Bolivia

Bahamas

(CARICOM members but not in CSME)

CA R EP IFOU A M

EU -

EU

Paraguay Uruguay MERCOSUR

Argentina

Brazil

CARICOM CSME

Antigua and Barbuda, Barbados, Belize, Dominica, Grenada, Guyana, Jamaica, St Lucia, St Kitts and Nevis, St Vincent and the Grenadines, Suriname, Trinidad and Tobago

Haiti

Venezuela ACE 59

Panama

1.2 Spaghetti bowl of PTAs in the Western hemisphere (source: Baldwin 2008)

NZ

Peru Chile

Costa Rica

Dominican Republic

Colombia ACN ACE 59 Ecuador

CACM

Nicaragua

El Salvador Guatemala Honduras

Canada-CRI

Chile Cent. Amer.

G-3

Mexico

DR-CAFTA

Canada NAFTA USA

EU, EFTA

EFTA

16

gómez-mera | 17

by the emergence of a new type of regional integration project, which has broadened the scope and nature of the commitments undertaken by Latin American countries.

‘Post-liberal’ regionalisms A second model of regional cooperation initiatives that has recently emerged in Latin America further adds to this complex landscape. As some scholars have noted, the emergence of these ‘post-liberal’ projects, such as the Bolivarian Alliance for the Americas (ALBA) and the Union of South American Nations (UNASUR), was partly a response to the perceived failure of the previous model of ‘open’ regionalism (Da Motta Veiga and Rios 2007).2 In fact, these new alternatives of regionalism were part of a broader process of backlash in Latin America against ‘neoliberal’ globalization and the policies associated with the so-called ‘Washington Consensus’. The advent of left-wing governments in many countries in the region, including Chile, Brazil, Venezuela, Bolivia, Ecuador and Argentina, resulted in an increasing politicization of the economic agenda. The previous neoliberal model of development was replaced by a more interventionist economic strategy that paid greater attention to social and distributional objectives. The erosion of the ‘liberal convergence’ that was dominant in the 1990s left room for the adoption of heterogeneous and sometimes divergent strategies of international and regional insertion, such as UNASUR and ALBA (ibid.: 17). These post-liberal regional projects thus differ from the ‘new regionalism’ blocs of the 1990s, as well as from the more recent bilateral PTAs, in two ways. First, they were attempts by governments in the region to advance the new, more ‘developmentalist’ and state-led development paradigm to intraregional economic and political relations. This is perhaps clearer in ALBA, which emerged as a radical alternative to the neoliberal trade-based model of cooperation promoted by the USA in the 1990s. Created and led by Venezuelan president Hugo Chávez, ALBA emphasizes state-centred collaboration, public ownership and regional solidarity, seeking to advance ‘a new vision of regional welfare and equity’ at the regional level (Hart-Landsberg 2009). It promotes managed exchanges of goods and services that reflect each member’s national strengths, so as to promote more sustainable and equitable national development. Examples of these planned exchanges include Venezuela providing Cuba with oil in exchange for Cuban doctors and teachers. Similarly, the two countries have signed an agreement with Bolivia, by which the latter provides them with natural gas and mining and agricultural products, in exchange for Cuban and Venezuelan support in the strengthening of Bolivia’s education, health and infrastructure (ibid.). Secondly, both UNASUR and ALBA reject the narrow focus on commercial interdependence of the free trade areas and customs unions of the liberal period and seek to broaden the scope of regional collaboration to other economic and non-economic areas, including energy, security and cultural issues. While

18 | one

one of UNASUR’s central objectives is to establish a South American free trade area, members have insisted that commercial liberalization must be accompanied by industrial policy interventions and other mechanisms aimed at ensuring a more balanced distribution of gains from cooperation within and among member states. Particular emphasis has been placed on the Initiative for the Integration of Regional Infrastructure in South America (IIRSA), which promotes the development of transport, energy and telecommunications infrastructure with the aim of facilitating physical integration among South American countries. Other priorities on the UNASUR agenda include political dialogue, energy integration, telecommunications, environment and social cohesion. UNASUR and ALBA have also paid significant attention to cooperation in financial and monetary issues. Several mechanisms have been proposed and put in place. In 2007, seven of the twelve UNASUR members agreed to the creation of the Bank of the South (Banco del Sur), with the stated goal of asserting their political and financial independence from the Washingtonbased international financial institutions (IFIs), particularly the International Monetary Fund (IMF) and the World Bank (Rosales 2010). Some members, especially Venezuela and Ecuador, initially favoured a stronger and more autonomous entity that could serve not only as a development bank but also as a lender of last resort and a stabilization fund. By contrast, Brazil has remained ‘an unenthusiastic supporter of the Bank’ (Hart-Landsberg 2009: 11), only endorsing its role as a development institution that focuses primarily on the financing of regional infrastructure projects (Rosales 2010). After several months of negotiations, South American governments signed the Bank of the South’s Constitutive Treaty in September 2009. According to this agreement, the Bank’s main function is to ‘finance development projects in key sectors of the economy, with the aim of promoting competitiveness, scientific and technological progress, infrastructure and maximizing the value added of raw materials produced in the region’ (ibid.: 7). The Constitutive Treaty also stresses the institution’s role in mitigating members’ external vulnerability and strengthening their financial autonomy (Leon and Martin 2011). Frustration with the slow progress in the establishment of the Bank of the South, and, in particular, with its moderate ‘developmentalist’ character, led the Venezuelan government to launch an alternative proposal for monetary and financial cooperation within ALBA. In April 2009, ALBA members signed the agreement for the creation of a Unified System for Regional Compensation (Sistema Unitario de Compensación Regional de Pagos, or SUCRE), thus establishing the foundations for a common regional currency (SELA 2009). The SUCRE was conceived as a medium of exchange to be used in all commercial transactions among ALBA members, with the ultimate goal of replacing reliance on the US dollar in regional exchanges and thus enhancing Latin American countries’ sovereignty and autonomy. Apart from introducing

gómez-mera | 19

a common unit of account (the SUCRE), the 2009 agreement created the Regional Monetary Council and the Trade Convergence and Reserves Fund, which have been viewed as a central element in the constitution of an alternative financial architecture in the region (Rosales 2010). In July 2010, Venezuela and Ecuador conducted the first bilateral trade deal using the SUCRE.3 Finally, the last decade has witnessed several attempts at energy cooperation among Latin American countries. Venezuela has been particularly active in this regard, pushing for the creation in 2004 of Petrosur, a joint initiative between Brazil’s oil company Petrobras, Venezuela’s oil company Petróleos de Venezuela S.A. (PDVSA) and Argentina’s energy company Enersa, with the aim of promoting energy production and integration in South America. A similar agreement was signed with Andean and Caribbean countries (Petroandino and Petrocaribe, respectively), with the ultimate goal of creating Petroamerica, a coalition of all state-owned oil companies in South America.4 Petrocaribe, which was launched in 2005, offers preferential pricing of crude oil and petroleum products to Caribbean countries, with the aim of ‘establishing a new favorable, equal and just exchange scheme between the countries in [this] region’.5 In April 2007, UNASUR countries held the first South American Energy Summit in Isla Margarita, Venezuela. The meeting led to the creation of the South American Energy Council to coordinate energy policy at the regional level. table 1.2 ‘Post-liberal’ regional blocs Regional bloc

Members

Year

SACN

Bolivia, Colombia, Ecuador, Peru, Argentina, Brazil

2004

UNASUR

Paraguay, Uruguay, Venezuela, Chile, Guyana, Suriname

2008

ALBA

Antigua & Barbuda, Bolivia, Cuba, Dominica, Ecuador, Nicaragua, St Vincent & the Grenadines, Venezuela

2004

The causes of RTA proliferation and regime complexity in the Americas

What explains the increasing complexity and density of regional economic agreements in the Western hemisphere? Several factors contribute to the proliferation of bilateral trade agreements as well as to the emergence of broader economic and political initiatives such as ALBA and UNASUR.

Globalization and competitive economic dynamics Several arguments have been put forward to account for the proliferation of regional trade agreements since the 1990s. One explanation is that regionalism is spreading as a response to the stagnation in multilateral trade negotiations (Krugman 1991; Bhagwati 1993, 2008). A focus on the evolution of multilateralism, however, fails to account

20 | one

for cross-regional variations in patterns of regionalism. Baldwin’s domino theory addresses some of the shortcomings of conventional explanations linking regionalism to developments in the multilateral trading system (Baldwin 1993, 1997). Baldwin’s model highlights how the trade and investment effects of preferential trade agreements create incentives for exporters in non-member states to lobby their governments to join the agreement. If new members join the existing PTA, however, the risk of trade and investment diversion effects increases in other excluded countries, which now face incentives to either join the original agreement or to form a new one. The creation of a single agreement thus triggers a chain reaction or ‘contagion’ effect, leading RTAs to spread ‘like wildfire’ (Baldwin and Jaimovich 2010). This political economy account of the progressive expansion of regional agreements sheds much light on the evolution of regionalism in the Western hemisphere. According to Baldwin, the establishment of the US–Mexico free trade area triggered fears of exclusion and underlined defensive economic incentives for Latin American countries to deepen subregional integration efforts (Baldwin 1993). Recent efforts to launch monetary and financial cooperation at the regional level can also be understood as joint responses by Latin American countries to the constraints and opportunities posed by globalization. South American leaders viewed the Bank of the South as a vehicle for reasserting their political and financial interdependence from the Washington-based IFIs, and particularly the IMF (Hermon 2008). In addition, they believed the establishment of a regional financial institution would contribute to mitigating South American countries’ vulnerability to and dependence on volatile international flows of capital (Hart-Landsberg 2009; Furtado 2008). Yet, at the same time, the creation of the Bank owed much to the region’s increasing financial strength in the last decade. The unprecedented accumulation of foreign reserves in several South American countries, resulting from the rise in commodity prices in the post-2002 period, allowed them to cancel their debts with the IMF and led governments to search for alternatives that could contribute to enhancing the region’s position in the context of increasing financial globalization (Hart-Landsberg 2009).

Interstate power asymmetries A focus on the competitive economic pressures derived from globalization sheds significant light on the incentives faced by both developed and developing countries to engage in preferential trade agreements. However, to account more fully for the changing landscape of regionalism in the Americas it is essential to consider the role of interstate power asymmetries. Disparities of power in the Western hemisphere have crucially influenced the nature and timing of the recent wave of PTAs and the emergence of the post-liberal regional projects in Latin America (Phillips 2010). While some smaller Latin American countries have had little option but to ‘bandwagon’ with the USA and accept its terms of integration, others have

gómez-mera | 21

followed an alternative strategy, choosing instead to balance against the USA by strengthening their South–South ties. Indeed, the creation and relaunch of the ‘new regionalism’ trade blocs (MERCOSUR, the Andean Community, etc.) in the 1990s was partly a response to the signing of NAFTA and the US-led proposal for hemispheric integration. Along the same lines, the expansion of bilateral PTAs between countries in the Americas and extra-regional partners, as well as the emergence of UNASUR and ALBA, can be explained as defensive reactions to the hegemonic position of the USA in the Western hemisphere. A similar balancing rationale can be identified in regional cooperation initiatives in money and energy. According to Hart-Landsberg (2009: 10), the Bank of the South ‘would lay the foundations for a truly autonomous financial system, which would contribute to the reduction of power asymmetries between countries in the region’. In the same vein, the regional energy agreements sponsored by Chávez have been interpreted as ‘a political plan that would improve Latin America’s negotiating position with other players’.6 Secondly, asymmetries of power among Latin American countries have also influenced the geography of regional trade and economic relations, adding to the proliferation of overlapping agreements. In South America, Brazil’s economic preponderance has crucially shaped patterns of regional cooperation (Gómez-Mera 2005, forthcoming). Apart from participating in MERCOSUR, Brazil has, since the late 1990s, promoted broader South American cooperation, first through the establishment of a South American Free Trade Area, and more recently with the creation of the South American Community of Nations (SACN) and UNASUR. These attempts reflect a deep-rooted Brazilian ambition of consolidating its leadership at the regional level and its role as an ‘intermediate power’ in the international order. Indeed, Brazil’s quest for regional prominence intensified under President Luiz Inácio Lula da Silva. Lula’s foreign policy placed strategic emphasis on South America and regarded it as a platform for the construction and exercise of Brazilian leadership. However, Brazil’s regional preponderance has also been a destabilizing force for regional cooperation. First of all, Brazil has consistently resisted the deepening and strengthening of regional institutions within MERCOSUR. The current set of minimalist, intergovernmental bodies provides Brazil, and to a lesser extent also Argentina, with a greater degree of influence in regional-level decisions. At the same time, Brazil’s recent rising power in the region and beyond has triggered balancing efforts by smaller partners, which have contributed to eroding regional cohesion. While Uruguay has tried to exploit closer links with the USA, Argentina grew closer to Venezuela. The increasing salience of Venezuelan president Hugo Chávez in South America has also pointed to an emerging rivalry between Brazil and Venezuela. Although President Chávez has maintained cordial relations with his Brazilian counterpart, he has actively sought to expand Venezuela’s sphere of influence in the Western hemisphere through ALBA (Gómez-Mera 2008; Burges 2007).

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Moreover, tensions between Brazil and Venezuela also conditioned the pace and nature of monetary and financial cooperation in the region. Initially, Brazil was not interested in joining the Bank of the South, defending the role of the Brazilian Development Bank (BNDES) in financing regional infrastructure projects through IIRSA. While eventually endorsing the project, Brazil strongly resisted its constitution as a regional stabilization fund or lender of last resort. This uncompromising position led to a stalemate in regional negotiations, which was resolved only when Venezuela and Ecuador agreed that the Bank would become primarily a development institution (Hart-Landsberg 2009; Krapohl and Rempe 2010).

Domestic political factors Global economic pressures and interstate power asymmetries have influenced the trade strategies of Latin American countries in important ways. However, ultimately, the ways in which different states react to these systemic pressures depend on domestic economic and political considerations. According to Shadlen (2006, 2008), domestic political processes in Latin American countries contributed significantly to the proliferation of preferential agreements with the USA. His analysis suggests that, in contrast to standard models of trade politics, in Latin American countries those groups that benefit directly from asymmetric RTAs tend to be stronger and better organized politically than those that lose from regulatory reforms and regional trade liberalization. Focusing on the balance of power between import-competing and exporting groups also helps explain differences in trade strategy among Latin American countries. For example, Sánchez-Ancochea (2008) argues that in El Salvador and the Dominican Republic, the strengthening of export-oriented business interests with close links with multinational corporations facilitated the passage of the Dominican Republic–Central America Free Trade Agreement (DR–CAFTA). By contrast, in Costa Rica, strong domestic resistance by trade unions in the public sector and other social actors delayed the agreement’s ratification until October 2007. While shedding some light on the sources of asymmetric trade agreements in the Western hemisphere, interest group explanations have much less to say about patterns of South–South cooperation in this region. To understand the onset and evolution of trade and economic integration among Latin American countries, it is essential to examine the role and preferences of government officials. Indeed, the different ways in which Latin American countries responded to US preponderant power in the region – either by bandwagoning with or by balancing against – reflected not only the relative position and size of each country but also the preferences and political orientation of national governments. The regional trade blocs established in the 1990s reflected the broader support by governments in most countries in the region for market-oriented reforms and particularly trade liberalization strate-

gómez-mera | 23

gies. The first decade of the twenty-first century witnessed important changes in the political landscape of several South American countries (Weyland et al. 2010). As left-wing governments spread through the region, the nature of regional integration projects inevitably shifted. As discussed earlier, ideological convergence among the new leaders in Argentina, Venezuela, Ecuador, Brazil and Bolivia facilitated the launching of ambitious projects such as UNASUR and ALBA, which have gone beyond trade to include monetary, financial, energy and security cooperation. The consequences of RTA proliferation and regime complexity

How have the recent proliferation and increasing diversity of regional arrangements affected the dynamics of cooperation in the Americas? Has the increasing complexity in regional economic relations worked to strengthen or to undermine cooperation among Latin American countries? According to Alter and Meunier (2009), international regime complexity sometimes has positive feedback effects that enhance cooperation and the effectiveness of existing institutions.7 However, institutional proliferation may also create competitive effects and inefficiencies, ultimately undermining the objectives of international cooperation. Below, I discuss three different mechanisms through which the proliferation of regional agreements has influenced (both negatively and positively) the politics of cooperation in the Americas.

Implementation problems Recent research shows that PTAs in the Western hemisphere have promoted significant trade liberalization and integration among countries in the region (Estevadeordal and Suominen 2009). However, the divergent and overlapping rules established by the different types of agreements have also resulted in high transaction costs for both private actors and governments. Implementing these complex rules is particularly problematic for those countries with financial and technical resource constraints. Moreover, negotiation and implementation of overlapping agreements require not just extensive technical capacity but also coordination and consistency in positions across the different negotiating venues in which countries participate. In fact, Latin American countries have a history of poor implementation of regional cooperation initiatives. Domínguez (2007), for example, has argued that ‘laxity in implementation’ has been a constant feature of trade cooperation in the Americas. According to him, pervasive, lax implementation goes unpunished and is ‘generally accepted, even when its existence hampered the procedures or organizations that participating states sought to create’ (ibid.: 95). By contributing to the fragmentation of international legal norms and introducing rule ambiguity, the recent proliferation of overlapping agreements has exacerbated this problem. In a context of multiple legal obligations, states can take advantage of overlap and ambiguity, selecting their preferred rule or interpretation and ignoring those that do not reflect or advance their national

24 | one

interests (Alter and Meunier 2009). Regime complexity, therefore, also affects the politics of implementation. Consistent with this, the spread of trade and economic commitments in the past decade has allowed countries to shift their attention to the negotiation of new issues and to leave aside prior obligations such as the completion of the customs unions and the elimination of exceptions to intra-regional liberalization in existing trade blocs. The uneven pace of implementation of trade agreements by Latin American countries affects the level of intra-regional trade. Table 1.3 presents data on intraregional exports for the main trade blocs in Latin America and the Caribbean and for the region as a whole. The table also includes data for Association of Southeast Asian Nations (ASEAN) and African countries. It is interesting to see that, despite the dramatic increase in the number of free trade agreements signed by countries in the region, levels of intra-regional exports have not increased at the same pace. In fact, the coefficient of intra-regional exports, which was 20 per cent in the mid-1990s, fell to 18.2 per cent in recent years. Moreover, the level of intra-regional trade in Latin America is significantly below the levels observed in East Asia and Europe. table 1.3 Evolution of intra-regional trade flows: intra-regional trade coefficient (RTC)1 (%)

Andean Community MERCOSUR CACM CARICOM Latin America & the Caribbean Africa ASEAN European Union

1986–89

1994–97

2005–07

3.7 7.7 14.2 8.1 13.6 4.3 17.9 64.2

8.7 21.9 21.4 13.2 20.0 9.4 24.5 65.7

9.1 13.8 20.9 14.2 18.2 14.5 25.2 67.1

Note: 1. RTC (intra-regional exports/total exports) = 100 Source: Rosales (2009)

Cross-institutional political strategies Overlapping agreements allow actors to pursue cross-institutional political strategies, such as forum shopping, strategic inconsistencies and regime shifting, which may work to undermine regional cooperation. States may use these strategies to influence the political context and the nature of the regime itself (Alter and Meunier 2009). ‘Forum shopping’ refers to the strategy by which states select among competing venues in an effort to obtain a favourable outcome for a specific problem. International law scholars have been particularly concerned with this practice in the context of trade dispute settlement mechanisms. A visible trend among

gómez-mera | 25

the recent PTAs in the Americas and everywhere is that they include formal trade dispute settlement mechanisms (DSMs) (Hillman 2009; Granados and Lacarte Muró 2004). The features of these dispute settlement procedures vary according to the scope of the agreement and the preferences of its members. Many of these DSMs contain choice of forum provisions, allowing countries to select among different but parallel dispute settlement mechanisms (Petersmann 2004). While broadening the choices for participating states, the proliferation of dispute settlement mechanisms may also result in potential overlaps and conflicts of jurisdiction (Kwak and Marceau 2006; Graewert 2008). In addition, states may use parallel venues to protect their national interests by, for example, selecting the forum where they expect to obtain a more favourable outcome. An example from MERCOSUR illustrates these strategies. In 1999 Brazil resorted to MERCOSUR dispute settlement mechanisms to challenge Argentina’s restrictions on imports of poultry. After the MERCOSUR panel ruled in Argentina’s favour, Brazil initiated WTO proceedings to challenge the same measure, eventually winning the case (ibid.). The Argentina–Brazil dispute over poultry also shows that states sometimes resort to cross-institutional strategies, such as cross-forum escalation and retaliation. Another example of a dispute that escalated from the regional to the multilateral level is the Argentina–Chile conflict over price bands. Argentina first brought a case against Chile’s price band system to the DSM of the MERCOSUR–Chile Agreement (ECA-35). Although the group of experts ruled in Argentina’s favour, Chile failed to comply with its recommendations. In response, Argentina initiated a dispute against Chile at the WTO. Not long after that, Chile brought to the WTO a case against Argentina regarding safeguards on preserved peaches. In Argentina, this move was widely interpreted as ‘revenge’ (Delich 2005). In ‘regime shifting’, states may use cross-forum strategies in order to influence the nature and shape of the rules of the game. In Latin America, Venezuela has relied on regime shifting in monetary affairs. The original ideologue of the Bank of the South, Venezuelan president Hugo Chávez turned his attention to the SUCRE and monetary integration within ALBA in response to the stagnation of negotiations with Brazil and other South American countries over the shape and nature of the bank.

Competition International regime complexity also generates competition among institutions and actors, which can have both positive and negative effects on the stability of cooperation. While competition may lead to efficiency gains, it can also result in diminished incentives for coordination and collaboration. Along these lines, Solís et al. (2009) argue that the extent to which the proliferation of PTAs contributes to region-wide integration depends upon the mechanisms through which these agreements diffuse across countries and geographical regions. The spread of PTAs through emulation and processes of social learning is expected to facilitate coherent and cohesive regional

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integration. By contrast, competitive pressures may erode regional solidarity and result in increasing legal and political fragmentation. Competitive pressures have played a central role in explaining the dramatic expansion of bilateral and regional agreements in the Americas. Indeed, according to Solís et al. (ibid.), it is important to consider not only economic competition but also competitive pressures arising from security and legal objectives as drivers of PTAs. Economic competition, which is particularly relevant for small countries such as Chile, and other Central American states, creates incentives for individual members of existing trade groups to seek separate agreements with extra-group partners, thus weakening the prospects for cohesive regional integration. In the Andean Community, for example, the decision by Colombia and Peru to negotiate free trade agreements with the USA triggered a strong reaction by Venezuela, who pulled out of the bloc and applied for membership in MERCOSUR. At the same time, political rivalry among larger countries such as the USA and Brazil (and Venezuela in South America) may undermine regional coherence and convergence through diplomatic and regulatory competition. Given the predominance of these competitive dynamics, the recent surge of trade and economic agreements in Latin America could hinder the consolidation of Latin American unity and collaboration (ibid.). Competition has had other effects on patterns of regional cooperation in the Western hemisphere. The proliferation of parallel institutions broadens the strategic options available for states, making it easier for them to disregard an inconvenient obligation and even to exit or withdraw from an organization. The case of Venezuela and its switch from the Andean Community illustrates this point. Concomitantly, the fact that states can choose from a broader menu of potential memberships and strategic partnerships affects their leverage and negotiating power. In the early 1990s, Argentina’s strong interest in negotiating a preferential agreement with the USA, and its resulting strategic ambivalence about MERCOSUR, worked to increase its bargaining position vis-à-vis Brazil (Gómez-Mera forthcoming). Uruguay and Paraguay have also tried to play the US card to improve their leverage within MERCOSUR. In 2008, for example, Uruguay announced its intention to negotiate a preferential trade agreement with the USA. Argentina and Brazil severely criticized this move but, in what could be seen as an attempt to appease their smaller partner, agreed to create a structural convergence fund to mitigate economic asymmetries within the bloc. Conclusions

The past two decades have witnessed an impressive expansion in the number and scope of regional agreements signed by Latin American countries. The proliferation of overlapping cooperative initiatives in the region has resulted in growing density and fragmentation of international economic governance. What are the implications of this increasing regime complexity for the future

gómez-mera | 27

of regional cooperation in the Western hemisphere? What are the prospects for the emergence of more coherent region-wide cooperation, based on a convergence of the various models of integration that are currently in place? On the one hand, the recent spread of trade and economic agreements in the Western hemisphere reflects the strong and consistent commitment of Latin American governments to the idea of regional cooperation. Yet, on the other hand, there are grounds for concern regarding the longer-term durability and stability of the various overlapping regional projects currently in place in the Americas. First, the evidence demonstrates that, despite the important increase in the number of agreements signed, the levels of intra-regional trade and investment remain moderate in comparison to other regions. This points to enduring problems of compliance and implementation, which may become accentuated as the number and scope of commitments undertaken by Latin American countries increase. Moreover, the persistent gap between the ambitious agreements signed and endorsed by Latin American governments and the actual levels of integration in the region threaten to erode the legitimacy and credibility of these initiatives, ultimately undermining their political rationale. A second source of concern lies in the clashing strategic visions and political orientations underlying the different models of regional cooperation currently coexisting in the Americas. There is little room for convergence between ALBA and the regional trade blocs launched in the 1990s. In theory at least, UNASUR seeks to join and build on MERCOSUR and the Andean Community. However, UNASUR’s underlying ‘developmentalist’ vision and political agenda are at odds with the neoliberal-oriented strategy of trade integration followed by the two South American trade blocs during the 1990s. There are also important divergences among the members of the South American union. While some countries, such as Chile, Colombia and Peru, have chosen to pursue free trade agreements with the USA, Argentina, Brazil and Venezuela have vigorously defended the strategy of Latin American integration. At the same time, it is clear that these strategic divergences reflect the different political orientations of the governments in office, which brings into question the stability and long-term durability of the current cooperation initiatives. For example, after Sebastián Piñera’s triumph in Chile’s presidential elections, there was significant speculation regarding his country’s commitment to UNASUR. Similarly, victory by José Serra in the 2010 Brazilian elections could have led to important changes in Brazil’s policy towards the region, and particularly in its position on MERCOSUR. A third obstacle to deeper region-wide integration in Latin America is directly associated with the two former problems. The strong political character of broader regional cooperation efforts such as UNASUR and ALBA, and the relatively limited levels of effective economic interdependence among countries in the region, have resulted in poor support and participation by private sector actors in the process of integration. Recent research indicates

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that in a context of globalization of trade and investment flows, multinational corporations based in developed countries face incentives to push for preferential agreements with developing nations (Manger 2009). As discussed above, the political strength of export-oriented interests and multinational firms has worked to facilitate the establishment of asymmetric agreements between Latin American and developed countries. By contrast, the coalitions of business interests that support South–South trade and investment cooperation in the Americas have been weaker. As Da Motta Veiga and Rios (2007) argue, the success of regional integration in South America in the next five to ten years will depend, in part, on the consolidation of private economic interests linked to the expansion of intra-regional flows of trade and investment. The prospects for more coherent and cohesive cooperation among Latin American countries thus look bleak. To be sure, region-wide integration will very likely remain an elusive (and unclear) goal. The success and sustainability of both traditional and more recent post-liberal regional blocs, in turn, will be conditioned by a series of internal and external factors, including domestic political developments and the strategic calculations of the larger players, especially Brazil and Venezuela, as well as the evolution of multilateral trade negotiations and international macroeconomic conditions. The current stalemate in WTO talks, the global economic recession and the increasing economic role of China in the Western hemisphere may lead to further incentives for Latin American countries to sign agreements with extra-regional partners. Apart from the negative consequences discussed above, the maintenance of the status quo of increasing institutional fragmentation and complexity undermines the ability of Latin American countries to present a joint front in external negotiations, and thus participate more actively in the design of global economic governance. Appendix table 1.a1 RTAs in the Americas Customs unions CACM CARICOM Andean Community MERCOSUR FTAs ANCOM–MERCOSUR Bolivia–MERCOSUR Bolivia–Mexico Canada–Chile Canada–Costa Rica

Signed 1960, 1993 (current form) 1973, 2001 (revised treaty) 1969, 1996 (current form) 1991 Signed 2004 1996 1994 1996 2001

29 FTAs Canada–EFTA Canada–Israel Canada–Peru NAFTA CARICOM–Costa Rica CARICOM–DR CARIFORUM–EU Central America–Chile Central America–DR DR–CAFTA Central America–Panama Chile–Australia Chile–China Chile–Colombia Chile–EFTA Chile–EU Chile–Japan Chile–Korea Chile–MERCOSUR Chile–Mexico Chile–New Zealand, Singapore, Brunei Darussalam Chile–Panama Chile–Peru Chile–USA Colombia–Mexico–Venezuela (G3) Colombia–Northern Triangle Costa Rica–Mexico El Salvador–Taiwan Guatemala–Taiwan MERCOSUR–Israel MERCOSUR–Peru Mexico–EFTA Mexico–EU Mexico–Israel Mexico–Japan Mexico–Nicaragua Mexico–Northern Triangle Mexico–Uruguay Nicaragua–Taiwan Panama–Singapore Panama–Taiwan Peru–China Peru–Singapore Peru–USA

Signed 2008 1996 2008 1992 2004 1998 2008 1999 1998 2004 2002 2008 2005 2006 2003 2002 2007 2003 1996 1998 2005 2006 2006 2003 1994 2007 1994 2007 2005 2007 2005 2000 1997 2000 2004 1997 2000 2003 2006 2006 2003 2009 2008 2006

30 FTAs USA–Australia USA–Bahrain USA–Israel USA–Jordan USA–Morocco USA–Oman USA–Singapore Partial preferential agreements Argentina–Brazil (ACE 14) Argentina–Chile (AAP.CE 16) Argentina–Mexico (ACE 6) Argentina–Paraguay (ACE 13) Argentina–Uruguay (AAP.CE 57) Bolivia–Chile (AAP.CE 22) Brazil–Guyana (AAP.CE 38) Brazil–Mexico (AAP.CE 53) Brazil–Uruguay CARICOM–Colombia CARICOM–Venezuela Chile–Colombia (AAP.CE 24) Chile–Ecuador (AAP.CE 32) Chile–Venezuela (AAP.CE 23) Colombia–Costa Rica (AAP.A25TM 7) Colombia–El Salvador (AAP.A25TM 8) Colombia–Guatemala (AAP.A25TM 5) Colombia–Honduras (AAP.A25TM 9) Colombia–Mexico–Venezuela (ACE 61) Colombia–Nicaragua (AAP.A25TM 6) Colombia–Panama (AAP.AT25TM 29) Costa Rica–Venezuela (AAP.A25TM 26) Dominican Republic–Panama Ecuador–Paraguay (AAP.A25TM 30) Ecuador–Uruguay (AAP.A25TM 28) El Salvador–Venezuela (AAP.A25TM 27) Guatemala–Venezuela (ACE 23) Guyana–Venezuela (AAP.A25TM 22) Honduras–Venezuela (AAP.A25TM 16) Mexico–Panama (AAP.A25TM 14) Mexico–Peru (ACE 8) Nicaragua–Panama Nicaragua–Venezuela (AAP.A25TM 25) Trinidad & Tobago–Venezuela (AAP.A25TM 20)

Signed 2004 2004 1985 2000 2004 2006 2003 Signed 1990 1991 1993 1992 2003 1993 2001 2002 1986 1994 1992 1993 1994 1993 1984 1984 1984 1984 1984 1993 1986 1986 1985 1994 1994 1986 1985 1990 1986 1985 1995 1973 1986 1989

gómez-mera | 31 Notes 1 For further details on the history of these regional trade organizations, see IDB (2002), especially pp. 27–8. 2 ALBA was officially launched in 2004 with the signing of an agreement between Venezuela and Cuba. Since then, Bolivia, Nicaragua, Dominica, Honduras, Ecuador, St Vincent and the Grenadines and Antigua & Barbuda have joined the agreement. UNASUR was formally established in 2008 as an intergovernmental institution joining MERCOSUR and the Andean Community with Suriname and Guyana. Its predecessor, the South American Community of Nations (SACN), was created in 2004 at the Third South American Summit, as part of an ongoing process of economic and political cooperation among South American governments launched in 2000 in Brasilia. 3 See ‘Venezuela pays for first ALBA trade with Ecuador in regional currency’, Venezuel analysis.com, 7 July 2010, accessed 18 November 2010. 4 See ‘Doubts surface about the integration of Latin America’s oil industry’, www.wharton.universia.net/index.cfm?fa= viewArticle&ID=1016, accessed 13 December 2010. 5 See www.pdvsa.com/index. php?tpl=interface.en/design/readmenuprinc. tpl.html&newsid_temas=48, accessed 13 December 2010. 6 Juan Battaleme, quoted in ‘Doubts surface about the integration of Latin America’s oil industry’. 7 According to Alter and Meunier (2009: 13), ‘international regime complexity refers to the presence of nested, partially overlapping and parallel international regimes that are not hierarchically ordered’.

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trade agreements contagious?’, CEPR Discussion Paper 7904. Bhagwati, J. (1993) ‘Regionalism and multilateralism: an overview’, in J. de Melo and A. Panagariya (eds), New Dimensions in Regional Integration, Cambridge: Cambridge University Press, pp. 22–51. — (2008) Termites in the Trading System: How Preferential Agreements Undermine Free Trade, Oxford: Oxford University Press. Burges, S. (2007) ‘Building a global southern coalition: the competing approaches of Brazil’s Lula and Venezuela’s Chávez’, Third World Quarterly, 28(7): 1343–58. CIEL (2006) ‘The Brazil retreaded tires case’, Background paper, www.ciel.org/Publications/Brazil_Tires_3Apr06.pdf. Da Motta Veiga, P. and S. Rios (2007) ‘O regionalismo pos-liberal, na America do Sul: origens, iniciativas e dilemas’, CEPAL – Serie Comercio Internacional no. 82. Davis, C. (2009) ‘Overlapping institutions in trade policy’, Perspectives on Politics, 7(1): 25–31. Delich, V. (2005) ‘Trade and dispute settlement in South America: concerns and challenges in the way to the FTAA’, Integration & Trade, 24: 3–25. Devlin, R. and A. Estevadeordal (2001) ‘What’s new about the new regionalism in the Americas?’, in V. Bulmer-Thomas (ed.), The Political Economy of Regionalism in Latin America, London: Institute of Latin American Studies. Devlin, R. and R. Ffrench Davis (1998) ‘Towards an evaluation of regional integration in Latin America in the 1990s’, INTAL ITD Working Paper no. 2. Domínguez, J. (2007) ‘International cooperation in Latin America: the design of regional institutions by slow accretion’, in A. Acharya and A. Johnston (eds), Crafting Cooperation: Regional Interdependence in Comparative Perspective, Cambridge: Cambridge University Press. Estevadeordal, A. and K. Suominen (2009) Bridging Regional Trade Agreements in the Americas, Washington, DC: Inter-American Development Bank. Ethier, W. (1998) ‘The new regionalism’, The Economic Journal, 108(449): 1149–61. Flores-Quiroga, A. (2009) ‘Competitive

32 | one regionalism and Mexico’s FTA strategy’, in M. Solís, B. Stallings and S. Katada (eds), Competitive Regionalism: FTA Diffusion in the Pacific Rim, New York: Palgrave, pp. 139–57. Furtado, F. (2008) ‘South Bank: a people’s perspective of integration’, International Development Economics Association, 14 February, www.networkideas.org/alt/ feb2008/South_Bank.pdf, accessed 15 December 2010. Gómez-Mera, M. L. (2005) ‘Explaining MERCOSUR’s survival: strategic sources of Argentine–Brazilian convergence’, Journal of Latin American Studies, 37(1). — (2008) ‘How new is the new regionalism in the Americas? The case of MERCOSUR’, Journal of International Relations and Development, 11(3): 279–308. — (forthcoming) Power and Regionalism: The Politics of MERCOSUR, South Bend, IN: Notre Dame University Press. Graewert, T. (2008) ‘Conflicting laws and jurisdictions in the dispute settlement process of regional trade agreements and the WTO’, Contemporary Asia Arbitration Journal, 1(2): 287–334. Granados, J. and J. A. Lacarte Muró (2004) Inter-Governmental Trade Dispute Settlement: Multilateral and Regional Approaches, London: Cameron May. Hart-Landsberg, M. (2009) ‘Learning from ALBA and the Bank of the South’, Monthly Review, September, www.monthlyreview. org/090901hart-landsberg.php, accessed 13 December 2010. Hermon, B. (2008) ‘The Bank of the South’, Issue brief, Halifax Initiative, December, www.halifaxinitiative.org/fr/node/2974, accessed 13 December 2010. Hillman, J. (2009) ‘Conflicts between dispute settlement mechanisms in regional trade agreements and the WTO – what should the WTO do?’, Cornell International Law Journal, 12(36): 193–208. IDB (Inter-American Development Bank) (2002) Beyond Borders: The New Regionalism in Latin America, Washington, DC: InterAmerican Development Bank. Krapohl, S. and D. Rempe (2010) ‘Financial crises as catalysts for regional integration? The chances and obstacles for monetary integration in ASEAN+3 and MERCOSUR’, Working Paper.

Krugman, P. (1991) The Move toward Free Trade Zones, www.kansascityfed.org/PUBLICAT/ EconRev/EconRevArchive/1991/4q91. pdf#page=7 . Kwak, K. and G. Marceau (2006) ‘Overlaps and conflicts of jurisdiction between the WTO and RTAs’, in L. Bartels and F. Ortino (eds), Regional Trade Agreements and the WTO Legal System, Oxford: Oxford University Press. Lacarte, J. and J. Granados (eds) (2004) Intergovernmental Trade Dispute Settlement: Multilateral and Regional Approaches, London: Cameron May. Leon, Li and J. Martin (2011) Regional Integration Process in South America: Analysis of Institutions and Policies of Regional Integration under the EU Framework, Hamburg: Diplomica Verlag. Manger, M. (2009) Investing in Protection: The Politics of Preferential Trade Agreements between North and South, Cambridge: Cambridge University Press. Petersmann, E. U. (2004) ‘The proliferation and fragmentation of dispute settlement mechanisms in international trade’, in J. Lacarte and J. Granados (eds), Inter-governmental Trade Dispute Settlement: Multilateral and Regional Approaches, London: Cameron May. Phillips, N. (2010) ‘US power and the politics of economic governance in the Americas’, in W. C. Smith and L. Gómez-Mera (eds), Market, State, and Society in Contemporary Latin America, Oxford: Wiley-Blackwell. Quiliconi, C. and C. Wise (2009) ‘The US as a bilateral player: the impetus for asymmetric free trade agreements’, in M. Solís, B. Stallings and S. Katada (eds), Competitive Regionalism: FTA Diffusion in the Pacific Rim, New York: Palgrave, pp. 97–117. Rosales, A. (2010) ‘El Banco del Sur: (des) acuerdos sobre una arquitectura financiera alternativa’, Unpublished paper, Universidad Central de Venezuela, www.rls.org. br/informes/Banco_del_Sur_y_Sucre-_ Antulio_Rosales_.pdf, accessed 13 December 2010. Rosales, O. (2009) ‘Crisis internacional y oportunidades para la cooperación regional’, CEPAL, Serie de Comercio Internacional no. 93. Sánchez-Ancochea, D. (2008) ‘State and

gómez-mera | 33 society: the political economy of DR–CAFTA in Costa Rica, the Dominican Republic and El Salvador’, in D. SánchezAncochea and K. C. Shadlen (eds), The Political Economy of Hemispheric Integration: Responding to Globalization in the Americas (Studies of the Americas), New York: Palgrave Macmillan. Sánchez-Ancochea, D. and K. C. Shadlen (eds) (2008) The Political Economy of Hemispheric Integration: Responding to Globalization in the Americas (Studies of the Americas), New York: Palgrave Macmillan. SELA (2009) ‘Experiencias de cooperación monetaria y financiera en América Latina y el Caribe: balance crítico y propuestas de la acción de alcance regional’, SP/Di N. 10-09. Shadlen, K. (2006) ‘Latin American trade and development in the new international economy’ (review essay), Latin American Research Review, 41(3): 210–21. — (2008) ‘Globalization, power, and integra-

tion: the political economy of regional and bilateral trade agreements in the Americas’, Journal of Development Studies, 44(1): 1–20. Solís, M., B. Stallings and S. Katada (eds) (2009) Competitive Regionalism: FTA Diffusion in the Pacific Rim, New York: Palgrave. Stallings, B. (2009) ‘Chile: a pioneer in trade policy’, in M. Solís, B. Stallings and S. Katada (eds), Competitive Regionalism: FTA Diffusion in the Pacific Rim, New York: Palgrave, pp. 118–38. Vacek-Aranda, A. (2006) ‘Sugar wars: dispute settlement under NAFTA and the WTO as seen through the lens of the HFCs case and its effects on US–Mexican relations’, Texas Hispanic Journal of Law and Policy, 12: 121–60. Weyland, K., R. Madrid and W. Hunter (eds) (2010) Leftist Governments in Latin America: Successes and Shortcomings, Cambridge: Cambridge University Press.

2 | AFRICAN TRADE AND ECONOMIC INTEGRATION: LONGER-RANGE PROSPECTS

Eric Kehinde Ogunleye1

Regional integration in Africa was premised on two grounds: political exigencies and economic imperatives. The former precedes the latter and began, not among African countries, but with fellow Southern countries of Asia at the Bandung Conference of 1955. Although promotion of economic and cultural cooperation was advanced as the basic objectives of the conference, opposing colonialism or neocolonialism by the North was the main motive. This conference, coupled with the emergence of many African countries from colonial independence a few years later, led to a second phase of integration wherein economic imperatives, especially trade and investment, became the driving force, since the political exigencies had been achieved, to some extent. During this time, the need for trade and economic integration in Africa derived from the sparsity of individual country markets, a desire to increase intra-regional trade through tariff elimination and the weakness of individual country bargaining powers. The overriding objectives of economic integration in the region were rapid economic growth and development. More specifically, African leaders during this time believed that trade and economic integration in the continent would spark economic diversification, structural transformation and technological development, among other benefits. This conviction suggests that regional economic integration, if well designed and managed, could have very strong welfare effects on member countries. Generally, the need for regional integration is motivated by the now wellknown theory of the customs union, in which preferential trade and economic agreements induce trade creation and diversion effects on member countries. The examples of East Asian countries are often cited to demonstrate the beneficial effects of regional and trade integration among developing countries. These countries have succeeded in harnessing the potential for synergy among countries through comprehensive economic and trade cooperation and integration. Indeed, a large percentage of the high economic performance recorded by most of the countries in the region has been attributed to regional economic integration. Trade liberalization and production fragmentation have instigated the policy drive towards spreading the benefits of regional integration in the area, which has resulted in marked welfare gains (Mohanty and Pohit 2007). African countries have more need for integration given the nature, structure

ogunleye | 35

and geography of the continent, where several countries are landlocked. For instance, through trade and economic integration, landlocked countries are easily connected to their coastal neighbours, thus reducing the cost of trade and financial transactions and ultimately improving competitiveness. This tends to increase trade, investment and general economic cooperation among the integrated countries and with the rest of the world. African countries are not oblivious of this fact. Thus, they have made several efforts at regional trade and economic integration both among themselves and with other developing countries and regions of the world. However, despite these efforts, the objectives remain elusive and progress remains limited. Some of the constraints to success include: excessive focus on political concerns at the expense of economic issues; lack of political will and genuine commitments on the part of some governments; excessive overlapping membership of regional, economic and trade institutions; absence of effective legal mechanisms to enforce agreed convergence criteria, protocols and conventions; weak institutions that are incapable of coordinating, monitoring and implementing agreements; and instability. This chapter focuses on the dynamics of trade and regional integration in Africa – among African countries and between African countries and other Southern economies. The nature, structure and trends of trade, investment and regional cooperation arrangements among African countries and between them and other developing countries and regions are assessed in addition to a review of basic challenges facing trade and regional integration in Africa. The chapter goes a step further to provide the long-range future prospects of these relationships based on recent and ongoing initiatives that have the potential for consolidating the achievements so far and deal with emerging challenges. It argues that the future of African countries depends, to a large extent, on trade and economic integration among themselves and with other Southern countries. African trade and economic integration in historical perspective

Evidence suggests that Africa is a pioneer in regional economic integration with the establishment of the South African Customs Union (SACU) in 1910 and the East African Community (EAC) in 19192 (Geda and Kebret 2007). The first generation of emerging African leaders immediately after independence were most interested in, and put considerable efforts into, regional economic integration, as exemplified by Dr Kwame Nkrumah, to mention the most prominent of these. Their efforts were given impetus by the Economic Commission for Africa (ECA) under the leadership of Professor Adebayo Adedeji, the ‘godfather of African economic integration’ (ECA 2002: 8). One of the most important efforts at driving regional integration in the continent was the establishment of the Organization for African Unity (OAU) in 1963, now the African Union (AU). Shortly after attaining independence,

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a good number of African states jointly expressed the growing desire for more unity and integration of the independent states. It was strongly believed that years of colonialism had weakened the continent socially, politically and economically (Adedeji 2002). This strong belief led to the establishment of the OAU, aimed, among other things, at promoting the unity and solidarity of the African states and acting as a collective and cohesive mechanism for the African continent. This was a very important milestone for the continent in its effort to secure Africa’s long-term economic and political future. The main themes of OAU’s declarations include advocacy of unity, solidarity, the long-term economic and political future of Africa, and especially economic integration as a prerequisite for real independence and development.3 The political leaders shared the same thoughts and acknowledged the fact that the continent had strongly felt the negative effect of unfulfilled promises of global development strategies,4 resulting in stagnation and exposure to the social and economic vagaries of the industrial countries (see Lagos Plan of Action). It is pertinent to dwell a little on the Lomé Convention because its perceived failure to deliver on some of its promises was the driving force behind the renewed interest of Africans in deepening regional integration among themselves. The Lomé Convention was a trade cum aid agreement between the European Community (EC) and developing African, Caribbean and Pacific (ACP) countries. Though it was signed in February 1975 and effective from April 1976, the groundwork for this relationship was laid in 1957 through the Treaty of Rome (see Articles 131–6 and Annex IV of the Treaty). Beginning with Lomé I with forty-six countries as signatories, the cooperation aimed at providing a new framework for engagements between EC and ACP countries. This agreement was based on two foundations: entry of ACP agricultural and mineral exports into the EC free of duty based on a quota system; and a financial commitment by the EC for aid and investment in the ACP countries. There have been no fewer than three other renegotiations of the terms of this cooperation ever since, with the number of ACP countries involved increasing to seventy at the Lomé IV negotiations, and currently standing at seventyeight signatory countries. However, African leaders perceived that most of the promises were unfulfilled, leading to the economic stagnation of Africa and making the region more susceptible to the socio-economic vagaries in developed countries than other developing regions of the world, especially when ACP preferential access to EU markets became more difficult with the emergence of a single European market in 1992. Worse still, a political dimension was introduced to the ACP–EU pact in the subsequent Cotonou Agreement, thus linking development cooperation to conditionality. Since governance issues were involved in the conditionality, it became more difficult for several African countries to meet these conditions. Thus, African policy-makers began making efforts at looking inward through regional and economic integration.

ogunleye | 37

It was understood that the negative effects of these shocks resulted from the apparent weak structure of the economies. Determined to offer measures that would help restructure the economic base of the continent with a view to reversing the trend, in July 1979 African leaders adopted a far-reaching regional approach based on collective self-reliance known as the Monrovia Declaration of Commitments. It is noteworthy that the ECA’s Revised Framework of Principles for the Implementation of the New International Order in Africa formed the theoretical and intellectual base, not only for this declaration, but also for the subsequent Lagos Plan of Action and the Final Act of Lagos, both of 1980. Together with the OAU, the ECA launched the Lagos Plan of Action. This Plan envisioned three regional arrangements at subregional levels that would ultimately develop into a regionally integrated Africa. These regional arrangements were the Economic Community of West African States (ECOWAS), established in May 1975, which pre-dated the Lagos Plan, a preferential trade area (PTA) for East and southern Africa, which came into existence in 1981, later replaced by the Common Market for Eastern and Southern Africa (COMESA) in December 1994, and the Economic Community of Central African States (ECCAS), established in October 1983. Also noteworthy is the existence of the Arab Maghreb Union (AMU) in North Africa during this period. These arrangements were expected to transmute into an African-wide common market by 2025. The objective of the Plan was followed up in the Abuja Treaty of 1991, whereby the heads of state of the OAU reaffirmed their commitments to achieving a regionally cohesive and integrated Africa. This desire was a major driving force behind the launch in 2001 of the AU as a replacement for the erstwhile OAU. In addition, the Abuja Treaty articulated the vision of creating the African Economic Community (AEC), which it was hoped would be created in stages and with specific timelines as follows: (i) creation of regional blocs in regions where such did not yet exist (to be completed in 1999); (ii) strengthening intra-regional economic communities (REC) integration and inter-REC harmonization (to be completed in 2007); (iii) establishing a free trade area and customs union in each regional bloc (to be completed in 2017); (iv) establishing a continent-wide customs union and thus also a free trade area (to be completed in 2019); (v) establishing a continent-wide African Common Market or ACM (to be completed in 2023); (vi) establishing a continent-wide economic and monetary union (and thus also a currency union) and pan-African parliament (to be completed in 2028); and (vii) end of all transition periods by 2034 at the latest. Also noteworthy are other economic groupings that later came into existence. These include the Southern African Development Community (SADC), established in April 1980 through the Lusaka Declaration, the East African Community (ECA), originally established in 1967 but which collapsed in 1977 before its resuscitation in July 2000. There are currently no fewer than

38 | two

fourteen known regional economic groupings or communities in Africa, suggesting strong African interests in promoting regional trade and economic integration in the continent and with the world. The AU, the ECA and the African Development Bank (AfDB) in collaboration with RECs have been making significant efforts at speeding up the regional integration progress in the continent. Through these concerted efforts, Minimum Integration Programmes (MIPs) have been developed, and were further expanded in 2009. Efforts are also being made to develop an African Central Bank, an Investment Bank and a Monetary Fund. Realizing the critical role of infrastructure in regional integration and development, Programmes for Infrastructure Development in Africa have been initiated. Several conferences of ministers of African countries responsible for economic integration have been convened, specifically aiming at urgently rationalizing and harmonizing RECs and their activities. Also, a guiding template for dealing with emerging issues in Economic Partnership Agreement (EPA) negotiations has been developed. The nature and structure of trade and regional economic integration in Africa

There is currently a proliferation of regional economic and trade blocs in Africa, cutting across subregions in many cases (see Table 2.1). Three striking features of these economic groupings are noteworthy – overlapping memberships, varying degrees of integration, and differing membership philosophies that range from economic and political to security, with sub-objectives that include customs and monetary cooperation. The dominant specified objective of most RECs in Africa is full economic union, in addition to other minor objectives that include creating common markets, free trade areas and sectoral integration. It is interesting to note that different levels of integration and sophistication are in operation in Africa. Free trade areas, as exemplified by the COMESA, are the weakest form of integration. This arrangement focuses on removal of tariffs on trade within the member countries while applying a common trade and economic policy towards third-party non-member countries. A customs union, typified by SACU, is the next level of integration, combining the features of a free trade area with the removal of restrictions on the movement of labour, capital, goods and services. A common market and economic union, the dominant objectives of most REC arrangements in Africa, involve a higher level of  economic integration whereby some degree of harmonization is sought in economic policies with the ultimate aim of removing all sorts of discrimination in policies among member countries. While this level of integration has been largely elusive for African countries, some RECs have set in motion modalities for macroeconomic convergence to achieve this. For instance, the West African Monetary Zone has developed several macroeconomic criteria along these lines. For a recent

ogunleye | 39

assessment of the performance of the Zone on these criteria, see Egwaikhide and Ogunleye (2010). Monetary union supersedes the economic union by incorporating the adoption of a common currency and monetary policy, usually under a single monetary authority. It is noteworthy that there are at least two functional monetary unions in Africa, namely the West African Economic and Monetary Union (UEMOA) and the Economic and Monetary Community of Central Africa (CEMAC). The Common Monetary Area (CMA)5 within SACU is a very weak form of this type of cooperation whereby the South African rand is in free circulation and serves as legal tender in Lesotho, Namibia and Swaziland simultaneously with the national currencies of these countries (ECA 2010). Conversely, in UEMOA and CEMAC countries the respective CFA franc is the only legal tender in circulation without any rival national currency. The CMA arrangement within SACU is believed to precede the Union of South Africa that came to existence in 1910 (Van Zyl 2003). Full economic integration that involves the complete unification of fiscal, monetary and social policies coordinated by a supranational authority is yet elusive in Africa. The current overlapping structure of RECs in Africa can be typically described as a ‘spaghetti bowl’ but with some common features.6 This is the result of proliferation of RECs in Africa. Currently, about 51 per cent  of the  fifty-three African countries belong to at least two RECs, 34 per cent belong to three RECs, 13 per cent maintain membership in one REC and one country belongs to four RECs. In all, only seven countries have maintained membership in just one REC. It is noteworthy that while the existence and membership of several RECs demonstrate strong efforts by African countries to integrate, this could also be disadvantageous as proliferation of economic groupings could breed inefficiencies, duplication of roles and confusion. This could induce gratuitous competition among institutions and countries that could ultimately be counterproductive to the regional integration aspirations of the continent (ECA 2008). African countries are not oblivious to these possible negative developments. Thus, based on the recommendations contained in ECA (2006), the AU Commission engaged in wide consultations with RECs  and individual countries and has put an embargo on establishing more RECs. Although not the main focus of this chapter, there are also individual-country bilateral, subregional and continent-wide economic and trade cooperations with Northern countries outside the region that were more pronounced with the former colonial masters in most cases. The European Union and the African, Caribbean and Pacific States (EU–ACP) cooperation dates back to the Treaty of Rome of 1957 and persists today as a way (in part) to promote economic and social development. Today, this arrangement has shifted towards a more reciprocal model, compatible with the World Trade Organization obligations (Karingi et al. 2005). A similar North–South arrangement with continent-wide focus is the African

Goods, services, investment, migration

Goods, services, investment, migration

Goods, services, investment, migration

Goods, services, investment, migration

Free Common trade Market for Eastern and Southern Africa (COMESA)

Free trade

Free Economic Community of trade Central African States (ECCAS)

Free trade

Economic Community of West African States (ECOWAS)

Community of Sahel-Saharan States (CENSAD)

Goods, services, investment, migration

Free trade

Arab Maghreb Union (UMA)

Areas of integration and cooperation

Type

Major regional economic communities

24 July 1993

1 July 2007

4 Feb. 1998

8 Dec. 1994

17 Feb. 1989

Benin, Burkina Faso, Cape Verde, Côte d’Ivoire, Gambia, Ghana, Guinea, Guinea-Bissau, Liberia, Mali, Niger, Nigeria, Senegal, Sierra Leone, Togo

Angola, Burundi, Cameroon, Central African Republic, Chad, Democratic Republic of the Congo, Equatorial Guinea, Gabon, Republic of Congo, São Tome and Principe, Rwanda

Benin, Burkina Faso, Central African, Republic, Chad, Côte d’Ivoire, Djibouti, Egypt, Eritrea, Gambia, Libya, Mali, Morocco, Niger, Nigeria, Senegal, Somalia, Sudan, Togo, Tunisia

Angola, Burundi, Comoros, Democratic Republic of the Congo, Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Madagascar, Malawi, Mauritius, Namibia, Rwanda, Seychelles, Sudan, Swaziland, Uganda, Zambia, Zimbabwe

Algeria, Libyan Arab Jamahiriya, Mauritania, Morocco, Tunisia

Date of Member states entry into force

table 2.1 Major regional economic communities in Africa

Full economic union

Full economic union

Free trade area and integration in some sectors

Common market

Full economic union

Specified objectives

40

Goods, services, investment, migration

Goods, services, investment, migration

Goods, services, investment, migration

Goods, services, investment, migration

Business law harmonized. Macroeconomic policy convergence in place

Free trade

Customs union

Customs union

Customs union

Customs union

Southern African Development Community (SADC)

Economic and Monetary Community of Central Africa (CEMAC)

East African Community (EAC)

Southern African Customs Union (SACU)

West African Economic and Monetary Union (UEMOA)

Source: UNCTAD (2009)

Goods, services, investment, migration

Free trade

InterGovernmental Authority on Development (IGAD)

Botswana, Lesotho, Namibia, South Africa, Swaziland

Benin, Burkina Faso, Côte d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal, Togo

10 Jan. 1994

Kenya, United Republic of Tanzania, Uganda, Rwanda, Burundi

Cameroon, Central African Republic, Chad, Congo, Equatorial Guinea, Gabon

Angola, Botswana, Democratic Republic of the Congo, Lesotho, Malawi, Mauritius, Mozambique, Namibia, Seychelles, South Africa, Swaziland, United Republic of Tanzania, Zambia, Zimbabwe

Djibouti, Eritrea, Ethiopia, Kenya, Somalia, Sudan, Uganda

15 July 2004

7 July 2000

24 June 1999

1 Sep. 2000

25 Nov. 1996

Full economic union

Customs union

Full economic union

Full economic union

Full economic union

Full economic union

41

42 | two

Growth and Opportunities Act (AGOA) and the New Partnership for Africa’s Development (NEPAD). The AGOA initiative was signed into law in 2000 as part of the Trade and Development Act of the United States, providing an opportunity for African countries to further open their economies and build stronger market integration with the US markets. Similarly, NEPAD provides an ‘integrated strategic framework’ within which member countries of the African Union (AU) collectively and individually bring about holistic socio-economic development of the continent through partnership with the North. Thus, a look at the Bilateral Investment Treaties (BITs) for the promotion and protection of foreign direct investment (FDI) and the Double Taxation Treaties of most African countries reveals that they are structurally North–South in orientation. However, a remarkable shift is being observed in this structure across the number of BITs among Southern countries aimed at facilitating investment flows. At the beginning of the 2000s, for instance, some African countries started initiating BITs among themselves and with other Southern countries, with a few pre-dating this period. For instance, South Africa signed a BIT with South Korea in 1995, shortly after emerging from the apartheid era, and with Chile and Argentina in 1998. In the later years, the country entered into BITs with four African countries, and with nine others between 2000 and 2006. More recently, South Africa signed BITs with Ethiopia in 2008 and Zimbabwe in 2009. Ghana and Benin provide a very impressive example given the fact that their BITs are dominated by those with African and other Southern countries. Between 1980 and 2004, Egypt and Morocco were ranked among the global top ten Southern countries in terms of South–South BITs, with Egypt coming second and Morocco coming tenth, overall (UNCTAD 2005). On Double Taxation Agreements, South Africa provides a prominent example, with no fewer than fourteen such agreements with different African countries. The motivations for entering into BITs with other countries are numerous and could differ from country to country. Nevertheless, the overriding motivations include the need: to foster economic cooperation among the contracting parties; to promote favourable conditions for reciprocal investments, recognizing the impact that such investment may have in generating prosperity in the host countries; to recognize the importance of technology transfer and human resources development; and to advance mutual respect for sovereignty (UNCTAD 2007). The emerging trend evident from this review is that African countries have become increasingly integrated with themselves and fellow Southern countries, especially in recent times. Deepening this trend without completely decoupling from their Northern partners is important. It is noteworthy, however, that the resurgence of North–South trade agreements has created more complex interactions in African economic integration efforts, thus adding new challenges to the existing complexity of the spaghetti bowl of regional integration in Africa.

ogunleye | 43 Assessment of intra-African economic integration and trade performance Several noticeable achievements have been recorded by RECs in Africa, even though progress remains mixed. CEMAC and the West Africa Economic and Monetary Union (WAEMU) have succeeded in forming a functional single currency union based on a monetary cooperation agreement signed in 1972/73 between these countries and France, with the currency pegged to the French franc but to the euro since 1999, when the euro replaced the French franc. The unlimited guarantee provided by the French treasury regarding the convertibility of the CFA franc to the euro at a fixed rate provides further stability for the single currency arrangement in the WAEMU and CEMAC countries. This has helped harmonize market frameworks and regulations and facilitate trade and general economic transactions among member states. ECOWAS has succeeded in removing tariffs on raw materials and has made giant strides towards macroeconomic policy convergence and business regulatory frameworks, especially in ensuring that all members migrate to the value-added tax (VAT) system. In the COMESA, single rules of origin have been designed that further simplified the customs procedures. Other achievements in this REC include removal of exchange restrictions and import quotas, elimination of non-tariff barriers relating to import licensing, and harmonization of road transit charges. In the EAC, cross-border non-tariff barriers have been successfully removed, and VAT rates, the pre-shipment requirements threshold and banking rules and regulations have been harmonized. SADC now has a harmonized policy on investment, taxation, stock markets and insurance, with significant success in macroeconomic convergence.

Intra-Africa trade flows Intra-regional trade in Africa has very high potential given the diverse nature and structure of the economies in terms of geography, needs, market conditions, endowments and structure. Granted, the current trade structures of the continent do not effectively harness this potential, as trade with the North dominated for a long time. However, momentums are beginning to gather and a gradual shift is being observed. Indeed, intra-African trade has been on a steady rise over the years. From a little over $6.5  billion in 1980, it increased to $84.5 billion in 2008 before plunging to $68.5 billion in 2009. Disaggregating the share of intra-African trade into exports and imports and observing these across regions, it is clear that eastern Africa has the highest share in both exports and imports (see Figures 2.1 and 2.2). While both eastern and western Africa stood on the same level in 1980, a divergence could be observed as eastern Africa recorded a rise in its share with a contrary downturn for western Africa before it again gathered momentum. A possible explanation for this is the nature of countries across these regions. Kenya in eastern Africa is a hub for re-exports into other countries within the region, especially landlocked Burundi, Rwanda and Uganda. This is especially true for petroleum products which Kenya refines from imported crude oil and

44 | two 35 30

Per cent

25

Eastern

20 Southern

15

Western

10

Northern

5

Central 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

0

2.1 Dynamics of intra-African exports by region, 1980–2008 (source: UNCTAD, Handbook of Statistics 2009, CD-ROM)

30 25

15 10

Eastern

Western Central

5 Northern 0

Southern

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Per cent

20

2. Dynamics of intra-African imports by region, 1980–2008 (source: UNCTAD, Handbook of Statistics 2009, CD-ROM)

re-exports to these countries. In addition, Kenya has a vibrant manufacturing base that serves the other eastern African countries and beyond. Intra-REC trade also shows very sound prospects (see Table 2.2). All the RECs recorded marked rise in both exports and imports, with the exception of exports from CEMAC. Conflict, economic instability and high trade

ogunleye | 45 table 2.2 Intra-African trade by RECs, percentage of total trade 1980–89 1990–99 2004–05

2006

2007

2008

2009

Exports AMU CEMAC COMESA EAC ECCAS ECOWAS SADC WAEMU Africa

0.59 0.34 1.39 0.50 0.40 1.88 0.83 1.22 5.54

1.13 0.35 2.39 0.72 0.47 2.85 2.05 1.48 9.24

0.91 0.29 2.45 0.86 0.39 3.05 4.39 1.52 9.41

0.86 0.29 2.29 0.66 0.46 3.08 3.88 1.25 8.62

0.83 0.29 2.42 0.73 0.84 2.98 4.44 1.20 9.08

1.13 0.23 2.18 0.73 0.93 2.88 4.36 1.14 9.14

1.31 0.32 2.62 0.96 0.89 3.71 5.09 1.61 11.23

0.78 0.36 2.13 0.43 0.54 1.93 1.51 1.38 5.60

1.31 0.45 3.64 0.84 0.97 2.69 3.27 1.67 8.88

1.06 0.54 4.04 1.11 1.25 3.38 4.42 1.96 10.21

0.94 0.50 3.78 0.97 1.26 3.31 4.63 1.79 10.06

0.95 0.47 3.50 0.98 1.28 3.02 4.62 1.64 9.69

1.10 0.45 3.75 1.00 1.32 3.15 4.77 1.69 10.19

1.09 0.45 3.75 1.09 1.21 3.14 4.42 1.61 9.90

Imports AMU CEMAC COMESA EAC ECCAS ECOWAS SADC WAEMU Africa

Source: IMF’s Direction of Trade Statistics, June 2010, CD-ROM

transactions due to poor infrastructure are likely reasons. SADC leads the RECs in intra-African trade with a rise of over 500 per cent for exports and almost 200 per cent for imports between 1980 and 2009. The EAC also made tremendous progress in imports, with a rise of over 150 per cent in intraAfrican imports between 1980 and 2009, followed by ECCAS, with a rise of over 100 per cent. Despite this success, the share of RECs in intra-African trade has been volatile when compared on a year-on-year basis. In addition, a few countries – one country in some cases – tend to dominate trade in most RECs, accounting for a great percentage of total trade. This is true in the case of South Africa in SADC, Nigeria in ECOWAS, Cameroon in CEMAC, Côte d’Ivoire in WAEMU and Kenya in EAC. More specifically, South Africa and Nigeria alone account for one third of intra-African exports. Despite the relative progress recorded in intra-African trade, numerous challenges remain. These include frail supply-side capacity, infrastructure deficiency (ports, roads, railways, etc.), weak domestic capacity, geography, limited complementarity in resource endowments of the countries, poor trade policies, etc. For details on these factors, see ECA (2010), Amjadi and Yeats (1995),

46 | two

Collier (1995), Rodrik (1998), Collier and Gunning (1999), Yeats (1998), Limao and Venables (2001) and Ancharaz et al. (2010). Specific policies aimed at confronting these challenges are imperative for improving intra-African trade integration.

Intra-Africa investment flows The major channels through which regional integration and FDI are related can be broadly categorized into investment rules, trade rules and other links (Blomström and Kokko 1997; Dunning 1997). To improve the region’s attractiveness for regional and global investment, most African countries have embarked on very useful reforms aimed at improving these conditions. Several African countries have undertaken reforms that have significantly improved the business climate. Typical examples are Botswana, Rwanda and Ghana, with Rwanda leading the world in undertaking business reforms in 2008/09 (World Bank 2009). These reforms have borne positive results, as total FDI flows to Africa have risen from about $1.3 billion in 1970 to over $87 billion in 2008. Intra-African investment was quite low until very recently. The current trend is driven mainly by Nigeria and South Africa and, to a smaller extent, Kenya. In 1999, for instance, South Africa accounted for about 50 per cent of the FDI stock in Botswana (UNCTAD 2003) and 25 per cent of total SADC FDI in 2003 (AfDB 2003), while only 7 per cent of total FDI was targeted at other African countries in 2004. More recently, the weight of the country’s FDI is most felt in the southern African region, accounting for 86 per cent and 80 per cent of total FDI inflows to Lesotho and Malawi, respectively (Page and Willem te Velde 2004). Similarly, Nigeria has in recent years increased intra-African FDI flows, with the banking sector engaging in very active intra-African investment. These banks have been riding on the back of a home-country corporate base and the recent consolidation that saw the emergence of a stronger banking sector. This has provided the space for aggressive greenfield operations in western African countries and beyond. Similar trends are being recorded by Kenya in eastern Africa, with the banking and retail sectors making inroads into most countries in the subregion. African trade and investment flows with other Southern countries There has been a phenomenal rise in trade between Africa and other developing countries, especially in the last decade, with prospects for a continued rise. Total African exports to emerging and developing economies (EMDEV) rose from a little over $8 billion in 1980 to almost $109 billion in 2009. Similarly, imports rose from $10.8 billion to $167 billion over the same period. The share of the Southern countries in total aggregate trade in Africa has been on a steady rise (see Table 2.3). When disaggregated to developing Asia and Latin America and the Caribbean (LAC), it is clear that this phenomenal rise is driven largely by trade with developing Asia (see Figure 2.3).

ogunleye | 47 70 60 Developing Asia

40 30 LAC

20 10 0

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

US$ billion

50

2.3 African South–South exports, 1980–2008 (source: IMF’s Direction of Trade Statistics, June 2010, CD-ROM)

table 2.3 African South–South aggregate trade, percentage of total trade 1980–89 1990–99 2004–05

2006

2007

2008

2009

Exports Developing Asia 2.17 LAC 2.09 EMDEV 14.06

4.54 2.38 19.80

8.71 3.45 25.18

12.54 4.26 29.06

14.95 4.38 32.17

14.80 4.33 32.17

16.71 4.03 37.36

5.78 2.32 23.69

10.12 3.11 35.06

15.71 4.07 43.92

17.26 4.29 43.24

18.16 4.45 45.80

20.52 3.85 46.21

Imports Developing Asia 3.69 LAC 2.39 EMDEV 18.35

Source: IMF’s Direction of Trade Statistics, June 2010, CD-ROM

African trade with both regions experienced relative stagnation from 1980 until 2000, when trade with both developing regions exploded, especially with Asia. For instance, between 2000 and 2009, African imports from developing Asia increased by over 800 per cent while exports to the region increased by over 300 per cent during the same period. Country-specific disaggregation shows that China, India and Brazil are the main drivers of African trade with developing regions, revealing a similar pattern and structure. China is currently the trailblazer with an unprecedented rise between 1980 and 2009 (see Table 2.4). With very few exceptions, imports and exports between African countries and other Southern countries outside the region are highly concentrated in

48 | two table 2.4 African South–South trade by country, percentage of total country trade 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 brazil Exports Africa COMESA SADC

2.45 0.70 0.77

3.44 1.08 1.02

3.94 1.09 1.20

3.94 1.08 1.40

4.41 1.20 1.53

5.06 1.41 1.68

5.45 1.81 1.77

5.38 1.07 1.94

5.15 1.05 1.97

n/a n/a n/a

Imports Africa COMESA SADC

5.20 0.48 0.13

5.99 0.85 0.42

5.69 0.43 0.10

6.74 0.47 0.12

9.83 0.46 0.09

9.06 0.49 0.07

8.85 1.15 0.71

9.40 1.04 1.38

9.10 0.95 1.75

n/a n/a n/a n/a

Exports Africa COMESA SADC

2.03 0.61 0.55

2.26 0.63 0.54

2.14 0.60 0.55

2.33 0.56 0.62

2.33 0.62 0.67

2.45 0.68 0.68

2.75 0.75 0.82

3.06 0.83 0.88

3.56 0.98 1.00

3.97 1.12 1.04

Imports Africa COMESA SADC

2.46 0.48 1.38

1.97 0.52 0.86

1.84 0.51 0.90

2.02 0.47 1.07

2.79 0.50 1.47

3.20 0.69 1.66

3.63 0.62 2.05

3.79 0.74 2.20

4.94 1.05 3.06

4.21 1.14 2.56

Exports Africa COMESA SADC

5.17 2.45 1.72

6.40 3.06 1.66

5.86 2.34 1.70

6.10 2.52 1.85

6.31 2.58 2.10

6.90 2.57 2.34

7.82 3.50 2.89

n/a n/a n/a

n/a n/a n/a

n/a n/a n/a

Imports Africa COMESA SADC

6.20 0.62 2.79

4.81 0.50 3.04

5.64 0.71 3.67

4.49 0.51 2.95

3.42 0.43 2.06

3.43 0.38 2.09

7.27 1.23 1.77

n/a n/a n/a n/a

n/a n/a n/a n/a

n/a n/a n/a n/a

china

india

Source: Trade Law Centre for Southern Africa (TRALAC) database, accessed 14 January 2011

a very few products. For China, the top two products represented 84 per cent of total exports and the top five products 90 per cent of total imports. Its trading partners are similarly concentrated, with the top five countries accounting for about 57 per cent of total trade in 2009. India maintained a similar trading pattern, with Nigeria, South Africa, Egypt, Algeria and Morocco being its major trading partners and five product lines representing 86 per cent of total imports and oil and gold accounting for a combined 73 per cent in 2006. Similarly, Brazil’s top ten imports from Africa represented 95 per cent of total Brazilian imports in 2008. A different pattern is observed, however,

ogunleye | 49

in African imports from India, which are more diverse, with the top twenty product lines accounting for less than 60 per cent of total imports in 2006. African South–South investment relations have likewise increased dramatically, especially in recent times. Indeed, average annual FDI inflows from developing Asia to Africa were estimated at $1.2 billion between 2002 and 2004 alone (UNCTAD 2006). Initially, Asian FDI was largely driven by the Republic of Korea, India and Malaysia, with Korea specializing in automobiles and electronics and India in natural resources. Recent trends in Asian FDI inflows into Africa have since changed, with China becoming the major driver and currently the highest single Asian investor in Africa, with cumulative investment reaching $850.7 million by the end of 2008. While China is aggressively investing in almost all sectors of most African countries, natural resources remain the dominant recipient sector. Among African host economies, Mauritius is by far the most favoured investment destination for Asian FDI in general and Chinese FDI in particular, accounting for 85.4 per cent of the total Chinese FDI stock in Africa. This is followed at a considerable distance by South Africa, which receives 5.8 per cent of total Chinese FDI destined for Africa, suggesting that these two countries – both in SADC – accounted for  over 90 per cent of total Chinese FDI stock in Africa. The recent substantial rise in Chinese FDI in offshore oil development in Angola and Nigeria will certainly influence and change this structure. Longer-range future prospects for trade and economic integration in Africa

Several efforts are being made in Africa that portend good fortune for the future of trade and regional integration in the continent. Some of these initiatives are continental in scope and focus, others are regional, championed by the RECs, while yet others are country driven. These efforts are largely underpinned by the conviction that the future success of Africa depends, to a large extent, on higher trade and regional integration, both with itself and with other Southern countries. Some of these bold policy actions that will shape the longer-range future of South–South trade and regional integration in Africa are highlighted below. Conscious that a proliferation of RECs with overlapping membership is a major constraint to REC arrangements in Africa, the AU and the main RECs in Africa have adopted a protocol aimed at offering a holistic continent-wide policy reaction to rationalizing RECs, promoting closer cooperation among RECs, and harmonizing and coordinating their policies and activities. The clear and holistic framework provided by this action will offer solutions to some of the most challenging constraints to regional integration in Africa. Specific policies are being directed at solving the problem of multiplicity of regional RECs, harmonizing programmes and correcting most of the challenges emanating from these problems. At the REC level, several countries are making concerted efforts to improve

50 | two

REC arrangements in their respective regions. ECOWAS has renewed the momentum towards regional integration by clarifying the objectives of the REC and establishing functional organs that include a parliament and a court of justice through enacting a revised treaty in 1993. The region is also making bold moves to ensure macroeconomic convergence, coordination and policy harmonization in the region. Currently, ECOWAS is assisting member countries that are yet to introduce VAT to do so, with a view to strengthening domestic resource mobilization in the subregion. It is proposed that this will be followed by harmonization of VAT rates across member countries, which currently range from 18 per cent in Côte d’Ivoire to 5 per cent in Nigeria. In 2008, the EAC successfully introduced free trade agreements that led to the removal of tariffs and customs duties among members. Aware of the positive effects of such moves, several other African RECs are planning to introduce this policy. These innovative policy actions are expected to continue, thus strengthening the current REC arrangements and quickening the pace of continental integration. RECs in Africa are also conscious of emerging issues and are revising their institutional arrangements to react to these. For instance, in a revised treaty in 1993, ECOWAS was formally assigned the responsibility for preventing and solving conflicts in the subregion, thus making ECOWAS the only REC in the world with such a mandate and with a stand-by military force for this purpose. Great success has been achieved with this development in ensuring peace and security in the region, thereby bolstering regional integration efforts. The ECOWAS Monitoring Group (ECOMOG), as the ECOWAS army is known, has succeeded in restoring peace in Liberia and Sierra Leone, demonstrating that RECs in Africa are capable of developing strategies for dealing with emerging challenges that may limit or weaken regional integration arrangements, guaranteeing bright future prospects for regional integration. Recent cross-border investment by the Nigerian banks in West Africa and beyond provides another interesting development that holds out good prospects for the longer-range future of regional integration in Africa. In many cases, these banks merge or acquire weak banks in the country of operation and inject capital into the banking sector and the economy at large. They are also noted for introducing cutting-edge technological innovations that promise to improve and integrate inter-country payment systems. In countries like Benin, Gambia, Liberia, Sierra Leone and Togo, Internet banking services have been made possible for the first time by these banks. Similar innovations are being introduced in eastern Africa by the Kenya Commercial Bank (KCB), with both cross-border investment and mobile banking – MPESA, the first of its kind in the world. As more countries liberalize their financial sector and banks invest more in technology and innovations, these trends are expected to continue over the long term, thus promoting regional investment, trade and integration. Successful harmonization of payment systems in a number of RECs and

ogunleye | 51

planned implementation of a similar policy in other RECs will positively shape the future of regional integration in Africa. Currently, there are three RECs that have a functioning single currency arrangement: CEMAC, WAEMU and, to some extent, the CMA. CEMAC and WAEMU are highly advanced, with an integrated regional payment system that uses the same structure for both national and cross-border systems among member countries, coordinated by the Banque Centrale des États de l’Afrique de l’Ouest (BCEAO) and the Banque des États de l’Afrique Centrale (BEAC), respectively. The achievements in WAEMU notwithstanding, efforts are still in progress to further reform the process for better results. These include developing an interbank card-based payment system, an Automated Inter-bank Clearing System (SICA-UEMOA) and an Automated Transfer Settlement System (STAR-UEMOA). To ensure security of transactions, Centrale des Incidents des Paiements (CIP) has been established as a safety tool. In 1999, COMESA launched the COMPASS Initiative, aimed at linking the payment systems in all member countries. Similar efforts are being made in the West African Monetary Zone (WAMZ) to develop a similar harmonized payment system, as well as in the EAC. In collaboration with member countries, the West African Monetary Institute (WAMI) has secured a US$23 million African Development Fund (ADF) grant to modernize the payment systems in Gambia, Guinea and Sierra Leone, with the expectation that the system will be harmonized by 2012. The region is also planning to develop automated cheque clearing and a clearing house in addition to developing a real-time gross settlement (RTGS) system. All of these are expected to promote intra-regional and intra-African trade and investment by reducing financial transaction costs and risks associated with currency convertibility, thus promoting longer-term regional integration in the continent. National and regional infrastructure development initiatives hold out good prospects for the long-range future of regional integration in Africa. Conscious efforts are currently being made to bridge the infrastructure gap in the continent. At both national and regional levels, there have been several EU-funded projects aimed at achieving this. For instance, the EU has established an EU– African Infrastructure Trust Fund aimed at financing infrastructure projects in Africa, with a high concentration on road infrastructure and energy. In fact, between 2007 and 2009 energy projects constituted almost 70 per cent of the Fund’s total approved grant operations (EIB 2010). Other concluded or ongoing projects made possible through this initiative include the Sambangalou Hydropower Plant, Felou Hydropower, Lower Orange River Hydropower, Transmission Line Kibuye–Goma–Birembo, and the Ruzizi Hydropower Plant. Many of these projects focus on connecting several countries within the subregions. In addition, a Southern partner, China, has been vigorous in developing infrastructure in the continent, with infrastructure finance reaching $7 billion by 2006 (Foster et al. 2009).

52 | two

In addition, leading African institutions7 have made recent progress in long-term infrastructure development in Africa by merging all the continental infrastructure initiatives into a single coherent programme called Programme for Infrastructure Development in Africa. Successes include the East African Submarine Cable System, the Togo–Benin–Ghana Power Interconnection Project, the West African Gas Pipeline project, East, Central Southern and West African Power Pools and the Kenya–Uganda Oil Pipeline. Implementation of this project is expected to continue up to 2030. As an institution, the AfDB is also keeping regional infrastructure development on the front burner, accounting for more than 50 per cent of total operations and with an investment exceeding $6 billion in 2009 alone. These efforts will no doubt strengthen regional competitiveness, which has been weak for a long time as a result of poor infrastructure. This will strengthen economies of scale and the continent’s ability to attract larger cross-cutting FDI, especially in the non-traditional sectors. Significant policy actions are also being developed within different corridors. The EAC Railway Development Master Plan is in progress. ECOWAS is working on improving the Abidjan–Lagos corridor to improve movement of goods by tackling the harassments, multiple roadblocks and instances of extortion that characterize the corridor. The Bamako–Dakar and Dori–Tera corridors, with the latter linking Burkina Faso and Niger, are also in an advanced preparatory stage. Current efforts at linking Monrovia to Accra through Côte d’Ivoire would mean successfully linking Monrovia to Lagos. The SADC is making plans to create a Durban–Kimberly corridor extending to Botswana and Namibia through a railway project. Other corridors being proposed for improvement include Durban–Zimbabwe–Zambia–DRC (the  North–South Corridor), Dar es Salaam–Rwanda–Burundi–Uganda–DRC (the Central Corridor), Mombasa– Rwanda–DRC (the Northern Corridor) and Walvis Bay–Botswana–South Africa (the Trans-Kalahari Corridor). These and several other similar ongoing road, railway and multi-modal corridor improvements will give a major boost to the longer-range future of regional integration in Africa. Another major initiative aimed at improving safe, reliable, affordable and efficient transportation along the corridors of sub-Saharan African (SSA) countries is the Sub-Saharan Africa Transport Policy Programme (SSATP). Established in 1987, this initiative is an international partnership of thirty-five SSA countries and RECs jointly funded by both African and non-African donor agencies, with strong human resources and facilities support from the countries and RECs. This initiative supports the African national and regional transport system through five components: the Road Management Initiative (RMI); the Rural Travel and Transport Programme (RTTP); Urban Mobility (UM); Trade and Transport (T&T); and Railway Restructuring (RR). This initiative is having a substantial impact on transport policy formulation and implementation in SSA. All of these are expected to contribute immensely to

ogunleye | 53

longer-term trade facilitation in the major African regional transit corridors and Africa as a whole. China has initiated a platform for strengthening its cooperation and partnership with Africa. This forum, the Forum for China–Africa Cooperation (FOCAC), provides an avenue for assessing the challenges facing both partners and outlining specific areas for cooperation. In addition, there is the African–Asian Business Forum, which provides a more general forum for the developing Asian countries in cooperating with African countries. These forums are excellent opportunities that will further cement African–Asian economic cooperation. The emergence of a new crop of leaders with knowledge of the importance of regional integration and thus politically committed to strengthening the existing arrangements and creating new structures is also an advantage for the long-term future of African regional integration. This can be seen in several recent initiatives aimed at driving the regional integration process. Some of the recent ongoing policy initiatives of these leaders include the establishment of the African Investment Bank, the Africa Finance Corporation, the African Central Bank and the African Monetary Fund. Renewed enthusiasm, drive and commitment championed by these leaders is expected to continue and will certainly have lasting positive effects on Africa’s long-run South–South integration. The big leap in South–South bilateral investment arrangements evidenced by the signing of Bilateral Investment Treaties and Double Taxation Treaties is an important demonstration of the good prospects for an improved African  South–South relationship in the long term. For instance, the number  of South–South BITs increased from forty-seven in 1990 to 603 at the end of 2004, representing 25 per cent of total BITs, although about 50 per cent of these are yet to be ratified (UNCTAD 2005). As of June 2011, Egypt had over sixty South–South BITs. Other countries with significant South–South BITs are Algeria, Ethiopia, Ghana, Guinea, Senegal, South Africa, Sudan, Tunisia and Zimbabwe. Given the current status of the South–South relationship, this trend is expected to increase considerably, leading to stronger South–South cooperation in Africa. Policy recommendations for accelerating trade and economic integration in Africa

Comprehensive country studies on the real and potential costs and benefits of regional integration. Such studies would address a degree of ignorance on the importance of regional integration at the local, state, subregional and continental levels. They will also enlighten policy-makers and secure political commitments for regional integration. Serious thought given to adopting product fragmentation or vertical specialization in the production process, leveraging existing country-specific resources and

54 | two

endowments. In West Africa, Nigeria could leverage its oil resources for the production and distribution of petroleum products, while Ghana builds on its strong manufacturing base to use the Nigerian petroleum by-products for manufactures. Within East Africa, Kenya could equally spread its manufacturing strength beyond its borders by locating some processes in regional countries such as Tanzania and Uganda. Adopting this production strategy would mean tackling the existing challenges as a precondition for promoting trade through production fragmentation. Prioritizing infrastructure development with a view to closing the existing large gap, thus reducing production costs and promoting international competitiveness. To ensure sustainability, this should be done with more emphasis on mobilizing and using domestic financial resources and public–private partnerships while de-emphasizing donor funding. Deepening economic reforms. Land use and ownership reforms deserve attention. This should be complemented by a functioning and responsive legal system to guarantee a reliable framework for dispute settlement in cases of friction. Financial market liberalization should not be overlooked. Furthermore, fiscal policy reform involving reductions in external tariffs among member states should also be considered. This series of reforms must be well sequenced and well targeted. Concentrating on relaxing the supply-side constraints. Broadly speaking, these include workers’ skills, infrastructure and installed capacity. A better-trained and educated workforce needs to be developed through improvements in conventional and vocational education and through on-the-job learning mechanisms. Firms should also be more proactive in the use of innovation and technology to improve production processes. Government needs to provide an enabling environment for this by investing more in research and development and providing security solutions to the possible risks emanating from the use of technology. Creating space for product complementarity. The structure of trade in African countries reveals high concentration and little diversification. Just as the oil-rich Middle East countries have successfully done, resource-rich African countries should invest their resource rents in strengthening agriculture, light manufacturing and services that would encourage a move up the value chain. For instance, Côte d’Ivoire and Ghana could consider jointly establishing a major chocolate production firm given their wealth in cacao production and their proximity to each other. Promoting competitiveness through trade and economic diversification by building a more market-friendly business environment. This will require the government to play a more active role as a developmental state and regulatory agency. Focusing on creating functioning legislative and institutional frameworks and allowing the private sector to take the lead is important. Appropriate macroeconomic management is also imperative in order to correct boom-and-bust business

ogunleye | 55

cycles, especially in resource-dependent economies. National governments and RECs need to develop a comprehensive competition policy that outlines specific actions for improving competition at all levels, taking into consideration the available human, capital and material resource endowments and ensuring specialization based on comparative and relative advantages. African countries need to gradually move towards service-oriented production such as banking, insurance and tourism as a means to improve regional and trade integration. Also important for improving competitiveness is an exchange rate policy reform that corrects misalignment and overvaluation. More efforts should be directed at rationalizing and streamlining REC arrangements. Overlapping REC memberships have led to confusion, resulting in countries’ inability to implement agreed measures in the different RECs to which they belong. Rationalizing the number of RECs to the barest minimum will help overcome some policy challenges and further simplify macroeconomic and policy convergence. Conclusion

Africa should emphasize South–South integration and cooperation because of its potential for mutual gain and the good prospects it holds for the continent. Regional trade and economic cooperation in Africa has yielded limited results for the continent. This is due to several challenges that include overlapping membership of RECs resulting in duplication of programmes and confusion, the poor state of infrastructure, the limited political commitment of member countries, high external tariffs, uncertainty and ignorance about the benefits and costs of regional integration, and weak institutions. However, African countries are not oblivious to these challenges. Thus, conscious efforts on the part of African countries and institutions at steering regional economic and trade integration and South–South cooperation in the right direction with home-grown initiatives aimed at confronting the existing challenges and tackling new and emerging ones have begun to yield results. The long-range future of South–South regional trade and economic integration, both among African countries and with other Southern partners, holds very high promise. African South–South cooperation is strongest with Asia, driven largely by China. This should be further cultivated, leveraging successes and existing institutional arrangements. In contrast, South–South cooperation between Africa and Latin America is as yet weak. This requires attention, and the development of a stronger framework for integration similar to FOCAC. If Africa could improve efforts in the medium term, especially in its ambitious regional infrastructure development, trade and regional integration and its associated beneficial effects would more than double for the continent.

56 | two Notes 1 Much of the data in the following chapter was recorded prior to the first submission of this paper in 2010. As the sources are no longer available to the author, we are unable to update some of the country data. In future editions, we would hope to bring the data more up to date. 2 This was under the name East African Common Services. 3 Some of these declarations include Algiers (1968), Addis Ababa (1970 and 1973), Kinshasa (1976) and Libreville (1977). 4 These include the First Yaoundé Convention (1964–69) between the European Community and the eighteen former African colonies that had recently gained independence. The Convention was signed on 20 July 1963 and entered into force on 1 June 1964. At the expiration of the First Convention, the Second Yaoundé Convention (1971–75) was signed on 29 July 1969 and entered into force on 1 January 1971. Another similar unfulfilled strategy was the Lomé Convention, a trade and aid agreement between the European Union (EU) and currently seventy-eight African, Caribbean and Pacific (ACP) countries, first signed in February 1975 in Lomé, Togo. 5 These countries are South Africa, Lesotho, Namibia and Swaziland. 6 According to Yang and Gupta (2005), these include ambitious goals, primary focus on intra-regional tariff reductions, different rules of origin that are sometimes restrictive, relatively high external trade barriers, concern about revenue losses in the design and implementation of RECs and a high desired level of integration. 7 The African Union Commission (AUC), the New Partnership for Africa’s Development (NEPAD) Secretariat and the African Development Bank.

References Adedeji, A. (2002) ‘History and prospects for regional integration in Africa’, Paper presented at the Third Meeting of the African Development Forum, Addis Ababa, 3–8 March. AfDB (2003) African Development Report, Oxford: Oxford University Press. Amjadi, A. and A. Yeats (1995) ‘Have transport costs contributed to the relative decline

of sub-Saharan African exports? Some preliminary empirical evidence’, Policy Research Working Paper 1559, Washington, DC: World Bank. Ancharaz, V., T. Kandiero and K. Mlambo (2010) ‘The first Africa region review for EAC/ COMESA’, AfDB Working Paper Series no. 109. Blomström, M. and A. Kokko (1997) ‘How foreign investment affects host countries’, World Bank Policy Research Working Paper no. 1745. Collier, P. (1995) ‘The marginalization of Africa’, International Labour Review, 134(4/5): 541–57. Collier, P. and J. W. Gunning (1999) ‘Explaining African economic performance’, Journal of Economic Literature, XXXVII: 64–111. Dunning, J. (1997) ‘The European internal market programme and inbound foreign direct investment’, Journal of Common Market Studies, 35: 189–223. ECA (2002) The Third African Development Forum (ADF III): Defining Priorities for Regional Integration, Addis Ababa: Economic Commission for Africa. — (2006) Assessing Regional Integration in Africa II: Rationalizing Regional Economic Communities, Addis Ababa: Economic Commission for Africa. — (2008) Assessing Regional Integration in Africa III: Towards Monetary and Financial Integration in Africa, Addis Ababa: Economic Commission for Africa. — (2010) Assessing Regional Integration in Africa IV: Enhancing Intra-African Trade, Addis Ababa: Economic Commission for Africa. Egwaikhide, F. O. and E. K. Ogunleye (2010) ‘Globalization and macroeconomic convergence criteria in the West African Monetary Zone’, Journal of Economic and Monetary Integration, 10(1): 89–130. EIB (2010) EU–Africa Infrastructure Trust Fund 2009 Annual Report, Brussels: European Investment Bank. Foster, V., W. Butterfield, C. Chen and N.  Pushak (2009) Building Bridges: China’s Role as Infrastructure Financier for SubSaharan Africa, Washington, DC: World Bank. Geda, A. and H. Kebret (2007) ‘Regional

ogunleye | 57 economic integration in Africa: a review of problems and prospects with a case study of COMESA’, Journal of African Economies, 17(3): 57–394. Karingi, S., R. Lang, N. Oulmane, R. Perez, M. S. Jallab and H. B. Hammouda (2005) ‘Economic and welfare impacts of the EU– Africa Economic Partnership Agreements’, APTC Work in Progress no. 10, Addis Ababa: Africa Policy Trade Centre, Economic Commission for Africa. Limao, N. and A. J. Venables (2001) ‘Infrastructure, geographical disadvantage and transport costs’, World Bank Economic Review, 15(3): 451–79. Mohanty, S. K. and S. Pohit (2007) ‘Welfare gains from regional economic integration in Asia: ASEAN+3 or EAS’, RIS Discussion Papers no. 126, New Delhi: Research and Information System for Developing Countries. Page, S. and D. Willem te Velde (2004) ‘Foreign direct investment by African countries’, Paper prepared for InWent/UNCTAD meeting on FDI in Africa, Addis Ababa, 22–24 November. Rodrik, D. (1998) ‘Trade policy and economic performance in sub-Saharan Africa’, NBER Working Paper no. 6562, May, New York: National Bureau of Economic Research. UNCTAD (2003) Investment Policy Review: Botswana, New York and Geneva: United Nations.

— (2005) South–South Cooperation in International Investment Arrangements, UNCTAD Series on International Investment Policies for Development, New York and Geneva: United Nations. — (2006) World Investment Report 2006: FDI from Developing and Transition Economies: Implications for Development, New York and Geneva: United Nations. — (2007) Bilateral Investment Treaties 1995–2006: Trends in Investment Rulemaking, New York and Geneva: United Nations — (2009) Economic Development in Africa Report 2009: Strengthening Regional Economic Integration for Africa’s Development, New York and Geneva: United Nations. Van Zyl, L. (2003) ‘South Africa’s experience of regional currency areas and the use of foreign currencies’, in Regional Currency Areas and the Use of Foreign Currencies, BIS Papers no. 17, pp. 134–9. World Bank (2009) Doing Business 2010, Washington, DC: World Bank. Yang, Y. and S. Gupta (2005) ‘Regional trade arrangements in Africa: past performance and the way forward’, IMF Working Paper WP/05/36, Washington, DC: International Monetary Fund. Yeats, A. (1998) ‘What can be expected from African regional trade arrangements? Some empirical evidence’, Policy Research Working Paper no. 2004, Washington, DC: World Bank.

3 | FINANCIAL CRISIS AND REGIONAL ECONOMIC COOPERATION IN ASIA-PACIFIC 1

Nagesh Kumar

Regional economic integration was adopted as a strategy for development in different regions of the world during the 1990s, following the formation of a single market by the European Union and of NAFTA by the North American countries. With the growing popularity of regional economic integration worldwide, more than half of world trade is now conducted between members of regional trading arrangements (i.e. on a preferential basis) and not on a most-favoured-nation (MFN) basis. The Asia-Pacific region has been rather slow to respond to the global trend of regionalism and to exploit the potential of regional economic integration. For historical and geopolitical reasons, the Asia-Pacific region has been better connected to the Western world than with itself. Quite unexpectedly, financial crises, acting as external shocks, helped in promoting regional economic integration by revealing regional interdependence and vulnerability. The Asian financial crisis of 1997, for instance, led to Association of Southeast Asian Nations (ASEAN) advancing the schedule of implementation of the ASEAN Free Trade Agreement and also adopting the Chiang Mai Initiative (CMI) with three dialogue partners (ASEAN+3) in monetary cooperation. The global financial and economic crisis of 2008/09 has demonstrated the resilience of Asian economies such as China and India, which continued growing robustly in the face of a sharp contraction in the advanced economies in the West and East alike. It is now clear that the growth rate in demand for the goods and services of the Asia-Pacific region in Western countries may not recover to pre-crisis levels as they try to restrain the debt-fuelled consumption to unwind the global imbalances (ESCAP 2010). Therefore, Asia-Pacific countries will have to find new sources of aggregate demand to sustain their dynamism through expanding domestic consumption or regional demand. Hence, regional economic integration is likely to occupy a much more important place in the regional policy agenda in the coming years than before. Furthermore, this chapter argues that the current phase of regional economic cooperation and integration is likely to be broader and more comprehensive in terms of coverage as countries in the region discover regional sources of demand and supply of resources. Deeper regional economic integration will enable the region to play its due role in global economic governance and will make it an anchor of peace and shared prosperity in the world economy.

kumar | 59 Impetus for regional economic cooperation in Asia

The East Asian crisis of 1997 highlighted the importance of regional economic cooperation, providing a much-needed stimulus for regional economic integration in the region. The ASEAN countries expedited the programme of implementation of the ASEAN Free Trade Area (AFTA) from 2008 to 2002 and moved on to further deepen their economic integration. The crisis also led to the Chiang Mai Initiative for monetary cooperation, which involves ASEAN+3 ( ASEAN, Japan, China and South Korea) countries. A more important stimulus for regionalism seems to have come from the emergence of Asia as the centre of final demand. With the emergence of large populous economies, i.e. China and India, as powerful growth drivers, Asia is quickly becoming the centre of gravity of the world economy. For many products from jet planes to motor cars to mobile phones, the biggest markets in the world are now in Asia rather than in the West. As a result more than 55 per cent of Asia’s trade is now intra-regional, thus making regional economic integration an increasingly viable trade strategy. Global investment banks such as Goldman Sachs are projecting China and India to emerge as the two largest economies in the world by 2050 (Wilson and Purushothaman 2003). The booming intra-regional trade is suggestive of the complementarity or synergies that have developed between the economic structures of the Asian economies. Regional economic integration could help in their exploitation for mutual benefit. Although regional production networks have begun to be developed across Asia to exploit the synergies through vertical specialization, regional economic integration could help in expanding such opportunities and exploiting the potential of such rationalization or restructuring more fully. The slow progress of the multilateral trade negotiations and their inability to live up to the expectations of Asian countries have also contributed to the importance attached to regionalism by them. Finally, as discussed earlier, in the aftermath of the global financial crisis, the Asia-Pacific countries may be forced to look inwards and seek to exploit the potential of regional economic integration. A return to business as usual is rendered difficult by the compulsion to restrain debt-fuelled consumption in Western countries as a part of unwinding global imbalances (ESCAP 2010). Emerging patterns of regional economic integration in Asia and the case for broader arrangements

Asian developing countries made a number of attempts at regional economic cooperation in the 1970s promoted by the United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP). These included the Bangkok Agreement, established in 1975, which covered reciprocal tariff concessions between five member states, namely Bangladesh, India, the Lao People’s Democratic Republic (PDR), the Republic of Korea and Sri Lanka. In 2000, China also joined the Bangkok Agreement. The Asian Clearing

60 | three

Union, with seven members in the region (Bangladesh, India, Iran, Myanmar, Nepal, Pakistan and Sri Lanka), came into being in 1974. It is generally agreed, however, that these early experiences have not been very successful. The expectations for these initiatives have not been met for various reasons. For instance, the Bangkok Agreement (now known as the Asia-Pacific Trade Agreement, APTA) has suffered from its limited membership and product coverage, shallow preference margins and lack of coverage of non-tariff barriers. Although set up in 1967, ASEAN had limited cooperation in economic areas until the ASEAN Free Trade Area (AFTA) was established in 1992. Similarly, the South Asian Association for Regional Cooperation (SAARC) came into being in 1985 but did not adopt a programme of economic cooperation until 1991 with the formation of the Committee on Economic Cooperation (CEC). It created a SAARC Preferential Trading Agreement in 1995, and in 2004 eventually agreed to create a SAARC Free Trade Area to be implemented over ten years from 2006. At the summit held in Bhutan in 2010, SAARC adopted a framework agreement on liberalization of trade in services. Besides regional economic integration, bilateral preferential trading arrangements between India and Nepal and between India and Sri Lanka have also sped up economic integration in the South Asian subregion. Another notable initiative in Asia is the Bay of Bengal Initiative for Multisectoral Techno Economic Cooperation (BIMSTEC), involving five South Asian (Bangladesh, Bhutan, India, Nepal and Sri Lanka) and two South-East Asian (Myanmar and Thailand) nations, bridging the two subregions. BIMSTEC adopted a framework agreement for an FTA to be implemented within ten years at its first summit held in Bangkok in July 2004. In the wake of the East Asian crisis of 1997/98 ASEAN countries expedited the programme of implementation of AFTA from 2008 to 2002 and moved on to deepen economic integration further to an ASEAN Economic Community by 2020, a goal that was later expedited to 2015. The crisis also led to the launch of several regional initiatives, such as the Chiang Mai Initiative. In addition, ASEAN’s policy of engaging key Asian countries as dialogue partners has provided much-needed cohesion in the Asian region, as is clear from the numerous schemes for regional and bilateral free trade arrangements that are at different stages of implementation. China, India, Japan, the Republic of Korea, Australia and New Zealand have all negotiated FTAs with ASEAN and are also engaging each other. It is also leading to more inclusive broader groupings. An important initiative is the launch of the East Asia Summit (EAS) in December 2005 in Kuala Lumpur, Malaysia, as an annual forum in which ASEAN and all its dialogue partners participate. Bringing together sixteen of the largest and fastest-growing economies in an annual summit-level dialogue, EAS is widely expected to pave the way for a broader regional arrangement in Asia that could be the third pole of the world economy.

kumar | 61

To sum up, initiatives towards regional economic integration include the following: • Subregional attempts such as those by ASEAN, SAARC and BIMSTEC to form FTAs and further deepen economic integration; • FTAs or comprehensive partnership arrangements between ASEAN and its dialogue partners, namely China, India, Japan and the Republic of Korea; and also between ASEAN and CER (Australia-New Zealand Closer Economic Relations); • FTAs or comprehensive arrangements between individual ASEAN countries and ASEAN dialogue partners, for example Japan–Singapore, India–Singapore and India–Thailand; and • FTAs or comprehensive arrangements between the dialogue partners themselves, such as India–Japan, India–Republic of Korea, already signed, and Japan–China–Republic of Korea (JCK) and India–China (under study). From this complex web of free trade arrangements linking all these countries (and Australia-New Zealand CER) and ASEAN countries a virtual Asian or East Asian economic community is emerging (Figure 3.1).2 It has been argued, however, that the subregional or bilateral attempts at regional cooperation, such as these, while desirable, are unlikely to exploit the full potential of regional economic integration in Asia and hence are suboptimal (Kumar 2005). This is because the complementarities are limited to the subregional levels because of similar factor endowments and economic structures within an immediate neighbourhood, as is clear from the low proportions of intra-subregional trade,

Japan

China Malaysia Philippines CLMV countries

ASEAN Singapore

Indonesia Brunei

Thailand S. Korea

India Australia–New Zealand CER

Framework agreements signed

Under negotiation

Under study

Note: The CLMV countries are Cambodia, Lao PDR, Myanmar and Vietnam 3.1

An emerging East Asian community (source: author)

62 | three

such as within ASEAN or SAARC. At the broader Asian level, on the other hand, the diversities in the levels of economic development and capabilities are quite wide, thus providing for more extensive and mutually beneficial linkages. Secondly, the bilateral arrangements do not provide a seamless market because of different scopes and coverage and the rules applicable to different FTAs, producing an Asian noodle-bowl syndrome and increasing transaction costs for businesses. As one observer has pointed out, without some form of overall regional framework within which to work, capital, human and natural resources may all be deployed at less than their optimal values (Rowley 2004). Hence, a case has been made for a broader regional arrangement coalescing various bilateral FTAs between Japan, ASEAN, China, India and South Korea ( JACIK) countries which will facilitate the optimal utilization of Asia’s resources and synergies for the benefit of all countries (Kumar 2004; Kumar et al. 2008). The prime minister of India, Dr Manmohan Singh, has been making a case for an Asian Economic Community combining ASEAN countries, China, India, Japan and the Republic of Korea as an ‘arc of advantage’ across which there would be a large-scale movement of people, capital, ideas and creativity, thereby creating a community that would release enormous creative energies. Recognizing the  need to deepen regional economic integration in the aftermath of the financial crisis, leaders of Japan, the Philippines and Australia also articulated their own visions of broader pan-Asian economic communities at the Fourth East Asia Summit, held in Hua Hin, Thailand, in October 2009.3 As EAS brings together all the JACIK countries as well as Australia and New Zealand, a start can be made on broader regional integration in the EAS forum. The Second EAS, held in Cebu, Philippines, on 15 January 2007, endorsed the preparation of the track-two feasibility study for a Comprehensive Economic Partnership of East Asia (CEPEA) involving EAS countries. The Fourth East Asia Summit adopted the final report of the CEPEA Study Group  set up as a follow-up to the Cebu session in 2007. The CEPEA Study Group finds a fruitful case for deeper regional integration in the EAS region, involving the three pillars of liberalization, facilitation and cooperation implemented in parallel (CEPEA Study Group 2009). Combining sixteen of the largest and fastest-growing economies of AsiaPacific with significant complementarities, an EAS trade bloc is a potential third pole of the world economy. The grouping has a population of 3.2 billion people, or one half of the world’s population (see Table 3.1). In terms of purchasing power parity (PPP), the EAS grouping will have a combined gross national income exceeding US$20 trillion, accounting for nearly 30 per cent of global income, which is much larger than either NAFTA or the EU. EAS’s exports will equal US$3.3 trillion compared with US$1.6 trillion from NAFTA. The combined official reserves of the EAS economies, at US$4

kumar | 63

trillion in 2008 (and over $5 trillion now), are much larger than those of the United States of America and the EU combined. Clearly, the region would have a sufficiently large market and financial resources to support and sustain expedited development. With both China and India together in one grouping, EAS would necessarily be way ahead of its Western counterparts in terms of dynamism, and would quickly emerge as a growth pole of the world economy. table 3.1 Proposed East Asian Community4 in relation to the EU and NAFTA in 2008 (US$ billions) Indicator

EU (27)

NAFTA

EAS (16)

Gross national income (PPP) (percentage of world total)

15,155 (21.88)

17,041 (24.60)

20,699 (29.89)

GDP (percentage of world total)

18,328 (30.27)

16,683 (27.55)

13,943 (23.02)

Exports (percentage of world total)

4,584 (37.05)

1,603 (12.95)

3,324 (26.86)

International reserves (percentage of world total)

494 (7.17)

205 (2.98)

3,934 (56.98)

Population (millions) (percentage of world total)

496 (7.42)

444 (6.63)

3,240 (48.39)

Source: Based on World Bank, World Development Indicators Online (accessed 20 September 2010); International Monetary Fund (IMF), Direction of Trade Statistics 2010, CD-ROM

Therefore, the EAS has the potential to create a regional grouping that could be comparable in size with NAFTA and the EU but would be much more important in terms of its dynamism. Besides the potential welfare gains accruing from economic integration by exploiting the synergies, such a grouping would help Asia play its due role in global economic governance, commensurate with its increasing economic weight (see Kumar et al. 2008). Gains from economic integration in the EAS framework

A number of recent studies have found considerable evidence of complementarities between EAS countries in their production and trade structures (Kumar 2004; Kumar et al. 2008). Using the Global Trade Analysis Project database (GTAP 6) with the World Bank’s LINKAGE model, the Asian Development Bank (ADB) study (Brooks et al. 2005) generated computable general equilibrium (CGE) projections of income and trade to 2025 under different scenarios to examine the relative impact of regional integration vis-à-vis global trade liberalization. The findings suggest that regional trade and integration could offer Asia great potential for rapid and sustained growth. The ADB study

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also finds that much of Asia’s gain from global trade liberalization could be realized by a regional initiative alone. Significantly, it finds that the combined gains from removing tariff and structural barriers to Asian trade far outweigh those from global tariff abolition. Hence, regionalism should have a very high priority for Asia. Furthermore, the ADB study suggests that regional integration would promote Asian economic convergence, raising average growth rates and benefiting poorer countries. In particular, greater regional integration would propagate commercial linkages and transfer the stimulus of Asia’s rapid-growth economies, particularly China and India, to their lower-income neighbours. A more recent ADB Institute study has also reported substantial potential welfare gains of up to US$284 billion from regional economic integration in the EAS or ASEAN+6 framework, which are in tune with previous studies.5

EAS versus East Asian economic integration based on ASEAN+3 There is some debate on whether ASEAN+3 is a better forum for developing a broader scheme of economic integration in Asia than EAS. However, research has shown that EAS has greater potential welfare gains for all participants than ASEAN+3. The CGE simulations reported earlier were repeated for ASEAN+3. The simulation results clearly demonstrate that welfare gains in the EAS are much higher than in an ASEAN+3 framework in each of the three studies that compared the two alternative frameworks (Kumar 2007). A possible explanation for this considerable difference in welfare gains could lie in the greater economic diversity of EAS owing to the inclusion of additional countries such as India, Australia and New Zealand with complementary strengths. For instance, India’s software- and services-dominated economy complements well the hardwareand manufacturing-driven economies of other East Asian countries, and its inclusion appears to be welfare-enhancing for all partners in EAS, a ‘win-win’ situation for Asia. Australia’s natural resource endowments also complement well the growing raw material requirements of fast-expanding EAS economies. Besides the complementarities, the dynamism and other strengths of Australia, India and New Zealand will also benefit the EAS group. India, with a US$1.3 trillion economy growing at 9 per cent per annum and a 300-millionstrong middle class, is emerging as the second-largest economy in the world. With foreign exchange reserves of over US$260 billion, one of the best-managed stock markets in Asia,6 a market-determined exchange rate, abundant human capital and entrepreneurial resources, rapidly growing industries and services and a prudently managed financial system,7 India is attracting attention for its strong macroeconomic fundamentals, especially in the context of the ongoing global financial crisis. India has recently been ranked among the top two investment destinations in the world by A.T. Kearney in terms of their foreign direct investment (FDI) confidence index (A.T. Kearney 2010). India is seen as having the potential to show the fastest growth over the next thirty to fifty years (Wilson and Purushothaman 2003). Another study by the IMF

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finds India poised to sustain growth rates of around 7 per cent over the next thirty to forty years, with very few downside risks (Rodrik and Subramanian 2004). The growing openness of the Indian economy means that this growth is spilling over to other economies as well and, according to the IMF, India is contributing nearly 10 per cent to global growth and 20 per cent to growth in Asia (IMF, September 2005). With China and India as two major dynamos propelling regional growth, the Asian dream will be realized faster (Kesavapany 2005). India’s burgeoning demand for infrastructure investments, projected at over US$500 billion, can provide a huge market for East Asian investors and underutilized construction and engineering capacities. India can help in mitigating the loss of demand in Asia resulting from the shrinking Western economies. Malaysian companies, among others, have already won substantial projects in road construction in open bidding. The booming middle class in the country is increasingly becoming a source of final consumption demand as income levels rise. The trend is already clear from the large and growing trade deficits that India has with ASEAN, China, Japan and Australia, among other EAS member states. India has also emerged as a major source for highspending tourists for a number of countries in East Asia. Rapid integration with East Asia as part of the ‘Look East’ policy followed by India after 1991 has made the region India’s largest trade partner, ahead of the EU and the United States. India is increasingly being integrated into East Asian production chains, especially in more critical knowledge-based sectors such as research and development (R&D) and product design. Indeed, East Asian companies have begun to exploit India’s strengths in R&D, software and design by locating their global R&D centres in India. For instance, Samsung’s R&D centre in India developed the hybrid mobile telephone that can operate across GSM and CDMA technologies. China’s Huawei Technologies, like many others, employs hundreds of engineers involved in chip design or embedded software development in Bangalore. Hyundai uses its Indian operations as a sourcing base for compact cars. Toyota is sourcing gearboxes from its Indian plant for South-East Asian markets. Furthermore, these production networks include not only those belonging to Japanese or Korean companies but also those being developed by Indian enterprises. For instance, Daewoo Trucks has become linked with the production chain of Tata Motors following its acquisition by the latter. Several Indian companies have also begun to take advantage of cheaper manufacturing costs for hardware in China and other East Asian countries by rationalizing their production. The trend is likely to become more firmly entrenched as the emerging FTAs between India and East Asian countries come into effect. India is already negotiating an FTA with ASEAN (in addition to those with individual countries such as Singapore and Thailand), the Republic of Korea and Japan, and is exploring an FTA with China. Hence, it is very much part of the growing web of FTAs linking the East Asian countries. There are also complementarities in the demographic

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trends of other East Asian countries and India. Just as those countries are about to enter a phase of demographic burden, implying a lower share of the working-age population and a higher median age of workers, India is entering a demographic gift phase, with a higher share of the working-age population. Through IT, an India integrated into Asia could help address East Asia’s demographic challenges (Asher and Sen 2008). With its excellent trading and transport links and emerging preferential trading arrangements with South Asian countries, the Gulf Cooperation Council (GCC) and other West Asian countries, India could act as a bridge for East Asia to markets in South, West and Central Asian countries. Lastly, it can be argued that a group having two large populous countries, i.e. EAS, will be more balanced than ASEAN+3 with one such country. Furthermore, the bilateral sensitivities among some north-east Asian countries tend to diminish in the presence of other partners. The potential of growing economic integration between East Asia and India is catching people’s imagination. A survey conducted by the World Economic Forum and Taylor Nelson Sofres revealed that over 37 per cent of New Asian Leaders (NALs) view an extended Asia, comprising ASEAN, China, India, Japan and the Republic of Korea, as the most desirable model of economic integration, with only 26.8 per cent preferring ASEAN+3 (World Economic Forum 2003).8 Priority areas for cooperation for EAS

The discussion above has shown that a regional trade arrangement (RTA) based on the EAS or a Comprehensive Economic Partnership in East Asia (CEPEA) would enhance welfare significantly, not only for participating countries but for the rest of the world. There are a number of other areas where regional cooperation could be fruitful, such as in monetary and financial matters, energy security and science and technology, among others. Some of these areas that should form part of the scheme of cooperation within the EAS framework are as follows:

Connecting markets through a balanced regional trading arrangement A key element of any scheme of regional economic integration is usually a trade agreement that provides conditions for market integration. In a region combining a diverse group of countries at different levels of development, a trading arrangement has to be sensitive to the differences in the levels of development. Hence, it has to include provisions for safeguards for sensitive products, special and differential treatment for countries at different levels of development, and dispute resolution. Care must be taken in designing the programmes of regional economic integration that they keep equity, employment generation and necessary social transformation and social safety nets for vulnerable sections of society and balanced regional development at their heart, thereby representing regionalism with an ‘Asian face’. By balancing the

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interests of efficiency and equity, the Asian arrangement could well emerge as a role model for trade liberalization in multilateral as well as regional contexts throughout the world. As indicated earlier, the EAS at its Second Session, held in Cebu, Philippines, in 2007, had launched a track-two feasibility study on a Comprehensive Economic Partnership Agreement of East Asia (CEPEA) covering all EAS countries. The study in its two phases was completed by 2009 and was accepted by the Fourth Session of EAS in Hua Hin in October 2009. At the Fifth Session of the EAS in Hanoi in October 2010, four working groups were set up to work further on the recommendations of the Study Group.9 CEPEA could be an engine of growth not only for the participating countries in Asia but also for the rest of the world by unleashing the synergies of Asian countries for trade creation. East Asian countries need to deepen their ongoing cooperation further and cooperate in shaping CEPEA as the foundation for the creation of an integrated or seamless Asian market.

Stronger physical connectivity and transport and trade facilitation As observed earlier, the Asia-Pacific region has been better connected with Europe and North America than it has been with itself for a variety of reasons. The potential of regional economic integration will never be fully exploited unless it is better connected with itself. The region has improved its highway and railway networks, but it cannot use the infrastructure effectively without the legal and regulatory bases for vehicles, goods and people to move across borders and transit countries. Currently many international movements are hindered by lack of connecting links between national highways and railways, transit arrangements, slow and costly processes, and formalities and procedures. In the future the region will need an integrated, multimodal transport system. It has now started to develop this – for example, by building intermodal transfer points, also known as dry ports, where goods, containers or vehicles can be trans-shipped using the most efficient mode of transport, along with facilities for product grading, packaging, inspections and the processing of trade documentation. The areas surrounding dry ports can then act as growth poles, bringing new investment and employment opportunities to impoverished hinterlands while reducing pressure on coastal areas (ESCAP 2010). Monetary and financial cooperation in Asia A regional financial architecture supportive of regional cooperation could assist in narrowing development gaps and in strengthening physical connectivity by providing financing for high-priority infrastructure projects in lagging regions and missing links in connectivity. The lack of a well-developed regional financial architecture has been a reason why the region’s central banks have invested their growing savings and foreign exchange reserves in United States treasury bills. The recent multilateralization of the Chiang Mai Initiative is an important step but is limited

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to management of liquidity crises. With combined reserves of nearly US$5 trillion, the region now has the ability to develop a more ambitious regional cooperative architecture that could not only help prevent and manage crises but could also assist in closing the infrastructure development gaps and unleash the potential aggregate demand in the region’s less-developed regions. ESCAP is elaborating the elements of a stable and development-friendly regional financial architecture, as per the mandate given by the member states at the last Session of the Commission, held in Incheon in May 2010. The objective of financial cooperation in Asia should be to leverage the combined strength of foreign exchange reserves of EAS countries for their mutual benefit. There is a growing consensus that Asia needs a regional institution to mobilize its foreign exchange resources for its own development, besides helping achieve stability of real effective exchange rates and for an orderly response to external shocks. Even conservative commentators like Martin Wolf now acknowledge the importance of Asia having its own regional monetary and financial institutions.10 Studies have shown that there is growing macroeconomic interdependence between Japan, Korea and ASEAN. Such interdependence is likely to include China and India, as well as Australia and New Zealand, with ongoing reforms, liberalization and market opening (Kawai 2004). The EAS held at Cebu in January 2007 identified finance as one of the areas of cooperation.

South–South economic cooperation for narrowing development gaps Over time, the range of complementarities has widened in the Asia-Pacific region with a diversity of country development patterns and rates of growth. As a result of this diversity there is a basis for the fruitful exchange of experiences in the region. Alongside that, there is evidence that a number of emerging countries in the region are increasingly coming forward to share their development experiences, expertise, capabilities and other resources with co-developing countries. China and India, along with Malaysia, Thailand and Singapore, among others, have well-organized programmes of South–South cooperation aimed at assisting other developing countries, especially in their neighbourhood. For instance, China and India have helped in building roads, bridges and hydroelectric plants in Cambodia, Lao PDR, Pakistan, Nepal and Bhutan. Thailand has many cooperative programmes in the areas of agriculture and health with Malaysia, Indonesia and Timor-Leste. Malaysia has provided assistance to Vietnam for research relating to rubber. Such flows can help establish institutions, improve capacities and ultimately boost the incomes of the poor. Another priority has been health. Malaysia, for example, has provided assistance for setting up clinics in Cambodia, while India has built hospitals in Afghanistan, Nepal, the Maldives and Lao PDR. China, India, Korea, Thailand, Malaysia and Singapore are all involved in assisting other countries in education and training by setting up educational institutions in the recipient country, funding vocational programmes to develop skills that help improve productivity and incomes, and

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offering scholarships for students from recipient countries. Some countries, such as India, have also offered preferential market access to the least developed countries on a unilateral basis (Kumar 2009). The programme of economic cooperation could be made a more integral part of the scheme of regional economic integration, with the objective of narrowing the development gaps between countries and regions, and go beyond the voluntary economic assistance programmes summarized above. This is because an important objective of the regional economic integration schemes is to narrow the development gaps and bring about convergence in levels of economic development among different participants through the most optimal deployment of a region’s resources. An objective of balanced and equitable regional development also creates conditions for the more enthusiastic participation of all partners, including those lacking capacity, in the schemes of regional economic integration. There is now some evidence suggesting that increased trade by itself, even if balanced, does not always ensure economic development. Complementary development policies, including investment in infrastructure and other public goods such as education and research and development, and regional and sectoral programmes to ensure balanced growth, are needed. Globally, the RTAs are being integrated with balanced regional development and social cohesion policies. The scope of economic cooperation could also cover sharing development experiences and capacity-building, as well as creation of structural funds based on contributions by the member countries on the basis of capacity to pay in cash or in kind. These funds could provide economic assistance to lagging regions within the member countries for capacity-building, infrastructure development, assisting underprivileged sections of the population, trade liberalization adjustment, improvement of connectivity, and for building enterprise-level technological capability development. Fruitful opportunities for cooperation in other areas such as energy security, food security and natural disasters risk reduction also exist.11 A coordinated approach to reforms in global economic governance

Regional economic integration is also likely to strengthen Asia’s role in global economic governance. Although Asian countries hold two-thirds of the world’s foreign exchange reserves, decision-making in the Bretton Woods institutions, for instance, is dominated by Western countries. By forming credible schemes of regional economic integration, Asia will be able to seek its due place in global economic governance and contribute to building a more democratic and multipolar world economy. One forum for coordinated action is the G20, which has emerged as the premier council for global economic cooperation. The region has eight members in the G20 (Turkey, Russia, China, India, Indonesia, Japan, Republic of Korea and Australia), more than any other region, reflecting the systemic importance of these countries. However, in the absence of regional coordination, they are not able to exercise their

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due role in the process. Greater regional economic and financial integration would facilitate greater regional coordination of their positions in forums like the G20. Effective coordination of the positions of the Asia-Pacific G20 economies would give them greater influence in shaping the direction, content and pace of reform of the international financial architecture. Asian economic integration, by increasing the interdependence of countries in the region, could also ensure peace and stability. Concluding remarks

The Asia-Pacific region has emerged as the growth pole of the world economy over the past decade. It has been argued here that sustaining its dynamism in the post-crisis world will critically depend upon its ability to rebalance in favour of greater domestic consumption and harness the potential of regional economic integration as the Western economies unwind their debt-fuelled excess consumption. For historical and economic reasons, the Asia-Pacific region has been better integrated with markets in America and Europe than with itself. But this is changing as it emerges as a centre of final demand for a growing number of products and services. In recent years, a number of initiatives have been taken at bilateral and subregional levels to foster regional cooperation, leading to a veritable Asian noodle bowl of crisscrossing FTAs. However, these FTAs do not provide an integrated larger regional market owing to varying scopes, coverage and rules, and remain suboptimal in terms of exploiting the potential of regional cooperation. The future will see these FTAs being coalesced into broader regional integration schemes able to exploit economies of scale, specialization and scope across the Asia-Pacific region. The most promising of these initiatives for evolving a broader regional architecture for regional economic integration is ASEAN’s initiative of developing dialogue partnership with six neighbours, including China, Japan, the Republic of Korea, India, Australia and New Zealand, culminating in the formation of the East Asia Summit (EAS). It has been demonstrated that economic integration within the framework of EAS has the potential to create a third pole of the world economy, with market size and resources comparable with those of NAFTA and the EU, but way ahead in terms of its dynamism, and with substantial potential for generating welfare gains and trade creation. EAS has taken some early steps towards creating a framework for regional cooperation by adopting a three-pillared comprehensive economic partnership of the sixteen countries, building on their mutual FTAs. Furthermore, monetary and financial cooperation in the region may further generate aggregate demand for sustaining their dynamism by efficiently mediating between the region’s excess savings and unmet investment needs. Other areas of fruitful cooperation are in the areas of strengthening physical connectivity and cooperation for capacity-building and narrowing development gaps to exploit the synergies resulting from the diverging development

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patterns of Asian economies. Asia-Pacific regionalism for the most part will be South–South cooperation, even though some OECD member countries, i.e. Japan, the Republic of Korea, Australia and New Zealand, will be part of it in view of their deep economic links with the economies of the region. By forming credible schemes of regional economic integration, Asia will be able to make an appropriate contribution to economic governance and help to build a more democratic and diversified world economy. By increasing the interdependence of countries in the region, Asian economic integration will also ensure peace and stability. Notes 1 An earlier version of this chapter was presented at the Conference on the Future of South–South Economic Relations held at the Frederick S. Pardee Center for the Study of the Longer-Range Future, Boston University, on 24 September 2010, and benefited from comments by participants. The author thanks Kevin Gallagher, Adil Najam and Rachel Thrasher of Boston University for their invitation and comments. The views expressed are personal and should not be attributed to the United Nations or its member states. 2 For more details, see Kumar (2005). 3 The Philippines made a case for ‘Asian economic cooperation including through the possible establishment of an economic community of Asia’; Japan made a case for ‘reinvigorat[ing] the discussion towards building, in the long run, an East Asian community based on the principle of openness, transparency and inclusiveness and functional cooperation’; and Australia proposed to build an ‘Asia Pacific community in which ASEAN will be at its core’ (EAS 2009). 4 EAS (16): ASEAN (10), Japan, China, India, Republic of Korea, Australia and New Zealand. 5 See Kumar (2007) for a review of simulation studies. 6 India’s capital markets are highly developed with a world-class electronic settlement system and rapidly improving corporate governance. Over six thousand companies are listed on India’s stock exchanges, a total second only to that of the New York Stock Exchange (NYSE). 7 The ratio of non-performing assets to GDP is just 3 per cent compared with China’s 41 per cent, Japan’s 11 per cent and Thailand’s 9 per cent.

8 The survey took place at the World Economic Forum’s New Asian Leaders (NALs) Retreat, held in Seoul in June 2003, covering all participants and invitees and other Asia-based Global Leaders for Tomorrow. 9 Along with the recommendations of a similar study conducted for an alternative proposal of an East Asia FTA for ASEAN+3 countries. 10 See Wolf (2004), among many others. 11 See Tuli (2008) for a discussion of cooperation possibilities in energy security.

References Agarwala, R. and P. De (2008) ‘Reducing global imbalances and accelerating growth: role of regional financial cooperation in Asia’, in N. Kumar et al. (2008), pp. 203–20. Asher, M. and R. Sen (2008) ‘India’s and the Asian economic integration’, in N. Kumar et al. (2008), pp. 105–40. Asian Development Bank (2005) Asian Economic Cooperation and Integration: Progress, Prospects and Challenges, Manila: ADB. A.T. Kearney (2010) Investing in a Rebound: The 2010 A.T. Kearney FDI Confidence Index, www.atkearney.com/images/global/pdf/ Investing_in_a_Rebound-FDICI_2010.pdf. Brooks, D. et al. (2005) ‘Asia’s long-term growth and integration: reaching beyond trade policy barriers’, Economic and Research Department Policy Brief Series no. 38, Asian Development Bank, are.berkeley. edu/~dwrh/Docs/PB38-for-upload%20(3). pdf. CEPEA Study Group (2008) ‘Report of the Track Two Study Group on Comprehensive Economic Partnership in East Asia (CEPEA)’,

72 | three Tokyo, 20 June, www.thaifta.com/thaifta/ Portals/0/cepea_report.pdf. — (2009) ‘Phase II report of the Track Two Study Group on Comprehensive Economic Partnership in East Asia (CEPEA)’, Tokyo, 3 July, www.dfat.gov.au/asean/eas/cepeaphase-2-report.pdf. EAS (East Asia Summit) (2009) Chairman’s statement at the 4th East Asia Summit, Hua Hin, 25 October, www.15thaseansummit-th. org/PDF/25-08_EAS%20Statement.pdf. ESCAP (2010) Economic and Social Survey of Asia and the Pacific 2010, Bangkok: United Nations Economic and Social Commission for Asia and the Pacific, www.unescap.org/ pdd/publications/survey2010/download/ Survey2010.pdf. International Monetary Fund (2010) International Financial Statistics, Washington, DC: IMF. Kawai, M. (2004) ‘Prospects for monetary cooperation in Asia: ASEAN+3 and beyond’, Presentation at the High-level Conference on Asian Economic Integration: Vision of a New Asia, organized by RIS, Tokyo, 18/19 November. Kawai, M. and G. Wignaraja (2007) ‘ASEAN+3 or ASEAN+6: which way forward?’, ADBI Discussion Paper no. 77, Tokyo: Asian Development Bank Institute. Kesavapany, K. (2005) ‘A new regional architecture: building the Asian community’, Public lecture delivered in New Delhi on 31 March 2005, New Asia Monitor, 2(2): 1. Kumar, N. (ed.) (2004) Towards an Asian Economic Community: Vision of a New Asia, New Delhi and Singapore: RIS and Institute for Southeast Asian Studies (ISEAS). — (2005) ‘A broader Asian community and a possible roadmap’, Economic and Political Weekly, 40(36): 3926–31. — (2007) ‘Towards broader regional cooperation in Asia’, Discussion paper, Asia-Pacific Trade and Investment Initiative, UNDP Regional Centre in Colombo. — (2009) South–South and Triangular Cooperation in Asia-Pacific: Towards a New Paradigm

in Development Cooperation, UNESCAP/ MPDD WP/09/05, www.unescap.org/pdd/ publications/workingpaper/wp_09_05.pdf. Kumar, N., K. Kesavapany and Yao Chaocheng (eds) (2008) Asia’s New Regionalism and Global Role: Agenda for the East Asia Summit, New Delhi and Singapore: RIS and Institute of Southeast Asian Studies (ISEAS). Purfield, C. (2005) ‘Is India becoming an engine for global growth?’, World Economic Outlook, Box 1.4, September. Rajan, R. (2006) ‘Monetary and financial cooperation in Asia’, in N. Kumar et al. (2008), pp. 185–202. Rodrik, D. and A. Subramanian (2004) ‘Why India can grow at 7 per cent a year or more: projections and reflections’, IMF Working Paper no. 04/118, Washington, DC: IMF, www.imf.org/external/pubs/ft/wp/2004/ wp04118.pdf. Rowley, A. (2004) ‘Asian Integration needs and overarching framework’, New Asia Monitor, 1(1): 6. Sen, A. (2007) ‘Asian immensities’, Keynote address in commemoration of the 60th anniversary of UN-ESCAP, Bangkok, 28 March. Shankar, V. (2004) ‘Towards an Asian Economic Community: exploring the past’, in N.  Kumar et al. (eds), Towards an Asian Economic Community: Vision of a New Asia, New Delhi and Singapore: RIS and Institute of Southeast Asian Studies (ISEAS). Singh, M. (2004) Speech at the ASEAN–India Business Summit, New Delhi, October. Tuli, V. (2008) ‘Regional cooperation for Asian energy security’, in N. Kumar et al. (2008), pp. 247–60. Wilson, D. and R. Purushothaman (2003) ‘Dreaming with BRICs: the path to 2050’, Global Economic Papers no. 99, Goldman Sachs, www2.goldmansachs.com/ideas/ brics/book/99-dreaming.pdf. Wolf, M. (2004) ‘Asia needs the freedom of its monetary fund’, New Asia Monitor, 1(2): 6. World Economic Forum (WEF) (2003) Press release, 18 June.

4 | REGIONAL TRADE INTEGRATION AND CONFLICT RESOLUTION: AN INSTITUTIONAL PARADIGM

Shaheen Rafi Khan1

Economic integration as a means to attain peace is becoming increasingly important, as the evolving global security paradigm wearies of attempted military solutions to inter- and intra-state conflict. A concrete articulation of such interdependence is the trend towards regional trade agreements (RTAs), which mushroomed globally during the 1990s.2 The ‘rush to regionalism’ generated considerable debate. While Jagdish Bhagwati dismisses these agreements as ‘spaghetti bowl situations’, at the other end of the spectrum, scholars and policy practitioners view RTAs as WTO-plus arrangements to spur global trade. Equally important, RTAs have political relevance inasmuch as they can promote regional peace. Inspired by the example of the European Union, aid donors and the international community have been particularly keen to promote regional economic integration in the developing world, anticipating both trade liberalization and political stability. This may be a reasonable expectation in the North given the enabling institutional environment. Southern dynamics are far more unstable, with the possibility that RTAs can actually implode; they can either trigger conflict, or they may become marginalized by conflict. In other words, conflict can both prevent (ex ante) and be a consequence (ex post) of trade. Trade-conflict literature draws principally on two diverging theories, namely the classical theory of trade and international relations theory. Several classical liberal thinkers, namely Montesquieu, Cobden and Bastiat, emphasized the political benefits of trade. Cobden defined trade as a moral issue, as it upholds the right of people to exchange the fruits of their labour and consequently draws ‘men together, thrusting aside the antagonism of race, creeds and language, and uniting us in the bonds of eternal peace’ (Cohler et al. 1989). The notion is that trade is inherently beneficial for countries as it brings efficiency gains for producers, consumers and governments. By increasing the economic incentive for peace and by providing channels for the non-military resolution of disputes, interdependence may ameliorate regional conflict, as a welcome political externality. With respect to intra-state conflicts, trade theorists contend that increased trade spurs domestic economic activity, thus generating employment and reducing unrest within domestic populations. International relations (IR) theory presents the opposite thesis. It suggests

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that trade by itself is not sufficient to ensure the absence of conflict. In certain cases, it can exacerbate it. The decision to trade or go to war depends on the potential returns from trade and the future expectations of the level of trade. Moreover, a state’s choice between conflict and trade is said to be based on relative trade benefits, and not absolute gains, as classical trade theory suggests. Hence, if a country perceives its neighbour to gain much more from trading, it would deem it in its interest not to liberalize trade. On the issue of intra-state conflict, IR theory is extended to suggest that the gains from trade are likely to be asymmetrical within the trading countries, given distortions in domestic distribution mechanisms. This increases the likelihood of intra-state strife reflecting the privileged elite’s control over the resource pie. This chapter is closest to Rodrik (2000). He contends that the yardstick which matters with respect to internal conflict mitigation is a high-quality institutional environment, rather than trade openness or consistency with WTO rules. The empirical evidence, largely present in case studies, is as diverse as the theory. The liberal approach is substantiated by the cases of Europe and to a lesser extent Latin America, where economic interlinkages have led to a significant decline in conflict between states. Barbieri (2002) finds a consistent, positive relationship between trade ties and conflict, specifically participation in militarized interstate disputes. Hegre (2000), on the other hand, demonstrates a clear negative relationship between trade and conflict. Reuveny (2000) documents evidence which points in both directions. Empirical support for the Rodrik thesis comes from South Asia and Africa, where regional trading arrangements like the South Asian Preferential Trade Agreement (SAPTA) and the Southern African Development Community (SADC) have been in place for some time, but there is little evidence of either trade or political stability. The divergence of views and empirical results illustrates clearly that the scope for research in the trade–conflict linkage remains considerable. I focus on the South Asian region and examine the economic, political and strategic context in which the subcontinental RTAs are embedded. South Asia is a strategically important region with a history of both integration and conflict. While the Mughals consolidated the Indian subcontinent, it remained internally divided. The British colonial rulers unified India administratively and also integrated it economically through the development of extensive rail, road and canal networks. The post-1947 colonial era saw India divide into two countries. Subsequently, Bangladesh broke away from Pakistan in 1971. These subcontinental divisions weakened the integration process considerably, and the region has continued to experience long spells of intra- and interstate tensions. The region presents an interesting case with which to examine the trade– conflict linkage. Three RTAs are of note. The South Asian Association for Regional Cooperation, better known as SAARC, is the first regional integration initiative. It was established in December 1985, with an overarching mandate to promote economic and political integration. Its members include Bangladesh,

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SAARC Integration, regional cooperation and non-trade issues

SAPTA trade specific

.4 1

SAFTA trade specific

The SAARC–SAPTA/SAFTA interface

Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka, with Afghanistan being recently inducted. Two agreements aiming at economic integration have been constituted within the SAARC mandate, namely SAPTA and the South Asian Free Trade Agreement (SAFTA). Both agreements are primarily trade focused, were formulated during the course of SAARC negotiations and are designed to promote its economic mandate. While other subregional and bilateral groupings exist, these are the only truly regional initiatives that can be analysed to shed light on the RTA–conflict linkage in South Asia. The chapter outline is as follows. Section II presents the research question: Do RTAs promote peace, and if not, does conflict constrain trade? Section III describes the key South Asian regional integration initiatives. These initiatives have primarily an economic orientation, with political stability being an expected induced consequence. Section IV addresses the first part of the research question, ‘Do RTAs promote peace?’ Section V examines the opposing thesis, ‘Does conflict constrain trade?’ This leads into Section VI, which undertakes an institutional analysis of conflict, framing it in a bilateral ‘dominant country’ context. Section VII concludes with a look into the future. Research question

The research question is framed in two parts. The first part addresses the question: Do RTAs promote peace? This somewhat binary question is deconstructed into its constituent elements, namely: 1 Does the potential for intra-regional trade exist? Clearly, in the absence of trade and economic complementarities, the RTA can end up diverting rather than creating trade.

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2 If there is a demonstrated trade potential, have RTAs been able to synergize regional trade? 3 Finally, has trade mitigated conflict? If the answer to the first question is in the affirmative, yet trade is constrained and there is no evidence of conflict abating, it brings us to the second part of the research question, namely, ‘Does conflict constrain trade?’ International relations theory and the supporting empirical evidence suggest that if regional trade generates skewed benefits it can instigate rather than mitigate conflict. However, the causality continues to be from trade to conflict in the ex post sense. My point of departure in this chapter, following Rodrik, is that skewed economic and political power can, ex ante, create conflict conditions and inhibit trade. This is particularly true when there are institutional dissimilarities across the dominant regional countries. RTAs can become a mirror image of regional political developments, and negotiations hostage to what happens on the political front. I undertake this assessment for India and Pakistan, the key economic players in the region. South Asian RTAs: mapping South Asian regional trade agreements

The idea of regional cooperation in South Asia came under discussion at three conferences: the Asian Relations Conference in New Delhi in April 1947, the Baguio Conference in the Philippines in May 1950, and the Colombo Powers Conference in April 1954. From 1957 to 1974, India and Pakistan made several attempts to lower trade barriers and improve relations between the two countries. These attempts were punctuated by conflict, including the war in 1965 and another in 1971. Relations between Pakistan and India reached their nadir after the 1971 Indo-Pak war and the dismemberment of East Pakistan. Left with little choice but to accept the final outcome as permanent, the two countries signed the Agreement on Bilateral Relations between India and Pakistan at Simla, India, in July 1972. Pakistan and India officially signed a new trade protocol in 1974 and a shipping protocol and a fresh trade agreement a year later. Both sides agreed to reinitiate trade ties and, by virtue of these protocols, were able to generate increased trade flows. During that time, existing political tensions were pushed to the back burner and the increased economic activity was even shielded from a 1977 military coup in Pakistan. Finally, three years of preparatory discussions at the official level culminated in the first South Asian foreign ministers’ conference in New Delhi in August 1983. The meeting concluded by launching the Integrated Programme of Action (IPA) on mutually agreed areas of cooperation, constituting the first step towards establishing SAARC. SAARC’s charter is diverse. It promotes active collaboration and mutual assistance in the economic, social, cultural, technical and scientific fields. However, the main thrust of regional efforts is towards economic integration.

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South Asian leaders, aware of the volatile conditions in the region, could only hope that opening their economies to trade and investment would lay the groundwork for peace in their conflict-ridden region. In short, mediation was not on the agenda. The SAARC charter explicitly stated that bilateral and contentious issues should be excluded from its deliberations. The South Asia Preferential Trading Agreement (SAPTA), signed in 1993, expired on 31 December 2003. The agreement dealt exclusively with trade in goods and constituted the first step in establishing an economic union. Under SAPTA, member countries extended concessions to each other on tariff, para-tariff and non-tariff measures in successive stages. The agreement was flexible, allowing countries to liberalize trade at their own pace and to decide upon which items to offer on concessional terms. It also included several provisions extending special treatment to Least Developed Countries (LDCs). Similarly, SAPTA allowed countries to withdraw from the agreement in the event they faced balance of payments difficulties, in order to minimize intra-state economic disruptions. SAFTA came into force on 1 January 2006. While building upon SAPTA, it continues to retain an indirect approach towards conflict resolution by promoting trade liberalization, as well as inter-country economic equality through various safeguards. SAFTA specifies time-staggered tariff reductions for each member country. SAFTA is more flexible than SAPTA in its anti-dumping provisions. It also addresses a broader range of trade-related issues, such as the harmonization of standards and certification, customs classification and clearance procedures, transit and transport facilitation, as well as rules for fair competition and foreign exchange liberalization. Recapping, owing to the high incidence of inter- and intra-state conflict in South Asia, the three RTAs have not been designed explicitly to mitigate inter- and intra-state conflicts and tensions. As the mapping shows, these RTAs focus primarily on economic cooperation. Having said that, the progressively extended economic mandate of the agreements, the concessions built into the agreements for LDCs, sensitive lists and dispute settlement mechanisms are a concession to inter- and intra-state security concerns. Do RTAs promote peace?

In this section we examine the regional potential for trade; whether such trade has materialized and, if so, whether trade has mitigated conflict. The first question we address is whether trade complementarities exist in South Asia as a region, otherwise the issue of trade–conflict linkages becomes somewhat redundant. Literature on South Asian trade points to significant trade and service sector complementarities across the region (static comparative advantage) (Burki 2005). Mukherji (2002) identified as many as 113 potentially tradable items within the SAARC region. Owing to existing trade barriers a number

78 | four 70

1986–90 1996–98

60

2002

50 40 30 20 10 0 South Asia .4 2

Middle East and Africa

Sub-Saharan Africa

East Asia

Europe and Central Asia

Latin America

Tariff reductions across regions (1986–2002) (%) (source: Newfarmer and Pierola 2007)

of these items are currently imported into the region. Zones of comparative advantage make trade feasible across these zones. Sri Lanka, Bangladesh and India all export tea, while Pakistan imports it. India and Bangladesh export jute and jute products to the rest of the SAARC member countries. Pakistan and India produce cotton, which its neighbours require. Similarly, India and, to a lesser degree, Pakistan export manufactured goods within the region. Informal trade (smuggling) in South Asia is also a good measure of trade complementarity. Under free trade, a substantial proportion of informal trade is likely to switch to formal channels (Khan et al. 2005). Bilateral FTAs in South Asia are proof that trade is capturing complementarities between countries. The Indo-Sri Lanka FTA – fears of industry contraction in both countries notwithstanding – has led to a threefold increase in bilateral trade flows (Thakurta 2006). The literature also suggests that increased trade flows are likely to engender technical efficiency, improve resource allocation and allow countries to create niches by specializing in different products (dynamic or induced comparative advantage). A World Bank study suggested that a free trade arrangement between Pakistan and India could have increased their trade flows ninefold within a ten-year period (Burki 2005). The notion of comparative advantage also applies to services. India’s dominance in information technology (IT) can be a trigger for profitable affiliations with reputed institutions in India. These can be joint ventures or strategic alliances which can utilize skilled professionals from neighbouring countries, especially Pakistan (FPCCI 2003; Taneja 2004a). This brings us to our second question. With their trade-promoting mandates, have the RTAs synergized trade and investment complementarities within the

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region? More specifically, and with respect to trade, have they been successful in lowering trade barriers? A comparison across regions shows that the tariff reductions for South Asia have, indeed, been the most pronounced. However, the correct attribution of such reductions is to the WTO, rather than to the RTAs. Figure 4.2 shows that the tariff reductions have been uniform across regions, clearly the result of a global (WTO) initiative rather than regional ones. The South Asian average tariff fell most rapidly but from a comparatively high base and still remains the highest at around 20 per cent. Pursell and Sattar (2004) found India and Bangladesh to be in the top 10 per cent of the 139 sampled countries on the basis of unweighted tariffs. In another study that researched all types of border barriers, Kee et al. (2006) found India to be the most protected economy in the world and Bangladesh the fifth most protected. Moreover, Bangladesh uses ‘supplementary duties’ that often end up doubling the effective tariff. Bangladesh and Pakistan also maintain a substantial negative list specific to India, thus restricting or banning the import of certain potentially tradable items. Non-tariff barriers are equally high among South Asian countries, and continue to pose major hurdles to intra-regional trade. In the early 1990s, India and Bangladesh had the highest non-tariff barrier coverage ratio for primary and manufactured goods. For primary products, India’s ratio stood at 72 per cent and Bangladesh’s at 59 per cent (Taneja 1999). Moreover, India has employed the anti-dumping measure most frequently in recent times, even surpassing the USA (Pursell and Sattar 2004). Pakistan accuses Indian customs authorities of biased treatment towards Pakistani consignments as a way of neutralizing the formal most favoured nation (MFN) status India has granted to Pakistan. Further, all South Asian countries are lax in implementing trade facilitation measures. Customs clearance procedures are time consuming. For example, as many as thirty-eight signatures are required to clear a consignment imported into Pakistan (Khan et al. forthcoming). In India, an export consignment needs 258 signatures and key punching can take up to twenty-two hours (Roy 2004). In short, the high tariff and non-tariff barriers in South Asia have stunted trade growth significantly and have led to trade leakages to extra-regional sources. The consequence of high tariff and non-tariff barriers, not surprisingly, is low trade flows. Intra-regional trade among the SAARC countries accounts for a mere 4–5 per cent of their global exports. Also, such trade has declined dramatically over the past five decades. It dropped to its current level from 19 per cent in 1948/49 and has remained stagnant over the years. In fact, the trade-to-GDP ratio stands at less than 1 per cent and is even lower than the  figure for sub-Saharan Africa. The persistence of these barriers has both choked intra-regional trade and diverted it into illegal channels. A substantial volume of trade flows through illegal channels, either smuggled across borders or transiting through third

80 | four table 4.1 Intra-regional trade comparisons Year

Intra-SAARC trade (US$ millions)

SAARC world trade (US$ millions)

%

1,055 1,146 1,732 1,723 1,590 1,914 2,488 2,458

44,042 49,480 52,669 58,595 65,490 63,435 71,149 72,211

2.4 2.3 3.3 2.9 2.4 3.0 3.5 3.4

2,937 4,263 4,928 4,447 6,001 5,511 5,884 6,537

82,839 103,878 110,962 115,370 123,144 131,152 146,924 143,443

3.5 4.1 4.4 3.9 4.9 4.2 4.0 4.6

Pre-SAPTA period 1986 1987 1988 1989 1990 1991 1992 1993

Post-SAPTA period 1994 1995 1996 1997 1998 1999 2000 2001

Source: International Monetary Fund, Direction of Trade Statistics Yearbook, 1997, 2002

countries. Its total value is estimated at US$1.5 billion (Taneja 1999; Khan et al. 2005). More substantively, a large proportion of South Asian imports from outside the region cost less owing to high intra-regional trade barriers, even offsetting the high transport costs. For example, Sri Lanka currently imports railway coaches from Romania, forgoing the much cheaper alternative available in southern India. In cement and shipbuilding Sri Lanka trades with South Korea instead of tapping the cheaper options in Pakistan and India (Dash 1996). Pakistan imports iron ore and textile machinery at a higher cost relative to India. The existing tariff barriers also drive up local input costs, thus making South Asian exports more expensive in relation to sources outside the region. A concern is that the removal of trade barriers would be trade-diverting rather than trade-creating. An initial reduction would probably lead to such diversion because potentially low-cost producers present in the region have been rendered uncompetitive owing to the existence of trade barriers, both open and hidden. However, reflecting the underlying trade complementarities, trade creation is likely to kick in eventually. The answer to the third question – whether trade has mitigated conflict – is

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self-evident. The numbers show that this trade has never exceeded 5 per cent of the region’s trade with the rest of the world. As such, the notion of trade promoting peace in South Asia becomes, at best, premature, at worst spurious. In the next section we invert the thesis, demonstrating how inter- and intra-state strife presents barriers to trade and economic integration. In other words, conflict resolution is a precondition for economic relations to flourish. Does conflict constrain trade?

South Asia is highly conflict prone. One EU report rates political risk in the context of trade and investment in South Asia. The report indicates that only the two smallest SAARC members, Maldives and Bhutan, are politically stable. All other states are considered fragile, with the average stability values falling well below the global average (European Commission 2005). Internal instability and external tensions and conflict feed off each other to create a cycle of political and economic instability. Relations between India and Pakistan have been particularly volatile, interspersed by short periods of peace. This was historically true in Sri Lanka and India’s case although, subsequently, the violence developed an internal momentum, as did its subsequent resolution. Intrinsically, the nexus of intra- and interstate conflicts has delayed internal economic and political reforms, and stalled regional economic integration and trade. The high incidence of inter- and intra-state violence, and the low volume of intra-regional trade suggest a connection, where the posited causality between trade and peace becomes reversed. Consequently, we can reconstitute the original schematic as: 100

93.5

Note: Higher values imply better ratings

90 80

71.9

70 60

51.4

50 40 30

26.5

22.2

20

15.7

20.5

8.1

10 0 Bangladesh

Bhutan

India

Maldives

Nepal

Pakistan

Sri Lanka

.4 3 Stability index (source: World Bank, Governance Matters: Governance Indicators for 1996–2002, 2003)

China

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SAARC Integration, regional cooperation and nontrade issues

SAPTA

SAFTA

External influences

External influences

Conflict dynamics

Conflict dynamics

.4

The process in reverse

In attempting to demonstrate that political stability is a precondition for trade, I present three propositions: 1 Conflict undermines the institutional processes of integration. 2 Trade is hostage to political imperatives, rather than being driven by economic considerations. 3 Conflict bilateralizes trade relations. Clearly the inverted schematic and the chain of reasoning underlying it is somewhat linear. A more detailed modelling exercise would work through second- and third-order effects, and highlight two-way causal links. A sophisticated exercise of this nature would probably generate more nuanced outcomes, where cause and effect become blurred and the attribution relative rather than absolute.

Conflict undermines institutional integration An analysis along a timeline explains the link between interstate conflicts and trade relations within South Asia. SAPTA’s below-par performance can be attributed to the fact that in the early 1990s tensions between most conflict-prone members had escalated, thus slowing down the process of economic integration. SAPTA attained only modest improvements as a number of potentially tradable items that were perceived to favour the other party were intentionally left out during negotiations. Political tensions between member states also delayed the finalization of the SAFTA agreement. The agreement, initially planned to be finalized in 2001 (Bandara and Yu 2001), was signed with a three-year lag in 2004. Just as SAARC was formally established when the Pakistan–India conflict was dormant and no other major conflict was active in the region, SAFTA was

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also finalized utilizing the rare window when no SAARC member state was embroiled in conflict.

The politics versus the economics of trade I illustrate this proposition in a bilateral context, with reference to India and Pakistan, invoking Baroncelli’s gravity model (2005). The model generates hypothetical estimates of trade flows. The baseline estimates are derived from macro variables, such as GDP, population and geographic distance, as well as cultural variables. These are then adjusted for the impact of three variables. Two of these variables promote trade growth, namely: a) grant of MFN status to India by Pakistan and mutual tariff relaxations and; b) the institution of RTAs (using a dummy variable). The third variable, conflict (again introduced via a dummy), captures the trade-reducing impact. The ‘peace dividend’ is captured by the gap between real and hypothetical trade. Based on annual data for the period 1987–2003, the hypothetical trade flows for the year 2002 are estimated to be US$2.62 billion, while the actual trade flows amounted to less than US$1 billion. Baroncelli attributes the gap between real and hypothetical trade to conflict. Conflict reduces the divergence between potential and actual trade, with the points of convergence coinciding with instances of conflict. In fact, at these  points, the dividend almost exactly offsets the trade-creating impact of RTAs. Furthermore, Baroncelli’s estimate is derived from the lower potential trade base of US$2.62 billion. The upper base, reflecting a more dynamic scenario based on a panel data set, is in the region of US$12 billion, which suggests an even higher peace dividend. Conflict bilateralizes trade relations Formal trade agreements have materialized between countries in an effort to bypass the political logjam stalling movement on the RTAs. Bangladesh, Nepal and Sri Lanka have entered into bilateral trade agreements (BTAs) in an effort to circumvent the Indo-Pak-induced SAARC stalemate. India signed a free trade agreement (FTA) with Sri Lanka in 1998 (European Commission 2005) and a new trade and transit treaty with Nepal in the mid-1990s. India also entered into an FTA with Bhutan, one of the only two SAARC members with which it did not have any substantial disputes (ibid.). The only two major SAARC members which have not concluded any trade pact with India are Pakistan and Bangladesh. Pakistan is still reluctant to grant India MFN status and continues to view trade relations as secondary to settlement of outstanding disputes, specifically Kashmir.3 In this case, even bilateral trade is being held hostage to conflict. Also, despite India and Bangladesh having signed an MFN trade arrangement as early as 1980, political tensions have limited trade flows. Regional integration is premised not only on an economic rationale but on collective political will. Such a will can become hostage to national agendas when one or two countries in the region have a monopoly on economic,

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demographic and natural resources. A bipolar situation can develop easily. In the following section we discuss the dominant-country paradigm in which key countries set the tone for the region. When the key players are conflict prone, regional trade agreements can collapse, giving way to bilateral or extra-regional arrangements, as we have noted above. The dominant-country paradigm

The dominant-country paradigm has two dimensions. First, India tends to see itself as an emerging superpower. Secondly, India and Pakistan jointly command the region’s economic, demographic and military resources; their bilateral trade constitutes well over 50 per cent of intra-regional trade.4 While India has aspirations to superpower status, Pakistan has always asserted itself as a competing regional power. Although, over time, the parity has been reduced to military equivalence, this fact alone is enough to determine the pulse and rhythm of regional integration. Despite shared common historical, ethnic, linguistic, cultural and religious roots, bilateral relations have historically been volatile. Both countries have been locked in either overt or covert conflict, since they gained independence in 1947, presenting the single largest constraint to regional economic integration. The early part of the 1980s was marked by latent rather than active conflict. However, the cumulative historical rifts, religious differences and military adventurism led to a significant deterioration in relations by the late 1980s (Bose 2001).5 Security concerns between Pakistan and India peaked in 1998, when both sides tested nuclear weapons, introducing a highly unstable dimension to the security paradigm.6 In 1999, Pakistan and India were locked in an armed confrontation in the Kargil region of Kashmir. Tensions reached a new high in 2002, when India blamed Pakistan for having engineered a terrorist attack on the Indian parliament. The two sides found themselves in the midst of a ten-month-long stand-off (Synott 1999; Khan et al. 2005). Mutual animosity peaked again under Pakistan’s elected government following the Mumbai massacre in 2008. The circle of hostility has expanded to embrace Afghanistan, as both India and Pakistan manoeuvre for influence in the embattled country. The potential to synergize constructive bilateral relations has been subverted by a number of ‘push factors’, most importantly the absence of true democracy in Pakistan, and growing sectarian and religious militancy in both countries. I focus on these two drivers of conflict.

The democracy deficit The absence of constitutional rule and democratic pluralism in Pakistan reflects institutional failure at many levels. First, alternating military and civilian rule has undermined institutional growth. Secondly, efforts at institution-building lack an indigenous context and, hence, credibility.

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Thirdly, geostrategic imperatives have diffused external efforts at promoting democratization. This inherent duality is reflected in support for and the perpetuation of military regimes. Consequently the transitional – or transactional – character of democracy in Pakistan is more conducive to conflict than to peace-building. Pakistan does not have an enduring democratic tradition. During its sixtyyear existence it has experienced three extended periods of military rule, interspersed with short spells of democratic government. Some argue that frequent military interventions with the army linked in a security nexus with the USA have stymied the democratic process in Pakistan. By centralizing power and authority, military rule has, almost axiomatically, led to the systemic destruction of legislative, judicial and executive institutions. By the same token the media and civil society have found their space constricted. The perception is that Pakistan’s lack of electoral continuity has prevented democratic evolution. In its stead, authoritarian regimes have masqueraded under various quasi-constitutional façades. Having said that, Pakistan has also enjoyed limited spells of democratic rule.7 It is fair to ask whether these intervals have established a foundation for more enduring institutions to emerge. The jury tends to rule negatively: Transitions to democracy are often inconclusive and the resulting states of ‘semi-democracy’ can be more conflict-prone than either genuine democracies or full-blown autocracies. While they provide an impetus for political contestation and the organization of interests, these systems typically lack institutional mechanisms for interest mediation, much less the capacity to address the underlying grievances. Especially in ‘politically difficult environments’, where violent conflict is a recent memory or where social, political, or ethnic tensions are running high, this can make for an explosive mixture.8

Pakistan’s history of democratic rule suggests elected governments have fared no better than their military counterparts. These periods have been prone to economic mismanagement, corruption, interprovincial discord and the miscarriage of justice. Civilian governments have aggressively instigated cross-border provocations with India, inviting damaging reprisals. In a comparative sense, inter- and intra-state violence have been endemic features across regimes. At first glance, one can attribute these outcomes to the transitional character of democracy – while space has been created for ‘political contestation’, these governments have not been able to advance to the state of institutional maturation where ‘interest mediation’ becomes possible and national interests subsume parochial concerns. Structural weaknesses within the political parties have left them vulnerable to military takeovers. In other words, these parties are defined by their feudal constructions or by their ethnic, religious and sectarian divisions. A dynasticfeudal politics prevails, wherein populism masks the surgical divide between

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the politicians and their constituents. Internal party decisions flow through hierarchical channels rather than through consultative processes. The two feudal-type organizations – the military and the major political parties – have more of the character of those among Italian city states during the Renaissance described by Machiavelli than of the party politics of traditional democracies … The difference between feudal leaders who wear uniforms and those in civilian clothes is in their constituencies, not in their commitment to a pluralistic process as we understand it. (Kissinger 2008)

The judiciary, for the most part, has remained subservient to both military and civilian governments, legitimizing extra-constitutional acts through diverse constitutional amendments and the infamous and much invoked ‘doctrine of necessity’. A corollary to the loss of judicial independence has been the traditionally low importance given to public litigation against economic, social and human rights excesses. Similarly, the media has been severely repressed and civil society groups are denied access to the corridors of power, unlike their counterparts across the border. Thus, the three entities with a strong affinity for constitutionalism have traditionally been the most marginalized.

The quasi-religious divide Both India and Pakistan are increasingly defining themselves by their religious identities. Even though India proudly flaunts its secular identity, its strong sense of nationalism is underpinned by religious associations. In Pakistan’s case, the clergy has permeated public and private consciousness. It steps rapidly and adroitly into spaces created by inept and corrupt politicians. The mutual rhetoric is increasingly confrontational and feeds conflict. Official doctrine states that Pakistan emerged as a separate homeland for the Muslims of India, who believed they would be targeted in a Hindumajority India – the much cited ‘two-nation theory’. The Pakistani state is quick to exploit this religious disconnect. It continues to portray India as the ‘evil empire’ – aiming to undermine the interests of the ‘Muslim’ Pakistan (Nizamani 2000).9 Often enough, hardcore interstate problems are immersed in such religious discourse, one which religious factions are quick to pick up and perpetuate. India, likewise, has seen a tremendous increase in Hindu militancy over the past two decades. Although the government cannot afford to cast interstate tensions in religious terms given its substantial Muslim population, it has not hesitated to do so through party politics and rhetoric. The BJP Hindu Nationalist party and other activist factions such as the Rashtriya Swayamsevak Sangh (RSS) and the Vishwa Hindu Parishad (VHP) have openly appealed to domestic constituencies. Often internal problems, especially those communal in nature, have been blamed on Pakistan, thus automatically tying these with the ideological discourse (Siddiqa-Agha 2004).

khan | 87 Looking to the future

Although narrow, the context of this chapter is consistent with the discouraging prognosis for South–South economic relations, assessed by some other authors in this book. Hochstetler concludes that South–South trade is environmentally indeterminate at best and non-compliant at worst. With the Environmental Kuznets Curve (EKC) as the frame of reference, she links trade with the environment via three mechanisms (scale, composition and technique) to arrive at her conclusions. Gallagher demonstrates that trade between China and its Southern partners is similar to the dependencia model of trade in manufactures and primary commodities. Rangel indicates that the emerging economies such as China, Singapore, Brazil and India find it more profitable to invest in developed countries rather than in the South. In effect, cultural and ethnic ties and development imperatives have deferred to hard-headed considerations such as access to technological assets and knowhow. A variant of this argument put forward by Habibi is that oil-rich Gulf Cooperation Council (GCC) countries are diverting their investments from the West to China and India, which, in the final analysis, reinforces economic disparity in the South. Ogunleye is optimistic about the future prospects of regional African economic integration but cautions that the institutional environment, much as in the case of South Asia, is presently not conducive to such integration and needs to be strengthened. The findings of the authors direct attention to the need for a realistic ‘control group’, as the one implicit in the various analyses is far too idealized. An alternative control group based on historical precedent would allow for imperfections in evolving South–South trade. In other words, dependencia, environmental and social non-compliance, economic disparities, institutional failure and conflict need to be recognized as inevitable pitfalls in South–South trade. Having said that, there is something to be said for lessons learned that allow for aggressive policy initiatives to tunnel through the EKC, address institutional failure and conflict, and establish mechanisms to promote technological and industrial collaboration among Southern trading partners. In short, while South–South trade is likely to echo the inequities of North–South trade, particularly in the historical context, there is much to be said for institutional and policy interventions to dampen some of its worst effects. Notes 1 Much of the data in the following chapter was recorded prior to the first submission of this paper in 2010. As the sources are no longer available to the author, we are unable to update some of the country data. In future editions, we would hope to bring the data more up to date. 2 As of July 2007, more than 380 RTAs had

been notified to the World Trade Organization (WTO), of which nearly 205 were active. 3 Trade between the two countries went up sixfold in fiscal 2009/10, compared to the previous year. 4 As we indicated earlier, the static potential for trade is close to US$1 billion. This reflects the addition of formal and informal

88 | four trade flows. The dynamic potential has been estimated at between US$10 and 12 billion. This potential has been estimated using a global comparison approach and an econometric model. There is also a huge investment potential (industry, energy, infrastructure, communications). 5 Bose provides a detailed account of the problem in Kashmir. 6 Some – albeit pro-establishment – analysts argue differently, claiming that nuclear capability creates a deterrent. 7 The first elected (Bhutto) government lasted seven years (1972–77). The Benazir Bhutto and Nawaz Sharif governments each shared power twice during the late eighties and nineties. Without exception, every elected government was dismissed before serving its term, either through executive fiat or martial law. 8 Excerpt from research proposal application circulated in 2008 by the International Development Research Centre, Ottowa, Canada. 9 This argument was most often used to defend Pakistan’s nuclear programme before overt nuclearization.

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study: economic gains and the “peace dividend” from SAFTA’, Geneva: SASPR, World Bank. Bhasin, A. S. (2001) India–Sri Lanka Relations and Sri Lanka’s Ethnic Conflict Documents: 1947–2000, New Delhi: India Research Press. Bose, T. K. (2001) ‘Resumption of India–Pakistan official dialogue and the prospects of peace’, Second International South Asia Forum Conference. Bowring, P. (2003) ‘India is causing trouble for Bangladesh’, Opinion, International Herald Tribune, 22 January. Burki, S. J. (2005) ‘Prospects of peace, stability and prosperity in South Asia: an economic perspective’, Islamabad: Institute of Strategic Studies. Carius, A., G. Dabelko and A. T. Wolf (2004) ‘Water, conflict and cooperation’, Policy Brief Series, Washington, DC: United States Aid Office of Conflict Management and Mitigation. Chowdhury, B. H. (2002) ‘Building lasting peace: issues of the implementation of the Chittagong Hill Tracts Accord’, ACDIS Occasional Paper, Urbana-Champaign: University of Illinois at Urbana-Champaign. CNN (2001) ‘Truce on India–Bangladesh border’, Associated Press and Reuters, www. cnn.com/2001/WORLD/asiapcf/south/ 05/11/india.armitage.pakistan.zhu.01/index. htm. Cohler, A. M., C. M. Basia and H. S. Stone (eds) (1989) Montesquieu: The Spirit of the Laws, Cambridge: Cambridge University Press. Dash, K. C. (1996) ‘The political economy of regional cooperation in South Asia’, Pacific Affairs, 69(2): 185–209. European Commission (2005) ‘Business opportunities through the liberalization of SAARC’, Luxembourg: European Commission. FPCCI (Federation of Pakistan Chambers of Commerce and Industry) (2003) ‘Statistics on trade, Pakistan and SAARC’, www.fpcci. com.pk/trade-with-countries/TRADE%20 BETWEEN%20PAKISTAN%20&%20SAARC %20COUNTRIES.pdf, accessed 5 February 2006. Hegre, H. (2000) ‘Development and the liberal peace: what does it take to be a trading state?’, Journal of Peace Research, 37(1): 5–30.

khan | 89 Homer-Dixon, T. (2001) ‘On the threshold: environmental changes as causes of acute conflict’, International Security, 16(2): 76–116. Hussaini, A. (2005) ‘Balochistan, crisis and conflict’, Pakistan Link News Network, pakistanlink.org/hussaini/12112009.htm, accessed 19 February 2006. IBM (1998) ‘India’s boundary disputes with China, Nepal and Pakistan’, International Boundary Monitor, www.idrc.ca/fr/ev132669-201-1-DO_TOPIC.html, accessed 19 February 2006. International Monetary Fund (1997) Direction of Trade Statistics Yearbook, Washington, DC: IMF. Iyer, R. (1999) ‘Conflict resolution: three river treaties’, Economic and Political Weekly, Special Articles, www.nepalesecommunity. org.uk/node/57, accessed 13 March 2006. Kee, H. L., A. Nicita and M. Olarreaga (2006) ‘Estimating trade restrictiveness indices’, World Bank Policy Research Working Paper 3840, Washington, DC. Khan, S. R., F. H. Shaheen and I. Arif (forthcoming) Trade Facilitation for Efficiency and Regional Integration in South Asia, Indian Council for Research on International Economic Relations (ICRIER). Khan, S. R., M. Yusuf, S. Bokhari and S. Aziz (2005) ‘Quantifying informal trade between Pakistan and India’, Research report, Islamabad: Sustainable Development Policy Institute. Kissinger, H. A. (2008) ‘Two paths in Pakistan: security and democracy’, Washington Post and Tribune Media Services. Kumar, R. (2001) ‘Sovereignty and intervention: opinions in South Asia’, Pugwash Occasional Papers, Pugwash Study Group on Intervention, Sovereignty and International Security, www.pugwash.org/reports/rc/ como_india.htm. Lee, R. A. (2006) ‘The history guy: India–Bangladesh border conflict, 2001’, www.historyguy.com/india-bangladesh_2001.htm. MacGregor, J. (2000) ‘The internalization of disputes over water: the case of Bangladesh and India’, Australasian Political Studies Association Conference, Canberra: ANU, apsa2000.anu.edu.au/confpapers/ mcgregor.rtf. Malik, J. M. (2001) ‘South Asia in China’s foreign relations’, Pacifica Review, 12(1): 73–90.

Mehta, P. S. and P. Kumar (2004) ‘RTAs and South Asia: options in the wake of the Cancun fiasco’, Australia South Asia Research Centre Working Paper 2004-11, Australia South Asia Research Centre, Australian National University. Mukherjee-Reed, A. (1997) ‘Rationalization in South Asia: theory and praxis’, Pacific Affairs, 70(2): 235. Mukherji, I. N. (2000) ‘Towards a free trade area in South Asia: instruments and modalities’, in B. C. Upreti (ed.), SAARC – Dynamics of Regional Cooperation in South Asia, New Delhi: Kalinga Publications. — (2002) ‘Charting a free trade area in South Asia: instruments and modalities’, in T. N. Srinivasan (ed.), Trade, Finance and Investment in South Asia, New Delhi: Social Science Press, SANEI. Murthy, P. (1999) ‘India and Nepal: security and economic dimensions, strategic analysis’, Journal of the IDSA, XXIII(9). Newfarmer, R. and M. D. Pierola (2007) ‘SAFTA: promise and pitfalls of preferential trade arrangements’, in Z. F. Naqvi and P. Schuler (eds), The Challenges and Potential of Pakistan–India Trade, World Bank. Nizamani, H. (2000) The Roots of Rhetoric: Politics of Nuclear Weapons in India and Pakistan, Kindle edn, New York: Praeger. Paranjpe, S. (2002) ‘Development order in South Asia: towards a South Asian association for regional cooperation parliament’, Contemporary South Asia, 11: 345–56. Pursell, G. and Z. Sattar (2004) ‘Trade policies in South Asia’, Report no. 29949, Poverty Reduction and Economic Management Sector Unit, World Bank. Rao, P. V. (2000) ‘Globalization and regional cooperation – a South Asian experience’, in B. C. Upreti (ed.), SAARC – Dynamics of Regional Cooperation in South Asia, vol. 1: Nature, Scope and Perceptions, New Delhi: Kalinga Publications, pp. 57–70. Research and Information Center for the Non-Aligned and Other Developing Countries (RISNODEC) (2001) ‘Economic impact of trade and investment facilitation and liberalization in South Asia (BBIN): a developmental perspective’, in Identification and Prioritization of Sub-regional Projects in South Asia, Asian Development Bank.

90 | four Reuveny, R. (2000) ‘Bilateral import, export and political conflict simultaneity’, International Studies Quarterly, 45: 131–58. Robson P. (1998) The Economics of International Integration, London: Routledge. — (2004) ‘The economics of international integration’, in A. S. Zaidi (ed.), Issues in Pakistan’s Economy, Karachi: Oxford University Press. Rodrik, D. (2000) ‘Can integration into the world economy substitute for a development strategy?’, Unpublished paper, Harvard University, Cambridge, MA. Roy, J. (2004) ‘Trade facilitation in India: current situation and the road ahead’, EU–World Bank, Asia, Workshop on Trade Facilitation in East Asia, 3–5 November. Sahadevan, P. (1999) ‘Ethnic conflict in South Asia’, Occasional Paper no. 16:OP 4, Joan B. Kroc Institute for International Peace Studies, University of Notre Dame. Siddiqa Agha, A. (2004) India–Pakistan Relations: Confrontation to Conciliation, Islamabad: Centre for Democratic Governance and the Network for Consumer Protection. Singh, N. (2005) ‘The idea of South Asia and the role of the middle class’, National Institute of Public Finance and Policy, mpra.ub.uni-muenchen.de/1277/1/MPRA_ paper_1277.pdf. Synott, H. (1999) ‘The causes and consequences of South Asia’s nuclear tests’,

Adelphi Paper 332, London: International Institute for Strategic Studies. Taneja, N. (1999) ‘Informal trade in the SAARC region’, Working Paper no. 47, Indian Council for Research on International Economic Relations, www.icrier.org/pdf/wp47.pdf. — (2004a) ‘Trade facilitation in the WTO: implications for India’, Working Paper no. 128, Indian Council for Research on International Economic Relations, www.icrier. org/pdf/wp128.pdf. — (2004b) ‘Informal and free trade arrangements’, South Asian Journal, 4, www. southasianmedia.net/magazine/journal/ informal_freetrade.htm. Thakur, R. and E. Newman (2004) Broadening Asia’s Security Discourse and Agenda: Political, Social and Environmental Perspectives, Tokyo: United Nations University Press. Thakurta, P. G. (2006) ‘Burying quarrels for regional free trade’, Inter Press Service, www.ipsnews.net/news.asp?idnews=31780. Thapa, D. and B. Sijapati (2003) A Kingdom under Siege: Nepal’s Maoist Insurgency, 1996 to 2003, Kathmandu: The Printhouse. Upreti, B. C. (2000) ‘Nepal’s role in SAARC’, in B. C. Upreti (ed.), SAARC – Dynamics of Regional Cooperation in South Asia, vol. 1: Nature, Scope and Perceptions, New Delhi: Kalinga Publications. Uyangoda, J. (2003) ‘Sri Lankan conflict and SAARC’, South Asian Journal, 1, www. southasianmedia.net/magazine/journal/ srilanka_conflict.htm.

5 | DEVELOPING COUNTRIES AT THE W TO IN A CHANGING GLOBAL ORDER

Haroldo Ramanzini Jr and Manuela Trindade Viana1

With the end of the Cold War, many believed that the United States would be the only world power. Yet fewer than twenty years have passed since the Soviet Union’s demise and emerging countries such as Brazil, China and India are now wielding more influence in important aspects of international politics. At the beginning of the second decade of the twenty-first century, the existing international structure faces crisis, rather than the emergence of a new order, strictly speaking. Today, because of the new challenges brought about by global transformations and the reactivation of discussions about the parameters of international legitimacy, developing countries are attempting to gain influence in traditional international bodies in order to change the structures that have consolidated hierarchies in the international system. According to Brazil’s foreign minister, Celso Amorim (2010), ‘greater South– South coordination – at the WTO [World Trade Organization], International Monetary Fund, United Nations, and new coalitions such as the BRIC (Brazil, Russia, India and China) – has raised the voices of countries once relegated to a secondary position’. The confidence among some Southern countries has laid the foundation for patterns of interaction that can potentially bypass the North, which has also opened opportunities for cooperation in major international institutions. At the same time, one of the defining characteristics of the global South is its increased stratification. While some countries are experiencing high levels of economic growth and industrialization, others are  still facing extreme poverty and political instability. However, the notion of ‘the South’ has worked historically for developing countries as a mobilizing symbol and ideological expression of the range of shared development challenges facing their governments (Alden and Vieira 2005). In multilateral trade negotiations, developing countries have employed a strategy of coalition-building to increase their bargaining power, but today they operate in a context of important international changes that potentiate their action. As Narlikar (2003: 6) has observed, ‘no coalition functions in a vacuum, and favourable external conditions can prove crucial in contributing to its successes’. We assume that the restructuring of world power in the 2000s (Kupchan 2002; Buzan 2004; Ikenberry 2008) – for example, the rise of India, South Africa, Brazil and, above all, China – has contributed to

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modifications in the structure of trade governance. The trade regime seems to be evolving from a main-trading-powers leadership to a wider participation and more balanced reflection of interests from both developed and developing countries. This is one reason why WTO negotiations have faced difficulties moving forward: some of the developing countries’ interests, especially in agriculture negotiations, depend on changes in the domestic or regional policies of developed countries. When the capacity of the multilateral trading system to change domestic policies of developed countries is limited (Paalberg 1997), situations of stalemate in the Doha Round become more common. Given this context, the aim of this chapter is to analyse how South–South cooperation is evolving inside the WTO and the main impacts of these arrangements on the structure of the organization. These issues will be addressed through two specific lenses: developing country2 coalitions and developing country participation at the Dispute Settlement Body (DSB). Indeed, coalitions and the use of institutional mechanisms are the main strategies through which some of the Southern countries have increased their relative capacity and emerged as central players in the multilateral trading system. In the next section, we discuss the main theoretical approaches to studying coalitions, considering the motivations behind developing countries’ actions. In the third section, we address developing country coalitions in the Doha Round with emphasis on the role of the G20 group of developing nations. This coalition represents a novelty in South–South cooperation that redefined the power structure inside the WTO. In the fourth section, we analyse the participation of the developing countries in the WTO DSB. We argue that developing countries have sought participation in the DSB as a way of questioning developed countries’ trade policies, as well as an instrument to strengthen negotiating positions. Motivations behind developing country coalitions

Coalitions are ‘formed by countries that, while having heterogeneous preferences, share a common set of interests and take a common stance in negotiations in order to increase their collective bargaining power’ (Costantini and Crescenzi 2007: 866). In the WTO, developing countries have, individually, little power to influence negotiations involving major powers. Some developing countries lack the technical knowledge demanded by the negotiation dynamics; others face limited resources to travel and sustain permanent delegations in Geneva. Furthermore, the action through coalitions can result in a division of research and labour across issue areas, or it can reduce the political costs of blocking an agreement by dividing the responsibility among members. By bargaining together, developing countries represent a larger share of world trade and can, hence, wield greater influence. The tabled proposals are perceived as having greater legitimacy if presented by a significant number of members. It also increases the possibilities of participating or being effectively

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represented in ‘green room’3 meetings. Coalitions allowed some countries to make joint proposals in cases where they probably would not have done, if they had been required to act on their own. Most of the literature agrees that, generally, developing countries should form coalitions to enforce some of their interests in negotiations (Narlikar 2003; Odell 2003; Costantini and Crescenzi 2007; Patel 2007; Narlikar 2011). On the other hand, the main costs of participating in coalitions are difficulties making concessions, loss of credibility when joining forces with more powerful countries, and coordination requirement challenges (Fernández 2008; Narlikar 2011). Usually the costs of acting in a group will be as large as the differing preferences of the members in the negotiations. Bargaining together is fruitful only after questions such as bargaining with whom, against whom, over what and for how long have been duly considered (Narlikar 2003). Narlikar (ibid.) produced a typology of two kinds of coalitions in the GATT/WTO negotiations: alliance type and bloc type. ‘Alliance-type’ coalitions are issue based and are more likely to endure only while the original cause for coalition creation persists. ‘Bloc-type’ coalitions, by contrast, reveal great durability, adapting themselves to new issues, even after the original issue for their creation has been resolved. Bloc-type coalitions may rely on pre-existing similarities with other states. Most coalitions encompass elements of both types, as we discuss in the G20 example below. Narlikar’s typology also reveals how different coalition-building methods can lead to different results. Both alliance-type and bloc-type coalitions, however, face problems of collective action, internal incoherence and lack of actual influence. According to Olson (1999), coalitions face collective action problems because the larger the group, the less relevant the individual contributions, resulting in ‘free riders’. Dealing with this obstacle, Hardin (1982) argued that the dilemma for collective action in large groups could be overcome through the action of ‘political entrepreneurs’. In theory, these countries would be willing to bear the costs of collective action disproportionately in exchange for consideration of their own interests, such as projection and leadership. In the context of the WTO, the political entrepreneur role is more likely to be played by intermediate countries, such as Brazil, India, China and South Africa. The process of enhancing multilateralism involves coalition formation, entrepreneurial flair and technical competence in the pursuit of some diplomatic objectives. The presence of an intermediate country, therefore, increases the likelihood of more sustainable developing country coalitions. Developing countries coalitions are also more likely to succeed if two additional prerequisites are met: internal coherence, and external weight or influence (Narlikar 2003). A coalition that lacks internal coherence can be extremely difficult to maintain. Likewise, agreement among countries to act collectively on an issue is less important if these same countries are weak, small in number and marginal to the sector being discussed at the negotiating

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table. The G20 exhibits both external influence and internal coherence. In this coalition, it is Brazil and India which play the political entrepreneur role. Developing country coalitions in the Doha Round

During the negotiations of the General Agreement on Tariffs and Trade (GATT), predecessor to the WTO, developing countries had limited participation because of their inward-oriented development strategies. At that time, their strategies were not compatible with the main goals of the GATT regime – specifically, lowering tariff and non-tariff barriers among its members. GATT negotiations were largely seen as a ‘rich man’s club’ where only the most powerful were able to represent their interests (Narlikar 2011). Though change began earlier, it was during the Uruguay Round (1986–94) that countries began to shift their positions in the global trade regime. The Uruguay Round brought new items to the agenda – a developed country effort, led by the United States, to harmonize public policy worldwide in strategic neoliberal patterns (Steinberg 2002; Velasco e Cruz 2007). Besides constraining governments to adopt restrictive trade measures, it also attempted to regulate national policies (Ostry 2002). Developing countries reacted by entering definitively into the system, to try to diminish GATT interference in their domestic structures and to block the entrance of the new issues on the agenda, especially services and intellectual property. However, they could not uphold these positions because of domestic difficulties, pressure from developed countries, and asymmetric international power distribution. From the 1988 Mid-term Review on, developed countries – mainly the USA, Japan, the European Union (EU) and Canada – directed the negotiation agenda and controlled most of the negotiation process (Tussie and Glover 1995; Farias 2009). Hence, the early history of the WTO suggests that the interests of developing countries were largely ignored, leading to texts  that reflected the interests of the dominant economic powers (Wilkinson 2006). By contrast, the current round (2001–present), negotiated under the Doha Development Agenda, is characterized by the increasing role of developing countries at the WTO (Narlikar and Tussie 2004; Ismail 2007). While some have criticized the WTO for the long-lasting negotiation deadlock, the WTO has, in fact, been changing rapidly in response to shifting global political and economic realities (Narlikar 2011). Indeed, the incorporation of the ‘development’ mandate attests to a growing awareness of the ascendancy of developing countries globally.4 The attention paid by the Doha Mandate5 to Small Economies (paras 35 and 36) and the least developed countries (LDCs) (paras 42, 43 and references throughout) can be explained by the lobbying efforts of the Small and Vulnerable Economies Group and the LDC coalitions respectively. Likewise, the decision on the waiver for the Africa-CaribbeanPacific-European Commission (ACP-EC) Partnership Agreement was a direct result of the efforts of the ACP and African groups.

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The Core Group on Singapore Issues emerged in opposition to the treatment of the four Singapore issues as a single basket. Owing to pressure from this group, three of the Singapore issues (investment, government procurement, competition) were removed from the agenda in the July 2004 package. Though the package retained trade facilitation, developing countries will not be required to implement it in the final agreement if they lack essential infrastructure or capacity for implementation. The Recently Acceded Members coalition has worked to ensure the differential treatment of new WTO members owing to the extensive levels of commitment these countries made in the process of accession to the WTO. The Cotton-4 coalition emerged to demand the complete phase-out of subsidies on cotton and the implementation of a financial compensatory mechanism, until the subsidies were phased out. This coalition also contributed significantly to the Brazilian victory against US subsidies in the cotton dispute (WTO DS267). Furthermore, the 2001 Declaration on Trade-Related Aspects of Intellectual Property Rights (TRIPS) and Public Health reflected much more the developing countries’ agenda than it would have in the absence of the TRIPS and public health coalition (Drahos 2003). Brazil, India and South Africa played a key role in making TRIPS more flexible by helping to counter developed country pressure to enforce pharmaceutical company patents under a strict interpretation of the TRIPS agreement. These negotiations represent an important example of how international institutions can provide a political space for the weakest countries to build coalitions with governmental and non-governmental actors to achieve their interests (Odell 2003; Shaffer 2006). The G20, which we discuss in more detail below, also played a key role in constructing the July 2004 package framework and helped to shape the 2005 Hong Kong Ministerial Conference. The Group kept a consistent position across the negotiation modalities through the various meetings in 2006. Even the collapse of the G4 (Brazil, India, EU and US) Ministerial Meeting, held in Potsdam in 2007, and the difficulties observed during the Geneva mini-ministerial meeting of July 2008, demonstrate the growing influence of developing countries. In the light of these results, it seems plausible to refer to the Doha Round as the round of the coalitions – at least from the developing countries’ perspective. This does not mean that coalitions were not present in the previous rounds (see Table 5.1), but that, in the Doha Round, there was a proliferation of developing country coalitions with a higher degree of institutionalization. These coalitions have been focusing on working within the existing trade structure rather than challenging the system, and they have become more formalized, maintaining secretariat offices in Geneva and holding ministeriallevel meetings to formalize positions. Coalitions are now playing a more visible role, issuing declarations, holding press conferences and engaging in media and civil society networks and campaigns.

96 | five table 5.1 Proliferation of developing country coalitions in the GATT/WTO, 1973–20076 Timeline

Coalition formation

1973–79 (Tokyo Round and PreUruguay till 1986)

ASEAN Group (1973); Informal Group of Developing Countries (1982); Café au Lait Group (1983)

1986–94 (Uruguay Round)

Developing Countries on Services (1986); Cairns Group (1986); Air Transport Services (1986); Food Importers’ Group (1986); Latin American Group (1986); MERCOSUR (1991)

1995–07 (WTO established)

Pre-Doha Round 1995–2001: Like-Minded Group (LMG) (1996); Small Vulnerable Economies (SVEs) (1996); African Group (1997); Caribbean Community (CARICOM) (1997); Friends of Fish (1998); Friends of Geographical Indications (1998); Friends of the Development Box (1999); G24 on services (1999); Least Developed Countries (LDC) Group (1999); Paradisus Group (2000). Doha Round 2001-2007: African, Caribbean and Pacific (ACP) Group (2001); Core Group on Singapore Issues (2001); Recently Acceded Members (2003); Cotton-4 (2003); Friends of Antidumping (2003); G11 (2005); G20 (2003); G33 (2003); G90 (2003); Core Group on Trade Facilitation (2005); NAMA-11 (2005)

Source: Patel (2007)

As a result of developing countries’ coalition action, the ‘WTO now incorporates coalitions into the formal decision-making process’ (Patel 2007: 17–18) by allowing representatives to attend and participate in green room meetings. However, this institutional shift may merely be an attempt to improve WTO institutional legitimacy. As such, participation is not synonymous with influence. Together with the proliferation of overlapping and simultaneous South– South coalitions, these characteristics have resulted in greater inter-coalition cooperation through information exchange, joint press conferences and bilateral meetings. The most prominent example of this is the G110, an alliance that emerged in the final stages of the Hong Kong Ministerial. Members describe this alliance as a ‘dialogue between the G20, G33, ACP, LDC, CARICOM, Cotton-4, SVEs and NAMA-11’ (ibid.: 10). More formal attempts have also been made to coordinate positions among coalitions, most notably the mobil-

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ization of the G90 at the Cancún Ministerial, comprising the African, ACP and LDC groups (ibid.). It is possible that cooperation in one coalition generates radiation effects, strengthening ties among member countries and stimulating actions within other coalitions. According to Ismail (2007), the G20 was important to the formation of the NAMA-11 coalition7 that emerged before the Ministerial Conference in Hong Kong (2005). Narlikar (2003) also argues that coalitions often produce cross-institutional effects. Advantages of membership of a multilateral coalition can spill over into other multilateral and bilateral dealings. The G20 is a clear example of how developing countries have been able to overcome their own differences and establish a common front against the developed countries. The coalition represents a landmark in South–South cooperation that has redefined the power structure inside the WTO. Thus, coalition formation is an important resource for cooperation and empowerment of developing countries in the WTO. Nevertheless, the coordination among developing countries at the WTO is still predominantly reactive in character – that is, it usually responds to Northern countries’ positions and interests. Even the G20 case, discussed below, suggests that the positions of developed countries are an important factor in the formation of developing country coalitions in the WTO.

The G20 coalition The creation of the G20 in the final preparatory stages of the WTO’s Cancún Ministerial Conference (2003) resulted from the developing countries’ efforts – led by Brazil and India – to reduce the ability of traditional WTO leaders to impose their positions. In contrast to the Uruguay Round, when the agriculture agreement elaborated by the USA and the EU led to the successful conclusion of the round, the US–EU joint proposal on agriculture presented in the 2003 Cancún Ministerial meeting was greeted with strong opposition from a group of developing countries. At least to some degree, the formation of the G20 represented a revival of the South–South coalition spirit. After a period of neoliberal euphoria, in the 2000s many states in the developing world started to reassess their policy options and assumed a more activist stance towards the developed world. According to Hurrel and Narlikar (2006), the Cancún Conference represents a break from the neoliberal consensus of the 1990s and from the notion that there was an inherent and powerful global logic in strengthening that consensus. The G20 reveals a tendency towards more assertive developing country positions in the international system, both individually and collectively, and represents an important turning point in the evolution of the trade regime (Vigevani and Ramanzini 2010). The group managed to balance the interests of developing countries with strong agribusiness sectors, such as Brazil and Argentina (also members of the Cairns Group), with those of countries with mainly family-based/subsistence

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agriculture, such as India and China (members of the G33). In this sense, the G20 proposed radical cuts in the domestic and export subsidies of developed countries, as well as greater market access. At the same time, to meet the demands of the agricultural importers, the group demanded a differentiated formula for market access and proposed Special and Differential Treatment (S&DT) for developing countries. The G20 countries agree, however, on the elimination of export subsidies for agricultural products in developed countries (MRE 2007). Brazil and India joined the USA, EU and Australia to constitute the Five Interested Parties (FIPs), who were the main actors in the configuration of the Framework Agreement of July 2004. The July package managed to advance the negotiations on agriculture, adopting a ‘tiered approach’ for market access, a ‘substantial reduction of internal support’, and a definite deadline for the complete elimination of all export subsidies. According to Deese (2008), the  G20 played a large role in these results through the Brazilian and Indian ministers. The G20 has experienced some opposition since its creation in 2003. In order to continue negotiations with the USA, for example, Peru, Costa Rica and Colombia were forced to abandon their affiliation with the group (Srivastava 2008). Gradually, however, the group has received international acknowledgement for its cohesive position on agriculture negotiations, as well as its 2004 proposal on market access. The G20 was also recognized for the technical content of its proposals in the various working group meetings held in Geneva. The fact that several G20 proposals formed the basis of the Round’s negotiations reveals the group’s power to shape the agenda. The G20 has also faced some obstacles internally. In the 2008 July Geneva Meeting, considered to be an opportunity to conclude the deadlocked Doha Round,8 the G20 was unable to present a common document. The core divergence found within the group was the criterion adopted for the use of the Special Safeguard Mechanism (SSM). The G20 had accepted the safeguard mechanisms in its general proposals package as a concession of some countries, such as Brazil, in order to keep the bloc cohesion when negotiations became difficult. However, the coalition members did not achieve an agreement on this issue in the final stage of the negotiations. Brazil accepted the WTO’s agreement proposal with SSM criteria well below those proposed by India. It included tolerable levels for Brazil’s access to industrial product markets; the latter proposal was strongly opposed by India, China, South Africa and Argentina representatives. This provides further evidence that Southern countries are not a homogeneous group and developing countries do not always share the same vision of how to deal with global challenges. Since its creation, the G20 has faced numerous challenges: risk of fragmentation, divergence of interests among members and reliance on a distributive strategy (that is, it demanded concessions from the developed countries,

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offering little in return). In spite of these vulnerabilities, the coalition remained relatively united during the negotiation process, at least until the July 2008 Geneva Ministerial Meeting. One plausible explanation for this is that the G20 has gone through a learning process lasting almost two decades, experiencing disputes among its members and other coalitions. As a result, it has now evolved into a new coalition type, gathering elements of the bloc-type and issue-based coalitions (Narlikar and Tussie 2004). The G20’s power of agenda and international acknowledgement, on one hand, and internal cohesion despite the differences, on the other, are key elements of coalition sustainability according to much of the literature. G20 participation in the WTO provides some positive examples for South– South cooperation in the future. First of all, the presence of the ‘political entrepreneur’ for the maintenance of coalition – usually either Brazil or India – was quite constant in the G20 experience. Meetings among the members allowed a regular exchange of information and internal confidence-building. Dialogue and action along with other coalitions and with WTO officials, as well as the presentation of technical and substantive proposals,9 which incorporated the Doha mandate, all contribute to the G20’s greater acknowledgement by the global community. By questioning US hegemony and attempting to restructure the development axes, G20 leadership signalled a power shift within the institution. Finally, G20 leaders maintained transparency in the process by presenting to the other members reports on the green room negotiations. This conduct should be interpreted not necessarily as an altruistic position, but as an action aligned with the country’s interest in coalition maintenance (Ramanzini 2009). Just like other developing country coalitions at the WTO, the G20 finds its origins in the attempt to effectively react to measures opposed to the interests of its members. Hence, as already mentioned, although the coalition has substantially influenced the pace and substance of negotiations, G20 origins are intrinsically related to the attempt led by the EU and the USA, at the Cancún meeting, to achieve an understanding in line with the Uruguay Round’s Blair House agreement. This suggests that exogenous factors continue to play a stimulating role in the formation of developing country coalitions (ibid.). One negative implication of this, both in the G20 and in other South–South coalitions, is that when developing countries manage to counteract the external factors that have stimulated the formation of the coalition, they face difficulties in continuing to act collectively. The difficulties regarding policy coordination among G20 members in the July 2008 Geneva meeting are a good example of this situation: in this meeting, the developing countries did not manage to reach a consensus – as they had previously done in Cancún, Hong Kong and Potsdam and other important meetings. Another explanation can be found partly in the domestic interests of countries. In this situation, when there was an opportunity for action in which

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the interests of Brazil – the main leader in the group – were more or less incorporated, the concessions strategically made in favour of the collective action were partially abandoned. With reference to the July 2008 Geneva meeting and the Brazilian position, President Lula da Silva stated: ‘there was no divergence of concepts’ with Argentina and other developing countries. But he recognized that often at critical moments, the national interest prevails in government decisions: ‘You see, however much you work towards an integration process, be it of the European Union or of South America or of the Asian world, at some moments you have to consider the situation of your nation-state. We must not see, in our differences, situations of conflict, but rather situations of difference; economic differences and differences of industrial potential’ (Clarín 2008). This episode constitutes an exemplary case, since it allows one to evaluate the possibilities and limits of a cooperation that partially presupposes worldviews and values with some similarity. Prior to the launch of the Doha Round, developing countries experienced this active tension between international and national pressures. Internationally, they were encouraged to join together with other developing countries simply because they are all ‘developing’, while domestic interest groups encouraged their governments to identify their specific national interests and accept ‘that these may differ from other developing countries’ (Page 2002). The former approach prevailed up until the Seattle Ministerial, but the coordination challenges before the G20 reveal that developing countries may be shifting their tactics. Indeed, the recognition that the global South has many diverging interests and concerns may reflect a growing maturity of those countries in global governance. Indeed, flexibility in responding to domestic and international changes could increase the sustainability of South–South coalitions in the long run. The affinities among developing countries open doors and promote understanding between trading partners, but they should not impede recognition of the fact that foreign policy and international cooperation are related above all to one’s own interests (Keohane 1984). The interests are inherent to the states and of structural importance to coalition formation and maintenance. Even if some common challenges constitute a uniting mobilizing symbol we should not underestimate the differences among developing countries that challenge some cooperation actions. In the next section we analyse the participation of the developing countries in the WTO DSB. We will see that their increased participation, though still concentrated in a small group of developing countries, can act to promote the interests of individual developing nations as well as the global South more broadly. Participation with teeth: developing countries and WTO dispute settlement

Another way in which developing countries have begun to promote their individual and collective interests within the multilateral trading system is

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through the WTO’s Dispute Settlement Body – a distinctive instrument of the WTO structure. The novelty of this mechanism is found in its procedures and structure, aimed at ensuring the implementation of WTO agreements. For developing countries, the importance of dispute settlement lies in three aspects: as a guarantor of rights, avoiding the pre-eminence of economic hegemony, and ensuring that systemic shocks do not undermine developing countries’ interests (Qureshi 2003: 175). Developing countries have not, up to now, collaborated directly within the DSB, though there is some evidence of countries joining as third parties in panels where their common developing interests are concerned. However, successful use of the DSB system has the capacity to influence the negotiating outcomes more broadly, as in the case of the Brazil–US cotton dispute (see above). These benefits are not homogeneously enjoyed by developing countries. For example, only one LDC has ever opened a panel against any other WTO member.10 Similarly, the absence of sub-Saharan African countries – many of which are classified as LDCs – in WTO panels has inspired many scholars to question the importance of the DSB to African countries (Alavi 2007; Mosoti 2003). One explanation for the noticeable disparity between LDCs and other WTO members in their use of the DSB is the special and differential treatment (S&DT) principle, according to which LDCs enjoy a longer transitional period to implement WTO obligations. Also, many of the disputes involving these countries are settled under preferential market access agreements that LDCs have signed with some major developed countries. The small share of world trade represented by the LDCs – around 0.54 per cent in 2000 – has also repeatedly been raised as an explanation for their absence on WTO panels. Given their resource constraints, it is likely that LDCs choose to dedicate more resources to other trade-related development initiatives than to WTO dispute settlement. Yet WTO norms are aimed not only at market access facilitation: they are also about ensuring that this market access is fair (Qureshi 2003: 175). Moreover, although they do not trade the volume or variety of products that large WTO members do, the trade barriers confronted by LDCs can be of greater relative importance to their economies. Hence, ‘while they may have low absolute stakes in the trading system in relation to total world trade, they can have higher relative stakes in relation to their particular economies’ (Shaffer 2006: 178–9). Because LDCs constitute a subgroup inside the developing country category, some of the elements mentioned above are also pertinent to developing countries in general – for instance, the relative stakes involved in a WTO panel. More precisely, developing countries face three main disadvantages, compared to developed countries, when participating in the DSB: a relative lack of technical knowledge as regards WTO norms,11 constrained financial resources12 and limited room for political manoeuvre. In addition to these

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obstacles, developing countries can face internal bureaucratic hurdles, such as the concentration of trade dispute matters around the ministry of foreign affairs, the lack of support from home capitals, and the lack of financial and informational support from the private sector (ibid.). Moreover, unlike the USA with their Trade Representative (USTR) and the European Community (EC) with their Trade Commissioner, most developing countries do not assign a cabinet position for international trade matters. Certainly, these difficulties have led to pressure over developing countries’ performance in the WTO dispute settlements trajectory. An interesting way of assessing the conditions of access imposed on all WTO countries is to focus on the incidence of the complainant status in a given category,13 since it illustrates that a country has evaluated the costs and benefits of the dispute. Such a process is an essential stage of the rationale behind the dispute settlement system, especially once it is recognized that panels are long, slow and expensive. That said, it can be argued that developing countries’ participation as complainants on dispute settlement panels was more strongly constrained during the first five years after the creation of the DSB. From 1995 to 2000, developed countries were involved in WTO panels as complainants 157 times, compared to 79 times for developing countries (see Figure 5.1). This scenario contrasts with the data found for the following years, when developing countries adopted a more participatory position in WTO dispute settlements than developed countries. From 2001 to 2006, developing countries filed complaints with the DSB 81 times, compared to only 57 complaints by developed countries. It is noteworthy that Figure 5.1 does not indicate a clear trend in absolute terms. That is, there is not an identifiable numeric pattern of panels per year in each one of the categories illustrated in the graph. Developing countries present a more consistent pattern of involvement in disputes, having varied from approximately 16 to 39 panels per year, since the creation of the DSB, in 1995. Developed countries, on the other hand, have ranged from 12 to 73 panels per year. However, neither case presents a decreasing or increasing trend in panels per year. What Figure 5.1 clearly shows is that the gap between both categories of countries has narrowed over the years. This could be due to the learning process of participating in WTO dispute settlement. The relative increase in the number of panels initiated by developing countries against developed ones is likewise associated with this narrowing gap (see Figure 5.2). Again, there is no identifiable trend in absolute terms, but the comparison between developed and developing countries’ performance can be illuminating. More specifically, until the biennium 1999/2000, the panels in which a developed country brought a case against a developing country outnumbered those in which the reverse happened. Read together, Figures 5.1 and 5.2 show that, compared to developed countries, developing countries managed to increase their active participation

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Developed countries Developing countries

47 36

29 18

1995–96

39

37

32

22

20

26

25

1997–98 1999–2000 2001–02 2003–04

15 17

16 16

2005–06

2007–08

17 17

2009–10

2011–12

5.1 Developed and developing countries’ involvement in WTO panels (1995–2010)14 (source: WTO 2012)

on WTO panels as complainants, as well as to increase their demands for compensation of losses or compliance verification towards developed countries. The relative prominence of developing countries can be explained not only by their learning process as regards DSB procedures and WTO trade norms. Developing countries have also ‘learned that they could use the dispute settlement mechanism to compel other members to honor the commitments made at the Uruguay Round’ (Fernández 2008: 431). The resort to institutional mechanisms in order to strengthen the members’ relative positions is an element that has been used by developing countries. In the negotiations on domestic support and export subsidies, the cotton dispute between the USA and Brazil played an important role, once it had demonstrated the necessity of more strict disciplines.15 The argument that developed countries violated WTO rules and harmed developing countries with their export subsidies was strengthened after the Appellate Body decision favourable to Brazil in the cotton case against the USA. A demand or proposal that is based on institutional elements such as the Doha Mandate or an Appellate Body decision tends to gain force inside the WTO. In general terms, the strengthened profile of some developing countries in dispute settlement can be considered a result of investments in human and financial resources. These, guided by the assessment that the gains-developing countries can achieve through multilateral regimes such as the WTO – or, more specifically, the DSB – are greater than those obtained in bilateral arrangements involving great powers (Qureshi 2003). In the light of this context, it seems possible to see the WTO, especially the DSB, as a dynamic institutionalized regime, which has gone through various changes over time.16 As Krasner (1993) puts it, in the moment of their creation, regimes reflect the distribution of power in the international

0

5

10

15

20

25

30

35

40

5.2

18

9

3

5

1997–98

13

38

0

17 16

1999–2000

8

21

2

3 2001–02

19 19 18

1

6

11

2003–04

14 14

0 2005–06

8 9 7 8 0

Developing–developing Others

6 5

2007–08

10 11

Composition of WTO panels according to country member category (1995–2012)17 (source: WTO 2012)

1995–96

12

22

35

Developed–developing Developing–developed Developed–developed

0

4

9

2009–10

9 9

0

2 3 2011–12

6 6 0

104

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system (Jönsson and Tallberg 2008). Indeed, originally, the idea of creating an enforcement mechanism for the multilateral trading system was presented by the USA in the Uruguay Round18 and was received with hesitation by some developing countries. At that time, these countries feared particularly the ‘teeth’ of the dispute settlement mechanism as regards cross-retaliation. Since many developing countries had more lenient intellectual property rights, they expected to be a recurrent target of cross-retaliation on this matter. Ultimately, however, developing countries accepted the idea of establishing a DSB with enforcement powers because of its rule-based and multilateral characteristics. Krasner’s traditional analysis suggests that regimes can change over time. Rules, norms and procedures created by regimes such as the DSB have crystallized through bureaucratic routines and structures and started to facilitate particular patterns of behaviour, as well as to affect members as a whole, including those who stimulated the creation of this given regime in the first place. In this sense, it is possible to consider that even if developed countries intended to use the DSB to constrain certain domestic politics of developing countries, the evolution of the system enabled developing countries, in turn, to challenge some of the domestic politics of developed countries that are contrary to the interests of the South. This is an important case of possibly unintended consequences of an international body. It does not mean that developed countries do not take advantage of the system; it means that developing countries can also use the DSB to attain some of their interests and strengthen relative positions. Conti (2010: 658), considering the idea that  disputants’ strategies influence the use of international trade law, asserts that ‘the effect of repeat participation [in the DSB] is not reducible to economic position in the world trading system or trade relationships. It is a general feature of how the system is used and is not restricted to the most powerful.’ Despite the decline in complaints proportionately in the last few years, the USA and the EC remain the predominant users of the WTO legal system, and ‘thereby are most likely to advance their larger systemic interests through the judicial process and through bargaining in its shadow’ (Shaffer 2005: 5). The USA and the EC have participated as a party or third party in approximately 99 per cent and 86 per cent, respectively, of WTO cases that resulted in an adopted decision (Shaffer 2006: 186). These numbers stem from the ability of the USA and the EC to develop mechanisms to identify foreign trade barriers, to prioritize them according to their impact, and to mobilize resources for WTO complaints. This coordination is structured upon networks involving governmental agencies and the private sector (ibid.). The data presented in this section indicates that many developing countries, as well, have been resorting to the existing institutional mechanisms such as the DSB in order to strengthen their relative positions in the WTO. As we have seen, their use of the WTO legal system has increased since 1995. This increasing participation is, however, still restricted to a small number of developing

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countries, notably Brazil (complainant on 25 panels), India (21), Mexico (21), Argentina (15) and, more recently, China (9). The acquired know-how that trade practitioners have developed through participation in disputes offers a significant advantage over those countries that do not often participate in the DSB (Conti 2010). Despite the fact that some countries have overcome technical, financial and political barriers, these are still incipient processes. Final remarks

The increase in South–South cooperation is a remarkable feature of recent years. The phenomenon has taken various shapes and has contributed to major international changes in international governance. At the WTO, cooperation arrangements between Southern countries have taken particular forms, resulting in an outstanding number of developing country coalitions as well as a considerable level of institutionalization in these groupings. When developing countries’ economic, political and technical profiles do not provide them with adequate leverage, coalitions between these countries are expected. The Doha Round represents a watershed in the history of the WTO with the proliferation of developing country coalitions and the increased participation of the global South. There were coalitions in the previous rounds, but more have emerged, presenting a higher degree of institutionalization, since the ‘Development Round’ was established. In this context, the G20 emerged as one of the most durable coalitions, presenting a high level of internal cohesion – despite the differences found among its members – institutionalized procedures and external political influence. Brazil and India have played a particularly determinant role in the maintenance of the coalition through the various negotiations. Coalitions and the use of institutional mechanisms are the main strategies through which some of the Southern countries increased their relative capacity in the multilateral trade system. At the same time, the global South is not a homogeneous group, as evidenced by the difficulties of policy coordination at the July 2008 Geneva Ministerial meeting. That is to say, developing countries’ visions about how to deal with global challenges are not always similar. The increase in developing countries’ relative power inside the WTO structure is also related to the DSB. It is possible to identify a greater participation of developing countries as complainants on WTO panels since 2001, which indicates that these countries have gone through cost–benefit assessments and decided that they had a chance of succeeding in the dispute, despite the costs and time invested in it. Participation in the DSB is not only a thermometer of WTO rules compliance; it is also indicative of a developing country’s decision to use institutional mechanisms to achieve gains through multilateral channels. Nevertheless, it is important to mention that the increasing participation observed in developing countries has, up to now, been concentrated in a small group of developing countries. Brazil and India, for example, the same

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emerging countries that have played a fundamental role in the G20 coalition, are becoming major players in the WTO’s DSB. Intermediate powers are, therefore, integral to political quests in a changing international system. In this process, institutional mechanisms have occupied a privileged locus in developing countries’ strategies. These countries’ actions have focused on working within the existing trade structure in order to promote their interests. It therefore seems unlikely that the Doha Round will be concluded with developed countries imposing an asymmetric distribution of outcomes as they have in past trade rounds. The changes in the WTO were driven by structural changes in the distribution of power in the world. One important long-range implication of developing country coalition formation and participation in the WTO DSB is that the trade regime will need to establish a more balanced reflection of interests of both developed and developing countries. This is a major change and not simple to consolidate. Still, situations of stalemate can call into question some of the WTO’s values. Recently, the WTO’s tendency to prioritize growth based on standard economic models has been challenged and doubts are emerging as to the capacity of the multilateral trading system to change the domestic policies of developed countries. The unprecedented activity of developing country coalitions in the Doha Round and intense participation in the DSB inform both a critique of the international structure led by the developed countries and a rallying point for insider activism, redefining developing countries’ role in the WTO. Notes 1 The authors thank Adriana Verdier for her valuable comments on this chapter. 2 The WTO groups its members generally according to two main categories, developed and developing countries. The latter is further divided into ‘developing’ and ‘least developed countries’ (LDCs), based in part on the UN LDC classification. This procedure differentiates the implementation of WTO agreements according to the members’ particular capabilities. The developing country status implies certain possibilities inside the WTO system, such as longer transition periods before they are required to fully implement an agreement, as well as technical assistance. In some WTO contexts, the designation ‘developing country’ is carefully defined (as in the agricultural subsidies negotiations). However, in general, there is no formal definition: members announce for themselves whether they are developed or developing countries. It is possible that other members will challenge the decision of a member to

make use of provisions available to developing countries. This can happen even after a country has been recognized as a developing country. Such was the case with Brazil in 2003 and 2004 when the USA and the EU tried to change Brazil’s developing country status. 3 The green room negotiations are ‘informal meetings limited to representative nations of the various groups having leverage in international negotiations … Deals negotiated in the Green Room have usually been accepted and become part of the final declaration with trivial amendments’ (Srivastava 2008: 38). 4 Commenting on the launch of the Doha Round, in November 2001, a British newspaper wrote that ‘the most significant story to emerge from the talks in the Gulf is the coming of political age of the developing country lobby within the WTO. Doha marks a turning point. It was not the radical climax for which some campaigners hoped, but it is a significant shift in the balance of power in global trade

108 | five negotiations away from a small coterie of rich industrialized nations.’ ‘Developing countries flex their muscles’, www.guardian.co.uk/world/ 2001/nov/15/globalisation.guardianleaders, accessed 27 November 2010. 5 Doha WTO Ministerial 2001: Ministerial Declaration (WT/MIN(01)/DEC/1), www.wto. org/english/thewto_e/minist_e/min01_e/ mindecl_e.htm, accessed 27 November 2010. 6 It should be noted that not all of these coalitions participated in exactly the same way. MERCOSUR, for example, was primarily active in the agenda-setting stage, submitting joint proposals leading up to the Seattle Ministerial, focusing on the agricultural negotiations. The NAMA-11 (led by South Africa), by contrast, has negotiated collectively to secure developing country flexibility in Non-Agricultural Market Access tariff reductions (Patel 2007). 7 The NAMA-11 Group presented joint proposals in the negotiations on Non-Agricultural Market Access (NAMA). Also, the group was able to establish a strong link between the level of ambition in NAMA and that in agriculture in the final text of the Hong Kong Declaration (Ismail 2007). 8 For a detailed assessment of the July 2008 meeting, see Ismail (2009). 9 According to Tussie (2009: 3), ‘a negotiator demanding a very high level of concessions from the opponent or refusing to make any concessions will be taken more seriously when backed up by detailed studies … The purpose of research cannot be understood narrowly as self-serving because the most important function is to justify and explain demands of one group to other groups.’ 10 The panel was opened by Bangladesh on 24 January 2004 against India. See: DS306 – Antidumping Measure on Batteries from Bangladesh. 11 WTO bodies and some nongovernmental organizations have developed programmes in order to offer legal assistance to developing countries, especially LDCs. For more information on these programmes, see Shaffer (2006). 12 According to Shaffer (2006: 190), the WTO disputes are ‘so expensive that many developing country enterprises simply cease exporting to the United States or Europe upon the initiation of a complaint’. 13 DSB effectiveness, on the other hand,

would be better analysed by considering the decisions manifested by this system. 14 As of April, 2012. Traditionally, WTO panels have one member as complainant and another as respondent. However, during the period considered, there were six occasions on which developing and developed countries gathered in order to question another member’s trade policy. In these cases, panels’ parties were counted in their respective category. For instance, in DS217, the United States was accused of dumping by Australia, Brazil, Chile, the European Community, India, Indonesia, Japan, Korea and Thailand. In order to build the graph, six developing and three developed countries were registered as complainants. Therefore, the total n presented in Figure 5.1 is superior to the total number of panels registered from 1995 to 2012 because a given panel may present more than a developed and/ or developing country as a complainant. 15 Celso Amorim holds that ‘recent disputesettlement cases will fuel the general trend toward more equitable disciplines for world trade in agriculture’. ‘The new dynamic in world trade is multipolar’, Financial Times, 8 April 2004. 16 Krasner (1982: 499) argues that ‘when regimes are first created there is a high degree of congruity between power distributions and regime characteristics: powerful states establish regimes that enhance their interests. But over time the two can drift apart … By facilitating particular patterns of behavior, regimes can strengthen or weaken the resources of particular actors. Regimes may reinforce or undermine the power capabilities that led to their creation in the first place.’ 17 As of April 2012. 18 Prior to the Uruguay Round, the underlying discussion about how the disputes should be settled also involved the EU. While the USA supported a rule-based system, the EU supported a diplomacy-based model (Alavi 2007: 26).

References Alavi, A. (2007) ‘African countries and the WTO’s Dispute Settlement Mechanism’, Development Policy Review, 25(1): 25–42. Alden, C. and M. A. Vieira (2005) ‘The new diplomacy of the South: South Africa, Brazil, India and trilateralism’, Third World Quarterly, 26(7): 1077–95.

ramanzini and viana | 109 Amorim, C. L. N. (2010) ‘Seven years of progress, expansion’, Miami Herald, 13 September. Buzan, B. (2004) The United States and the Great Powers. World politcs in the twentyfirst century, Cambridge: Polity Press. Clarín (2008) ‘Lula, en exclusiva con Clarín: “no existe ninguna hipótesis de que Brasil se juegue solo”’, edant.clarin.com/diario/2008/09/07/um/m-01755400.htm. Conti, J. A. (2010) ‘Learning to dispute: repeat participation, expertise, and reputation at the World Trade Organization’, Law & Social Inquiry, 25(3): 625–62. Cooper, A., R. Higgot and R. Nassal (1993) Relocating Middle Powers: Australia and Canada in a Changing World Order, Vancouver: UBC Press. Costantini, V. and R. Crescenzi (2007) ‘Bargaining coalitions in the WTO agricultural negotiations’, World Economy, 30(5): 863–91. Deese, D. A. (2008) World Trade Politics. Power, Principles, and Leadership, New York: Routledge. Drahos, P. (2003) ‘When the weak bargain with the strong: negotiations in the WTO’, International Negotiation, 8(1): 79–103. Farias, R. S. (2009) O Brasil e o GATT (1973– 1993): unidades decisórias e política externa, Curitiba: Juruá. Fernández, M. D. (2008) ‘Trade negotiations make strange bedfellows’, World Trade Review, 7(2): 423–53. Hardin, R. (1982) Collective Action, Baltimore, MD: Johns Hopkins University Press. Hurrell, A. and A. Narlikar (2006) ‘A new politics of confrontation? Developing countries at Cancun and beyond’, Global Society, 20(4): 415–33. Ikenberry, G. J. (2008) ‘The rise of China and the future of the West’, Foreign Affairs, 87: 23–37. Ismail, F. (2007) ‘The G-20 and NAMA-11: the role of developing countries in the WTO and Doha Round’, Paper presented at the GEG Seminar Series on Making Globalization Work for Developing Countries, Oxford. — (2009) ‘An assessment of the WTO Doha Round July–December 2008 collapse’, World Trade Review, 8(4): 579–605. Jönsson, C. and J. Tallberg (2008) ‘Institutional theory in international relations’, in G.

Peters, J. Pierce and G. Stoker (eds), Institutional Theory in Political Science, lup.lub. lu.se/luur/download?func=downloadFile&re cordOId=534142&fileOId=625444, accessed 6 May 2012. Keohane, R. O. (1984) After Hegemony: Cooperation and Discord in the World Political Economy, Princeton, NJ: Princeton University Press. Krasner, S. D. (1982) ‘Structural causes and regime consequences: regimes as intervening variables’, International Organization, 36(4): 497–510. — (1993) ‘Sovereignty, regimes and human rights’, in V. Rittberger (with the assistance of P. Mayer) (ed.), Regime Theory and International Relations, Oxford: Clarendon Press. Kupchan, C. A. (2002) ‘Hollow hegemony or stable multipolarity?’, in G. J. Ikenberry (ed.), American Unrivaled: The future of the balance of power, Ithaca, NY and London: Cornell University Press, pp. 68–98. Mosoti, V. (2003) ‘Does Africa need the WTO dispute settlement system?’, in ICTSD Resource Paper no. 5, March, pp. 67–88, ictsd. org/downloads/2008/06/dsu_2003.pdf. MRE (Ministério das Relações Exteriores) (2007) ‘O G-20 e a OMC’, in Textos, Comunicados e Documentos, Brasilia: Fundação Alexandre de Gusmão. Narlikar, A. (2003) International Trade and Developing Countries: Bargaining coalitions in the GATT & WTO, London: Routledge. — (2011) ‘New powers in the club: the challenges of global trade governance’, in C. D. Birkbeck (ed.), Making Global Trade Governance Work for Development, Cambridge: Cambridge University Press. Narlikar, A. and D. Tussie (2004) ‘The G-20 at the Cancun Ministerial: developing countries and their evolving coalitions in the WTO’, World Economy, 27(7): 947–1148. Odell, J. S. (2003) ‘Developing countries and the trade negotiation process’, Paper presented at the Conference on Developing Countries and the Trade Negotiation Process, UNCTAD, Palais des Nations, Geneva. Olson, M., Jr (1999) A Lógica da Ação Coletiva, São Paulo: EDUSP. Ostry, S. (2002) ‘The Uruguay Round North– South grand bargain: implications for future negotiations’, in D. L. M. Kennedy and J. D. Southwick (eds), The Political Economy of

110 | five International Trade Law, Cambridge: Cambridge University Press, pp. 285–300. Paalberg, R. (1997) ‘Agricultural policy reform and the Uruguay Round: synergistic linkage in a two-level game’, International Organization, 51(3): 413–44. Page, S. (2002) ‘Developing countries in GATT/ WTO negotiations’, Working paper, London: ODI. Patel, M. (2007) ‘New faces in the Green Room: developing country coalitions and decision-making in the WTO’, Paper presented at the Global Trade Governance Project, Oxford. Qureshi, A. H. (2003) ‘Participation of developing countries in the WTO dispute settlement system’, Journal of African Law, 47(2): 174–98. Ramanzini, H., Jr (2009) ‘Processo decisório de política externa e coalizões internacionais: as posições do Brasil na OMC’, Master’s dissertation, Departamento de Ciência Política, Universidade de São Paulo. Shaffer, G. (2005) ‘Developing country use of WTO dispute settlement system: why it matters, the barriers posed, and its impact on bargaining’, Paper presented at ‘WTO at 10: a look at the Appellate Body’, São Paulo. — (2006) ‘The challenges of WTO law: strategies for developing country adaptation’, World Trade Review, 5: 177–98.

Srivastava, S. (2008) ‘Negotiation analysis: the Cancun Ministerial of the WTO’, International Studies, 45(1): 23–43. Steinberg, R. (2002) ‘In the shadow of law or power? Consensus-based bargaining and outcomes in the GATT/WTO’, International Organization, 56(2): 339–74. Tussie, D. (2009) ‘Process drivers in trade negotiations: the role of research in the path to grounding and contextualizing’, Latin American Trade Network (LATN)/ Série BRIEF. Tussie, D. and D. Glover (1995) The Developing Countries in World Trade: Policies and bargaining strategies, Boulder, CO: Lynne Rienner. Velasco e Cruz, S. C. (2007) Trajetórias: capitalismo neoliberal e reformas econômicas nos países da periferia, São Paulo: Editora da Unesp. Vigevani, T. and H. Ramanzini, Jr (2010) ‘The changing nature of multilateralism and Brazilian foreign policy’, International Spectator, 45(4): 63–71. Wilkinson, R. (2006) The WTO: Crisis and the governance of global trade, New York: Routledge. WTO (World Trade Organization) (2012) Chronological List of Disputes Cases, www.wto.org/english/tratop_e/dispu_e/ dispu_status_e.htm, accessed 6 May 2012.

6 | SOUTH–SOUTH FOREIGN DIRECT INVESTMENT FLOWS: WISHFUL THINKING OR REALIT Y?

Mariana Rangel

Foreign direct investment (FDI) is a key instrument of economic exchange and a rising aspect of South–South cooperation. A first wave of FDI flows within Southern countries took place during the 1970s, but the 1980s crisis in the developing world put an end to the flows. States had to focus on reducing their financial obligations and companies divested in order to reduce their private debt. A new wave of FDI flows from the South emerged in the 1990s. In the last twenty years, capital flows between developing countries have grown more rapidly than those between developed and developing countries (North–South flows), particularly in foreign direct investment. South–South FDI flows were $47 billion in 2003, up from $14 billion in 1995 (World Bank 2006). Increased interactions have raised hope among development analysts: That developing countries are growing sources of FDI is doubly good news because these new players tend to be better equipped to invest in difficult and remote markets and to develop products and services better adapted to developing country consumers … these are low-spec products, but they are exactly what consumers in developing countries need … Another reason to be hopeful is that the destination sectors of FDI also are becoming more varied. FDI has evolved from focusing primarily on natural resources, infrastructure, and manufacturing (export-driven or ‘tariff jumping’ investment) to also covering banking, retail, construction, tourism, and offshore services. (Palmade and Anayiotas 2004: 2)

In this context, what does the future of South–South investment flows hold? A set of related questions includes: How much of this flow is actually South–South? What are the main traits? Are there any particular industries where cooperation is more intense? To what extent are South–South exchanges contributing to development? The purpose of this chapter is to examine the long-term evolution of outward foreign direct investment (OFDI) from the South, focusing on the characteristics of South–South linkages. This assessment employs quantitative and qualitative data, beginning at a general level through the examination of the countries of origin and destinations of the FDI. However, Goldstein (2007) warns that a general overview of OFDI origins and destinations may be an inadequate measure because

112 | six

some companies revert to this option as a way of round-tripping.1 Also, many Southern countries2 may provide only aggregated OFDI numbers. Furthermore, often information collected by international organizations places the offshore financial centres (OFCs) within the developing countries categories, overestimating transactions that occur in the natural resources sector, manufacturing and non-financial services. In response to these challenges, we follow the general assessment with two case studies: India and Brazil. We selected these two countries because they have a tradition of investing abroad and currently rank among the top investors from the South.3 Furthermore, Brazil and India have explicitly committed to South–South cooperation through the India, Brazil, South Africa (IBSA) group, and both are members of the Brazil, Russia, India, China (BRIC) bloc, which, from 2000 to 2004, contributed 46 per cent of the FDI outflows from the South (Gammeltoft 2008). We examine India’s and Brazil’s role as Southern investors using data on mergers and acquisitions (M&As) reported by companies rather than only data from national governments, as suggested by Gopalan and Rajan (2010). This data discards flows to financial offshore centres. The downside is that M&As are often recorded only above a certain amount of capital and they do not reveal small- and medium-size companies’ transactions, which might be relevant for certain sectors. More than three decades of South investment

From the 1970s until the 1990s FDI outward flows stemmed mainly from developed economies. However, there were some cases in which South-based companies undertook operations abroad. By 1980, 14 per cent of the outward investment stock in the world belonged to developing countries and 86 per cent to developed countries. Some country studies show how India, Mexico and Brazil participated in this first wave of investment (Lall 1983; Oman 1986; Wells 1988). Through greenfield investment, companies avoided protectionist policies and penetrated neighbouring countries or countries holding large ethnic diasporas. The 1980s were a time of economic instability and crisis in the developing world. Public and private debt became a burden and companies suffered severe financial problems. Many business groups sold their assets abroad as part of their survival strategies, which explains why the stock of FDI from the South had shrunk by 1990. Throughout the nineties a series of structural adjustment measures, such as the liberalization of investment regimes, privatization and the removal of exchange rate restrictions, stirred a new wave of South investments. Some countries, such as Chile and Mexico, which were early reformers and had learned from their domestic experiences, took advantage of their knowledge and made acquisitions in neighbouring countries. By 2000 Southern countries’ share in total outward flows had reached 13 per cent.

rangel | 113 OFDI stock 1980

OFDI stock 1990 8

14 North South 86 .6 1 Evolution of outward foreign direct investment by group of origin (source: UNCTAD 2010)

92

OFDI stock 2008

OFDI stock 2000 13

13

2

1

2

North OFDC South Transition

85

84

Foreign direct investment flows from the South have grown substantially since 2003, as Figure 6.2 illustrates. Brazilian investment jumped from US$50,000 million in 2003 to US$160,000 million in 2008, followed by China, which raised its OFDI flows from US$40,000 to US$150,000 million in the same period. Today, Southern economies are important global investors. Table 6.1 shows that the main countries of origin from the South in terms of OFDI stock for 2008 were: Hong Kong, Singapore, Taiwan, Brazil, China, Republic of Korea, Malaysia, South Africa, India, United Arab Emirates and Mexico. 180 160 140 120 100

India

80

Mexico

60

China

Korea

Malaysia

Brazil

40 20

South Africa 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

0

.62

Selected South countries’ OFDI flows, 1980–2008 (source: UNCTAD 2010)

114 | six

A recent study revealed that the bulk of South–South FDI (excluding offshore financial centres) is intra-regional in nature. In fact, during the period 2002–04, average annual intra-Asian flows amounted to an estimated $48 billion. The next-largest stream of FDI within the group of developing countries was within Latin America, mainly driven by investors in Argentina, Brazil and Mexico. table 6.1 Top OFDI sources in terms of stock, 2008 (US$ million) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

United States United Kingdom Germany France Netherlands China, Hong Kong Switzerland Japan Spain Belgium Canada Italy Sweden Russian Federation Australia Denmark Singapore British Virgin Islands Taiwan Norway

3,162,021 1,510,593 1,450,910 1,396,997 843,737 775,920 724,687 680,331 601,849 588,269 520,399 517,051 319,310 202,837 194,721 192,523 189,094 176,862 175,140 171,164

21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39

Brazil Ireland Austria China Finland Korea, Republic Malaysia Portugal Luxembourg South Africa India Israel Cayman Islands United Arab Emirates Mexico Greece Chile Argentina Indonesia

162,218 159,363 152,562 147,949 114,526 95,540 67,580 63,642 62,664 62,325 61,765 53,672 51,287 50,801 45,389 32,441 31,728 28,749 27,233

Source: UNCTAD (2010)

Intra-regional flows within Africa were an estimated $2 billion, reflecting, in particular, South African FDI to the rest of the continent. Inter-regional South–South FDI has gone primarily from Asia to Africa, while the second largest has been from Latin America to Asia. Perhaps somewhat surprisingly, total flows from Asia to the Latin American region were modest during the period 2002–04, and those between Latin America and Africa were negligible (UNCTAD 2006: xxiv). But the analysis at the general level is not sufficient to give a clear sense of the importance of South–South investment flows. India and Brazil together comprised around 10 per cent of the OFDI flows from the South and 13 per cent of the total value of South acquisitions in 2008. Both countries have a historical legacy of investment in the South and they have shown interest in enhancing South–South cooperation more through the IBSA dialogue forum

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in 2003. The main objectives of IBSA are: ‘To promote South–South dialogue, cooperation and common positions on issues of international importance; to promote trade and investment opportunities between the three regions of which they are part’ (IBSA 2010). Their cases will be examined in the next sections. India case study

Indian outward stock of foreign investment has significantly increased from US$78 million dollars in 1980 to US$61,765 million in 2008, turning India into the thirty-first-largest investor in terms of stock abroad. The country ranked eighth among Southern investors that same year. The following section explains how the country became a major South–South investor.

First era: investing in the South Shortly after independence in 1947 India implemented a strategy of state-led import substitution industrialization (ISI) under central planning, which encompassed a series of government laws to control industry and foreign capital. Tariffs and quotas were raised to discourage foreign trade. The government restrictions on overseas investment were based on the foreign exchange earning capacity of the companies. Athukorala (2009) explains that every proposal had to be placed before an inter-ministerial committee on joint venture for approval. Equity participation through cash remittances was discouraged and export of capital equipment was allowed. Figure 6.3 reflects the large concentration of Indian investment stocks in Southern countries from 1976 and until 1986. Developing countries captured 86.4 per cent of total Indian investment, developed countries 10 per cent and 3,000

2000 2006

2,500

2009

1,500 1,000 500

.6 3

ia

ay sia

M al

ne s

In

do

la

nd

an

ai Th

ia

Indian OFDI stock: main South destinations (US$ millions)

O m

ig er N

am tn

an

ka

Vi e

iL

Br az il

Sr

a

yp t Eg

g

in Ch

Ko n

n da

on g

Su

H

UA E

ga po re *

0

Si n

US $ million

2,000

116 | six table 6.2 Indian OFDI stock: 1976–86 (US$ millions)

Transition OFC South North

1976

1980

1986

0.00 1.29 31.51 3.69

2.47 2.36 108.22 6.43

1.88 3.00 83.59 1.46

Note: Transition economies include Russia which is the major recipient for this category. Source: Elaborated by the author with information from Pradhan (2007), Table A-1. Database compiled from d reports of the Indian Investment Centre (IIC) (Commission) and unpublished data from the Ministry of Commerce and Ministry of Finance.

offshore financial centres 3.5 per cent. By 1986, developing countries held 93 per cent while developed countries received less than 2 per cent of the total. The offshore financial centres’ participation remained unchanged. All of the top fifteen Indian outward investment destinations in 1986 were Southern countries. Most were in South-East Asia: Indonesia, Thailand, Malaysia, Singapore, Sri Lanka. Africa also received significant flows, directed towards Nigeria, Kenya and Niger. In the Middle East there were investments in Egypt, the United Arab Emirates, Saudi Arabia and Bahrain. Besides cultural and geographical proximities as a pushing factor, Pradhan (2007) claims that there was a policy perception in which investments in ‘Third World’ countries were considered India’s constructive contribution to South–South cooperation. OFDI was also conceived as a promotion vehicle for Indian exports. Thus, the Indian government introduced policies to promote the internationalization of Indian firms, such as providing financial incentives for commodities exports, cash compensatory support for exports, and tax exemptions for dividend receipts, among others. In the first wave of Indian investment abroad more than 80 per cent of Indian FDI was in the manufacturing sector, especially in textiles and yarn, making up about 25 per cent of the total. Other sectors were: paper and pulp, engineering of various types, food processing and chemicals (Lall 1986, cited in Athukorala 2009). The preferred mode of entry was greenfield investment.

Second era: changing destinations and sectors? A gradual liberalization of trade and investment regimes took place during the period 1985–2000, fostering an expansion of outward investment flows. In the 1980s, the government eased some of the approval criteria on FDI, but it was not until the structural adjustment reforms of 1991/92 that there was a wider relaxation of regulations. An automatic route – that is, the possibility of undertaking projects without

rangel | 117 table 6.3 Indian OFDI stock, 1996–2009 (US$ millions)

Transition OFC South North

1995

2000

2006

2009

50.06 62.99 456.30 392.46

90.31 1,205.68 1,589.41 1,214.90

3,065.77 3,301.76 5,660.11 5,719.27

3,141.77 5,398.76 10,726.11 6,899.27

Note: Transition economies include Russia which is the major recipient for this category. Data for 2009 was updated using Satyanand and Raghavendran (2010), Table 4a Source: Elaborated by the author with information from Pradhan (2007), Table A-1. Database compiled from d reports of the IIC and unpublished data from the Ministry of Commerce and Ministry of Finance.

obtaining prior approval from the Indian government for overseas investment of up to $4 million – was allowed, and in 2002 the upper limit was raised to $100 million per year. In 2005, firms were allowed to invest up to 200 per cent of their net worth via the automatic route. Since then, the Indian government has removed remaining barriers. Besides changes in the regulatory framework, a certain level of government support through the EXIM Bank Overseas Investment Finance Scheme has been crucial for companies investing abroad. The Indian Investment Centre under the Department of Economic Affairs of the Ministry of Finance provided information on OFDI opportunities to Indian firms and assisted them in locating foreign partners until it was replaced by the Indian Investment Commission in 2004. This decision has been controversial because the Commission’s main objective is to promote inward FDI rather than outward FDI (Pradhan 2007). Additionally, India actively engaged in negotiations of agreements to increase investors’ confidence and reduce their risks when choosing to set up operations abroad. In 1993, India was a signatory to two bilateral investment treaties and four double taxation treaties. By 2006, it had signed sixty bilateral investment treaties and sixty-seven double taxation treaties. India’s total annual FDI outflows increased from US$82 million in 1994 to US$17.7 billion in 2008 (UNCTAD 2010). The distribution of the flows per destination has also changed. In 1995, Indian investment in the North accounted for 40.8 per cent of its stock; OFCs became popular with 7 per cent, the South received 47 per cent, and the remaining 5 per cent went to transition economies. In the last ten years, the shares of the North and South as groups decreased to 32 per cent and 19 per cent and the OFCs’ prominence increased, capturing 37 per cent of all flows. Transition economies, mainly Russia, have also widened their participation to 12 per cent.

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In absolute terms, South–South flows have continued to increase. The main Southern destinations in 2009 were Singapore (14,231), United Arab Emirates (2,232), Sudan (1,191), Hong Kong (998), China (949), Saudi Arabia (820), Brazil (508), Sri Lanka (355), Nigeria (300) and Thailand (253), all figures in US$ million. There has been an important effort to secure other natural resource companies and the trend will very likely continue, even if only 10 per cent of recent Indian M&As were in oil and gas. The modes of entry of Indian companies are different in the second era. Acquisitions have displaced greenfield investment. It is noteworthy that ‘in 2007–2008, India ranked as the fourth largest overseas business acquirer among developing and transitional economies after Singapore, United Arab Emirates, and Russia’ (Athukorala 2009: 137). Indian firms participate in a variety of sectors and industries. According to the Reserve Bank of India, from 1999 to 2008 the manufacturing sector constituted 43 per cent of the total outflows but non-financial services, especially IT-related ones, had an important place, with 30.3 per cent. Oil and gas and other natural-resource-based industries occupied a relatively low position in Indian OFDI compared to FDI from Brazil and China. Mergers and acquisitions have been the preferred mode of entry in the second era of Indian OFDI. Here we examine two sub-periods of M&A activity: from 1996 to 2000 and from 2000 to 2010. According to UNCTAD (2004a), from 1996 to 2000, of sixty-two crossborder M&A deals by Indian companies, 70 per cent were in the North, 25 per cent in the South and the remaining 5 per cent in transition economies. Table 6.A1 in the Appendix reveals that, of the forty-one most important acquisitions by Indian companies from 2000 to 2009, 62 per cent of the  transactions unfolded in countries from the North and 36.6 per cent in the South. That means that the percentage of South–South M&As has increased compared to previous years. A closer analysis reveals that 85 per cent of the total value of acquisitions in the South was in the oil and natural resources sectors, in a move to secure access to steel, coal, pulp and paper and petroleum. Acquisitions in the North show a greater sectoral diversity, ranging from traditional industries such as metal products (60 per cent of the total in the North) and food and beverages (10 per cent) to IT & technology (6 per cent) and pharmaceuticals (3 per cent). Why is India increasingly investing in the North despite its expertise in Southern investments? Kumar (2008) explains that, in the first wave, Indian companies were market-seeking and driven by the desire to exploit their technology and capital goods, adapted to developing countries. In the 1990s, exports from the pharmaceutical and IT software sectors, which required a local presence, pushed firms to go abroad, but mainly to the developed countries. Since then, Indian companies have developed ownership advantages that allow them to aim at global leadership. Thus, the motivation behind

rangel | 119

the second wave of OFDI ‘has been dominated by strategic assets seeking, although many market seeking greenfield investments and natural resourceseeking investments are being made. Strategic assets include not only access to brands and customers, but sometimes also proprietary technology’ (ibid.: 13). Yet the absolute investment is increasing in the South, where Indian companies are exploiting their advantages in knowledge-based industries such as chemicals, pharmaceuticals and transport equipment, as well as in technologyintensive sectors. Companies like Infosys and Wipro in the software sector have investments in countries like Brazil, Mexico, South Africa and China. In 2010, Bharti Airtel Ltd completed the acquisition of Zain Group’s mobile operations in fifteen countries across Africa. A prevailing feature of the first era is that many Indian overseas investors were part of large business conglomerates. Until the mid-1980s the Birla Group of companies dominated the scene. They accounted for 40 per cent of shares of equity held in Indian firms. The Tata Group of companies, though larger than the Birla Group domestically, accounted for about 11 per cent and Thapar Group (textile and palm oil) accounted for 7 per cent (Lall 1986). There has been a heavy concentration of acquisitions in a few large firms in recent years. ‘During the period 2000–2006, 15 firms were responsible for 98 out of 306 acquisitions and they accounted for over 80 percent of the total value of acquisitions’ (Athukorala 2009: 141). The two most striking ownership advantages are that Indian companies have the capacity to adapt imported designs to local conditions and make ‘affordable yet functionally efficient products’ (Kumar 2008: 16) using their engineering skills. On the other hand, given the great size and diversity of the country, several firms have developed strong multicultural managerial capacities. Brazil case study

Brazil was a pioneer of South-origin investment in the late 1970s. Firms in the oil, engineering and banking sectors invested in neighbouring countries. By 1980, it had US$38.5 billion in OFDI stock and ranked fourth in the world’s top FDI sources, ahead of developed countries like France, Japan, Italy and Canada (UNCTAD 2010). By the 1990s, Brazilian manufacturing firms in the transport equipment and food and beverage sectors were also investing abroad. In 2004, the stock of OFDI was US$70 billion. In recent years, OFDI has experienced another boom, and by 2008 it had reached over US$162 billion. The country is the second-most important investor from the global South, after Singapore.

First wave of investment abroad: around the neighbourhood Brazilian governmental policies fostered a first wave of OFDI in the 1960s and 1970s, when the ISI strategy was complemented by export promotion programmes. Most of the foreign investment projects were led by state-owned firms like Petrobras

120 | six table 6.4 1986 Brazilian OFDI accumulated flows by destination (US$ millions) 1986

%

Other OFC South North

46.5 276.1 267.2 726.0

3.5 21.0 20.3 55.2

total

1,315.8

100

Source: Elaborated by the author with information from Wells (1988), Table 2.

and CVRD. Their objective was either natural-resource-seeking or to support distribution, marketing and assembly abroad (ECLAC 2006). Brazilian firms possessed the capacity to adapt technologies and their domestic production experience. These advantages were used as a springboard: ‘The domestic market grew for more than seven decades at an average rate in excess of 4 percent, providing excellent opportunities to grow’ (Goldstein 2007: 68). Between 1965 and 1976 Brazil had an OFDI stock of US$260 million (Santos 2010). From 1977 until 1982 the outward investment stock continued to increase, concentrating in the financial sector (45 per cent), in oil (27 per cent) and in the manufacturing sector (16 per cent). Santos (ibid.) explains that Brazilian banks, state and privately owned, were seeking external resources in the international markets. The oil sector investment was related to a government strategy to secure energy for its domestic market. Table 6.4 reveals that 55 per cent of the accumulated outward foreign direct flows from 1965 to 1986 went to Northern destinations, while 20 per cent went to the South. Offshore financial centres held a similar share to that of the South. Yet Santos (ibid.) points out that some investment projects registered in the North were actually transactions undertaken by Petrobras to conduct business in Iraq, Angola, Libya and Colombia. So this could be distorting the figures. Chudnovsky and López (1999) explain that in this first wave Brazil took advantage of its design and adaptation capabilities as well as managerial techniques by investing in countries in Latin America. Their findings coincide with a study by Wells (1988), who analysed thirty-three Brazilian internationalized companies in the late 1980s. According to the author almost half of Brazilian multinationals surveyed took their first steps in a foreign country between 1984 and 1988. In terms of the distribution of operations, more than 67 per cent of companies invested in Southern destinations. Of them, 50 per cent entered neighbouring markets in Latin America and the remaining 17 per cent invested in Africa: Angola, Algeria, Egypt, Ghana and South Africa. Another 27 per cent of operations abroad were in Northern countries such

rangel | 121

as the USA, the UK, Spain, Portugal, Norway and Italy, and 5 per cent in China, the Soviet Union and Poland. Besides the wide variety of destinations, destination sectors ranged from food and beverages to bus manufacturing and retail. Companies like Petrobras, Inbrac and Gerdau continued to grow. Some examples of the newcomers were Cacique (instant coffee), Globo (television), Nansen (electrical equipment), Grendene (shoes) and various companies in the textile and auto-parts sectors. Unlike in the 1970s, when only large Brazilian firms with sales over US$500 million had foreign investments, during the 1980s there was a significant participation of firms with sales between US$200 million and $500 million (BNDES 1995, cited in Correa and Lima 2007). Companies were seeking markets essentially to overcome tariff and non-tariff barriers, together with some strategic assets, using just-in-time techniques in the car manufacturing and parts industry (Chudnovsky and López 1999).

A second wave of internationalization: a few global players? In the first half of the 1990s economic liberalization stimulated an industrial restructuring process and encouraged a new phase of international expansion of manufacturing companies. Around 1995, Brazilian companies’ operations were distributed as follows: the United States held 40 per cent, Argentina 32.7 per cent, Mexico 7.3 per cent, Chile 3.6 per cent and Venezuela 3.6 per cent. This account does not consider flows to offshore centres. Regarding government policy, Schneider (2008) explains that during the structural adjustment period the Brazilian state put in place a set of protections that strengthened domestic champions. Throughout the 1990s, privatization rules prevented hostile foreign takeovers by placing a ceiling on foreign participation of 40 per cent in the acquisition of former state-owned companies. The BNDES (National Development Bank) also provided important financing for domestic firms that wanted to expand beyond the country’s borders. Most of the top outward investing companies enjoyed a certain level of state support, either direct or indirect. In the mid-1990s, a period of internal calm discouraged internationalization of operations but macroeconomic instability in the early 2000s drove firms into a new wave of OFDI. Through a diversification of location, companies avoided exchange rate volatility and fluctuations in domestic demand (ECLAC 2006). In other words, firms spread risk. Globalization also played a role because some Brazilian companies developed supplier relationships with transnational clients and had to follow them abroad. The absence of bilateral trade agreements with key markets for Brazilian exports also pushed outward foreign investment. In the last decade, there have been state-led efforts to promote Brazilian outward FDI. In 2003, President Luiz Inácio Lula da Silva encouraged businessmen to abandon their fear of becoming multinational businessmen. The trade and industry minister declared that they expected to have at least

122 | six table 6.5 Brazilian OFDI stock, 2001 and 2008 (US$ millions)

OFC Transition South North

2001

2008

35,505 0 6,541 7,602

81,893 43 9,857 30,578

Source: Banco Central do Brasil. Capitais Brasileiros no Exterior – CBE (2001–06 and 2007–08)

ten transnational companies by 2010 (cited in UNCTAD 2004b). An example of this decisive support is the position of Brazilian authorities towards the merger between Antarctica and Brahma breweries to create American Beverages (AmBev). Despite the fact that these two firms controlled more than 90 per cent of the domestic market, managers argued that they were small by international standards and that a merger would allow them to become national champions able to compete internationally and improve economies of scale. The Brazilian government uncharacteristically approved the transaction (Goldstein 2007). The BNDES has also backed up government declarations and in 2009 it lent $8 billion to help the expansion of multinationals (Economist 2009). Since the 1980s Brazil has signed twenty-five double taxation treaties and almost half of them were added between 2000 and 2006. Fourteen bilateral investment treaties have been negotiated since 1994. None of them, however, since 2000, and some analysts, such as Lima and Barros (2009), caution that this could be a major obstacle to further internationalization of Brazilian firms. In 2008, the Brazilian Central Bank reported 800 firms with some sort of OFDI. Carvalho et al. (2010) note that the figure might be inflated by fiscaldriven investments made only as a means of entering the Brazilian market with tax concessions or incentives. Operations are concentrated in a handful of firms: the three largest multinational companies own three-quarters of all foreign assets abroad. Petrobras, Vale and Gerdau were among the top fifty non-financial TNCs from developing countries in 2009 (UNCTAD 2009). The top reasons Brazilian firms invest abroad are: to follow their clients, to access natural resources, to improve their competitive position, to lower costs and reduce their dependence on the domestic market. Fiscal incentives and better infrastructure are also behind their decisions. Table 6.5 presents the distribution of Brazil’s OFDI in world regions in the last decade. It shows that a large amount, almost 70 per cent, went to financial centres, 15 per cent went to countries in the North and 13.17 per cent to countries in the South in 2001. Brazilian outward investment has a wide geographic spread and can be found in seventy-eight countries (Lima and

206

total 50

  50  

Other services (oil and gas)

333

80 253  

Petroleum resources

0

     

Other natural

Source: Elaborated by the author based on information from UNCTAD (2004b: Table 3)

156 50  

North South Transition

Metal and metal products (includes steel)

table 6.6 Major acquisitions, 1993–2000, by value (US$ million)

225

  225  

Banking

295

295    

Machinery and equipment

1,109

531 578  

total

47.9 52.1  

%

123

16 4

Source: Elaborated by the author based on UNCTAD (2004b: Table 2)

Note: 1. There can be more than one project in the same country

5,333 3,564 1,769

20

2,904 320 80 40 175 45 375 36 358 1,000

Total investment in South (millions US$)

Venezuela, Bolivia, Argentina, Ecuador, Iran Ecuador Peru, Guatemala Colombia Argentina Uruguay Portugal Norway Portugal Portugal

Countries

total south north

Energy Energy Food & beverages Energy Tourism Metals and mining Metals and mining Metals and mining Pharmaceuticals Chemicals

Sector

9 1 3 1 1 1 1 1 1 1

Number of projects1

Petrobras Odebrecht Ambev Maritima Mister Sheik Rima Industrial Compania Siderurgica Nacional CVRD Sigma Pharma Sondotecnica

Company

table 6.7 Largest greenfield FDI projects, 2002–04

67 33

100

                   

%

124

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Barros 2009). By 2008, the panorama had somewhat changed. The Northern countries attracted a larger share of investment (25 per cent) and, as in the case of India, about 67 per cent of the total went to offshore financial centres. The share of FDI to Southern countries decreased to 8 per cent. By 2008, two-thirds of the stock excluding tax havens was in developed countries, mainly Denmark, the United States and Spain, while Argentina and Uruguay are the top destinations in the South. In absolute terms, the amount of stock of Brazilian companies in the South increased from US$6.5 billion to US$9.8 billion. Still, the growth rate was quite low when compared to the growth rates of OFDI in the North and in offshore centres. Since the second half of the 1990s, major acquisitions were undertaken both in Northern and Southern countries, as illustrated in Table 6.6. Those in the North were concentrated in Canada, Italy, the UK and Spain. The largest transaction was Gerdau’s acquisition of MRM Steel in Canada. In 1999, there was a series of acquisitions in Europe in the manufacturing sector. Two companies producing refrigerators were bought in Italy and one producing railway equipment was acquired in Spain. In Latin America, there were some important transactions, most of them in Argentina, such as the takeover of Banco del Buen Ayre by Banco Itaú. Petrobras took control of Lasmo Oil in Colombia. Based on an UNCTAD study (2004b), Brazilian firms preferred greenfield projects as a mode of entry. From 2002 to 2004, companies invested in eighty-four greenfield FDI projects and carried out only nineteen cross-border M&A deals. Table 6.7 reveals that sixteen of the twenty largest greenfield FDI projects went to Southern countries, all of them in Latin America, except for one that went to Iran (Petrobras). A survey undertaken by Carvalho et al. (2010) found that 34 per cent of Brazilian firms participating in the study preferred greenfield investments followed by alliances and partnerships with 25 per cent. Acquisitions and joint ventures came in third with 16.6 per cent and 16.7 per cent respectively. However, acquisitions have become more popular since the stabilization of the economy and the country’s currency appreciation against the dollar. This allowed Brazilian TNCs to purchase companies abroad, mainly in Uruguay and Argentina. Brazilian firms have also made important acquisitions in countries like Canada and the United States. Table 6.A2 in the Appendix illustrates this point. It reveals that 88 per cent of M&As took place in the North, whereas only 12 per cent headed South. The main sectors were mining, food and beverages and metal and metal products. Brazilian transactions are largely related to the exploitation of natural resources. In terms of total foreign investment flows in 2008, besides Argentina (US$3.3 billion) and Uruguay (US$2.4 billion), the top recipients of Brazilian investment in the South were: Singapore (US$1.4 billion), Pakistan (US$495 million), Chile (US$387 million), Colombia (US$298 million), Venezuela (US$282

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million), Mexico (US$249 million), Peru (US$244 million) and Paraguay (US$153 million). Finally, since 2008 the Brazilian government and some companies like Odebrecht have signed agreements with African countries (Mozambique, Angola, Congo and Nigeria) to develop sugar cane crops to produce ethanol. They have promised to provide technical assistance along with funding. Results remain to be seen. Development effects of South–South investments

The development effects of foreign direct investment have been a subject of heated debate. Some argue that multinational companies generate a ‘race to the bottom’ in which countries striving to attract capital lower their environmental and labour standards. On the other hand, there are those who claim that FDI represents not only an important source of capital that is much needed in developing countries, but also aids transfer of knowledge and technology. The first wave of South–South investments had positive development effects, despite the fact that firms lacked the advanced technologies and skills possessed by companies from the North. Some authors, such as Pradhan (2007), found that Southern-based firms were more willing to accept joint venture agreements as a mode of entry, thus sharing intermediate technologies with local partners. Moreover, the cost of technology transfers between Southern countries was low because contracts did not have restrictions on reverse engineering or export quotas. While it may be too early to examine the impacts of recent South–South investment, Kumar (2008) suggests that Indian companies are displaying sensitivity to the concerns of employees and communities of acquired companies. As an example, he mentions that around 145 Indian companies have participated in the UN Global Compact4 compared to sixty-five from Japan. The author also provides some cases showing how Indian companies have kept community-oriented programmes. A similar argument has appeared with reference to some of the Brazilian companies abroad, although their development impacts have been less studied. Petrobras is a member of the UN Global Compact, being the first Brazilian company to report, and Vale (formerly CVRD) is also an active member. However, there are other less optimistic views about the development effects of recent South–South FDI. A report analysing South–South collaboration in Africa warns that so far [o]ne of the stylized facts about developing countries’ engagement in Africa is that their trade and, to a lesser extent, investment activities are heavily concentrated in the natural resource sector. While this is understandable given their growing need for resources, it replicates the pattern of economic relations between Africa and its traditional development partners, characterized

rangel | 127 by the export of primary commodities by Africa and the import of manufactures from traditional development partners. (UNCTAD 2010: 105)

In another study, Narula posits that it is hard to argue that developing country multinational firms (MNEs) provide more benefits: ‘Do [developing country] MNEs contribute more or less than developed country MNEs to developing host economies? The data on this subject is mute, although there is some suggestion that South–South FDI has advantages because technologies used are “more appropriate”’(2010: 49). And he concludes: ‘It is not clear to us, however, that [developing country] MNEs present a new and alternative channel for capital flows and knowledge flows for host developing countries’ (ibid.: 53). Indeed, on the surface, it is hard to argue that South-based multinationals provide more benefits. In Africa, they tend to be smaller, have smaller local subsidiaries, employ fewer workers, pay lower wages, provide less training to workers, use more expatriates, fewer skilled local workers and less local content (and import more imported inputs) (UNIDO 2007). This coincides with Lall (1983, cited in Pradhan 2007), who hypothesized that Southern multinationals were more willing to have joint ownership because they held few monopolistic advantages, yet as they acquired such advantages their behaviour might change. According to Pradhan (2007), in the case of India, as the sophistication of firm-specific assets increases there are no incentives to provide technology at cheap cost. Kumar (2008) stresses that general outward investment stimulates exports and strengthens enterprises’ competitiveness. On the other hand, Pradhan (2007) mentions that it is possible that the home country suffers some employment losses owing to investment outflows. This is all hypothesis, and further research on this issue is desirable. Conclusions

During the first wave of Southern OFDI, companies sought to avoid tariffs and quotas imposed by neighbouring countries and other Southern partners that employed the ISI model. In some cases, as in India, there was a clear government purpose of supporting South–South economic cooperation. Yet as economic liberalization dismantled barriers, this kind of investment waned. Since the mid-1990s outward foreign direct investment flows from the South have surged. Countries like Singapore, Brazil, China, India and others became prominent players in the international arena. Nonetheless, unlike in the first wave, in this second period the destinations in terms of total outflows and M&As from the South are mainly going to developed countries. The India and Brazil case studies reveal that South–South FDI has undergone major transformations. These two countries, which in the past directed their investments towards the South, driven by cultural, ethnic and economic

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ties, now invest in offshore financial centres and developed countries. This is in stark contrast to the commitments from both the Brazilian and Indian policy-makers that created IBSA. So far it seems that while the government is aiming at South–South cooperation, business is more oriented towards North–South projects. A further analysis of the strategies and public policies that have been adopted in Brazil and India to enforce the commitments and the coordination with business remains to be undertaken. It is clear that in both countries firms are using mergers and acquisitions in the North to access technological assets and know-how. This can be understood as a process of industrial upgrading, yet it should be approached with caution. If acquisition of technology is replacing indigenous R&D then the sustainability of the trend may be at risk. In the case of Brazil there are some flows to neighbouring countries, mostly in Argentina and Uruguay, driven by a market-seeking or resource-seeking strategy. In the case of India, none of their first-wave Southern partners remains a top recipient of OFDI in the present era. Some of the country’s major investments in the South are also resource-seeking, such as projects in Sudan. However, Indian service companies in the research-intensive sectors like IT and pharmaceutical development have some promising investments in the South. In absolute terms, the flows are still negligible, but their nature and impact make them important. A more detailed analysis of these operations is needed to measure their intensity and whether technology transfers are occurring. In this chapter we have emphasized outward investment flows from top Southern-origin countries and their destinations. Another way of conducting the analysis could be to examine lesser developed countries as recipients of South–South investment to assess their importance vis-à-vis flows from the North. This may shed further light on the issue. Finally, the findings suggest that government support in directing outward flows directly or indirectly affects the destinations chosen by business. If South–South economic cooperation is a real commitment of countries like Brazil and India, a more decisive effort should be made. That could entail providing information to investors or even funding certain projects. If governments and international institutions are not willing to undertake this effort then they should stop paying lip-service to the idea of South–South exchanges because most business is looking for profits, not for long-term global development.

19,059

total

1,129

805   324

272

272     2,690

2,580 110  

Automobiles

3,000

3,000    

Food and beverages

3,154

3,154     1,627

1,627     191

 

191

Power IT & Telegeneration technology comms

18,336

total

7038

6,014 1024  

722

722    

Metal and Cement metal products (includes steel)

10,729

10,242 487  

Food and beverages

400

  400  

Other services

2,668

  2,668  

120

120    

Petroleum Natural (oil and gas) resources

650

650    

Banking

36,897

29,829 4,744 2,324

total

952

952    

41,615

36,891 4,724  

88.6 11.4  

%

80.8 12.9 6.3

%

Source: Elaborated by the author based on information from several sources: UNCTAD (2004b: Table 3), Box 1 Carvalho et al. (2010), Aykut and Battat (2005) and Santiso (2008)

18,191 145  

North South Transition

Mining

table 6.a2 Major acquisitions by Brazilian companies, 2000–08 (US$ million)

1,309

  1,309  

Natural resources

total Machinery and equipment

4,466

2,766 1,700

Petroleum

Source: Elaborated by the author based on information from Athukorala (2009: Table 7) and UNCTAD (2004a)

18,200 559 300

North South Transition

Metal and Pharma- Chemmetal products ceuticals icals

table 6.a1 Major acquisitions by Indian companies, 2001–June 2009 (US$million)

Appendix

129

130 | six Notes 1 The IMF notes that some economies provide preferential policies to attract foreign direct investment, including low taxation, favourable land use rights, convenient administrative support, etc. Since it is not always easy for local enterprises to find foreign investors who are willing to invest in them, they may first channel capital abroad, which is then disguised as foreign capital for local investment to take advantage of the preferential treatments available only to foreign investors. This is called round-tripping. 2 In this chapter, ‘the South’ refers to all developing countries excluding offshore financial centres and transition economies. ‘The North’ refers to developed economies. 3 China is another major source of South OFDI but it is not considered in this chapter because other authors in this book explore that case. Notably, South–South Chinese flows continued to rise despite the 2008 global economic crisis. 4 The United Nations Global Compact is an initiative to bring together businesses that are committed to aligning their operations and strategies with ten universally accepted principles in the areas of human rights, labour, environment and anti-corruption.

References Athukorala, P. (2009) ‘Outward foreign direct investment from India’, Asian Development Review, 26(2): 125–53, www.adb.org/ Documents/Periodicals/ADR/ADR-Vol262-Athukorala.pdf. Aykut, D. and J. Battat (2005) Southern Multinationals a Growing Phenomenon, FIAS 38790. Ben Barka, H. (2011) ‘Brazil’s economic engagement with Africa’, Africa Economic Brief, 2(5), African Development Bank Group. Carvalho, F., I. Costa and G. Duysters (2010) Global Players from Brazil: Drivers and challenges in the internationalization process of Brazilian firms, UNU-MERIT, www.merit. unu.edu/publications/wppdf/2010/wp2010016.pdf. Chudnovsky, D. and A. López (1999) Las Empresas Multinacionales de América Latina. Características, Evolución y Perspectivas, Centro de Investigaciones para la Transformación, www.fund-cenit.org.ar/Descargas/ lasempresas.pdf.

Correa, D. and G. Lima (2007) Internacionalização produtiva de empresas brasileiras: determinantes e comportamento recente, www.fipe.org.br/publicacoes/downloads/ bif/2007/5_36-40-dani-gilb.pdf. Department of Economic Affairs, Government of India (2012) Statistics on Inflows of FDI to India, dipp.nic.in/fdi_statistics/ india_FDI_May2010.pdf. ECLAC (2006) Foreign Direct Investment in Latin America and the Caribbean in 2005, Chile: ECLAC. Economist (2009) ‘Arrivals and departures’, The Economist, 12 November, www.economist. com/node/14829517. Gammeltoft, P. (2008) ‘Emerging multinationals: outward FDI from the BRICs countries’, Paper presented at the IVth Globelics Conference, Mexico City, 22–24 September, globelics_conference2008.xoc.uam.mx/ papers/Peter_Gammeltoft_Emerging_ Multinationals.pdf. Goldstein, A. (2007) Multinational Companies from Emerging Economies. Composition, Conceptualization and Direction in the Global Economy, New York: Palgrave Macmillan. Gopalan, S. and R. Rajan (2010) ‘India’s FDI flows: trying to make sense of the numbers’, ARTNET Alerts, 5, January, Bangkok: UNESCAP, se1.isn.ch/serviceengine/Files/ ISN/104219/ipublicationdocument_single document/A9C9EA30-C456-4A8D-85A6BB16F9FF551C/en/80.pdf. Henley, J., S. Kratzsch, M. Kulur and T. Tandogan (2008) ‘Foreign direct investment from China, India and South Africa: a new or old phenomenon?’, UNU-Wider Research paper no. 2008/24, www.wider.unu.edu/ publications/working-papers/researchpapers/2008/en_GB/rp2008-24/. IBSA (2010) About IBSA, August, ibsa.nic.in/ about_us.html. Kumar, N. (2008) ‘Internationalization of Indian enterprises: patterns, strategies, ownership advantages and implications’, RIS-Dp no. 140, www.ris.org.in/dp140_pap.pdf. Lall, R. B. (1986) Multinationals from the Third World: Indian Firms Investing Abroad, Delhi: Oxford University Press. Lall, S. (ed.) (1983) New Multinationals: The Spread of Third World Enterprises, Oxford: Wiley.

rangel | 131 Lima, A. and O. Barros (2009) ‘The growth of Brazil’s direct investment abroad and the challenges it faces’, Columbia FDI Perspectives, www.vcc.columbia.edu/pubs/ documents/BrazilOFDI-Final.pdf. Narula, R. (2010) Much Ado about Nothing or Sirens of a Brave New World? MNE Activity from Developing Countries and Its Significance for Development, Paris: OECD Development Centre, www.oecd.org/ dataoecd/43/16/45046989.pdf. Oman, C. (ed.) (1986) New Forms of Overseas Investment by Developing Countries: The Case of India, Korea and Brazil, Paris: OECD Development Centre. Palmade, V. and A. Anayiotas (2004) ‘Looking beyond the current gloom in developing countries’, Public Policy for the Private Sector, September, rru.worldbank.org/documents/publicpolicyjournal/273palmade_ anayiotas.pdf. Pradhan, J. (2007) ‘Growth of Indian multinationals in the world economy: implications for development’, Working Paper no. 2007/04, mpra.ub.uni-muenchen. de/12360/. Santiso, J. (2008) ‘The emergence of Latin multinationals’, CEPAL Review, 95. Santos, L. (2010) A Expansão Geográfica das Empresas Multinacionais Brasileiras, www.agb.org.br/evento/download. php?idTrabalho=1719. Satyanand, P. N. and P. Raghavendran (2010) Outward FDI from India and its policy context’, Columbia FDI Profiles, Vale Columbia Center on Sustainable International Investment, 22 September. Schneider, B. R. (2008) ‘Economic liberalization

and corporate governance: the resilience of business groups in Latin America’, Comparative Politics, 40(4): 379–97. — (2009) ‘Big business in Brazil’, in L. Brainard and L. Martinez-Diaz (eds), Brazil as an Economic Superpower?, Washington, DC: Brookings Institution Press. UNCTAD (2004a) India’s Outward FDI: A giant awakening?, UNCTAD/DITE/IIAB, www. unctad.org/sections/dite_iiab/docs/ diteiiab20041_en.pdf. — (2004b) Outward FDI from Brazil: Poised to take off?, Occasional note, www.unctad. org/en/docs/iteiia200416_en.pdf. — (2006) World Investment Report: FDI from Developing and Transition Economies: Implications for Development, archive.unctad. org/templates/Download.asp?docid=7431&l ang=1&intItemID=3968. — (2009) World Investment Report: Transnational Corporations, Agricultural Production and Development, http://unctad.org/en/ Docs/wir2009_en.pdf. — (2010) Development in Africa Report 2010, www.unctad.org/en/docs/aldcafrica2010_ en.pdf. UNIDO (2007) Africa Foreign Investor Survey 2005, Vienna: UNIDO, www.unido.org/fileadmin/import/59260_Africa_FDI_2005.pdf. Wells, C. (1988) ‘Brazilian multinationals’, Columbia Journal of World Business, XXIII(4): 13–23. Wells, L. (1983) Third World Multinationals: The Rise of Foreign Direct Investment from Developing Countries, Cambridge, MA: MIT Press. World Bank (2006) Changing the Face of Development Finance?, go.worldbank.org/ WUGU4RKWB0.

7 | BRAZIL: SOUTH–SOUTH ECONOMIC RELATIONS AND GLOBAL GOVERNANCE

Alcides Costa Vaz1

The present text focuses on Brazil’s approach to South–South economic relations and cooperation. It introduces the major current trends in Brazilian trade and investment flows with the developing world and highlights the political aspects of the importance of South–South relations to Brazilian foreign trade and policy since 2003. It argues that despite the significant growth of Brazilian economic relations with the developing world in recent years, and the opportunities they have provided for the country to become more of a global actor and influence international decision-making in global economic governance, they exhibit liabilities that are illustrative of the imbalances and contradictions found in South–South economic relations at large. In this regard, we have paid particular attention to the strong concentration of trade on the large emerging economies and to the disconnection between trade dynamics and investment flows among them, two phenomena that suggest that – both in the Brazilian case and at a broader level – South–South economic relations are likely to deepen political and economic cleavages between these major emerging economies on the one hand, and the less developed ones on the other, thus undermining their potential to act as drivers of more symmetry within the developing world and in the international economic order. The Brazilian case is suggestive of a pattern of concentration in economic relations that favours the big emerging economies (China, Russia and India, primarily, and Brazil itself ) as main referents for economic initiatives of the so called ‘global South’, thus reinforcing a trend of dissociation of this core group from the much larger group of developing countries. Should this trend of dissociation between the big emerging economies and the rest of the so called second South persist, political cleavages within the global South might arise and erode the possibility of exploiting opportunities to act collectively in pursuing common long-term interests in the global economy and politics. Brazil and South–South trade relations: an overview

Since the mid-seventies, Brazil has portrayed itself as a global trader, a condition that had been closely associated with the pattern of relative diversification of its export markets. It must be noted that until the mid-seventies Brazilian imports had been strongly restricted and concentrated in terms of

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products and sources. During that time, exports were largely concentrated in the United States and western Europe, while Latin America became an increasingly important destination for Brazilian exports of manufactured goods. Africa, Asia and the Middle East, by contrast, accounted for relatively small shares of Brazilian exports. The profile of a global trader certainly would not apply if imports were taken into account: as mentioned above, they were strongly restricted and concentrated both in terms of products and origins. The growth and diversification of Brazilian domestic production and of its exports led to a significant change in the relative position of the country in world exports. From 1960 to 1980, reflecting its new status as an industrial economy, Brazil’s share in world exports rose from 1.45 per cent to 2.42 per cent. However, the global crisis of the mid-seventies and early eighties and the lasting macroeconomic imbalances led that participation to drop to only 0.99 per cent by 2003. Despite the modest rise observed since then (1.36 per cent in 2010), the Brazilian share of world exports is still significantly below the figures registered in 1980. Yet, in absolute numbers, Brazilian foreign trade has experienced meaningful growth since 2003. Exports increased from US$73.2 billion in 2003 to a peak of US$256 billion in 2011. A sharp decline to US$152.9 billion in 2009 was registered in the aftermath of the economic imbalances brought about by the world financial crisis that broke in September 2008. Imports increased from US$20.6 billion to a peak of US$226.2 billion in 2011. In overall terms, therefore, and despite the 2008 financial crisis, Brazil’s commercial performance has been very positive, yet still insufficient to change its marginal position in world trade (see Figure 7.a12). Brazilian trade flows with the developing world display a very different picture. They increased 1,508 per cent from 1990 to 2009, from only US$17.8 billion to US$259.1 billion. Most of this impressive growth took place from 2003 onwards, during which time these trade flows nearly tripled (see Figure 7.a2). These figures show that trade with the developing countries has become increasingly important for both Brazilian exports and imports. However, a closer look at the figures demonstrates that this growth was uneven: Brazilian exports to the developing world were much more dynamic than its imports. In 1990, the developing world absorbed 26.8 per cent of Brazilian exports and it was a source of 43.3 per cent of Brazilian imports. By the end of that decade, the figures were 36.5 per cent and 39.9 per cent respectively (see Figure 7.a3). Brazilian imports from other developing countries remained relatively stagnant until 2003. Since then, they have expanded at a moderate pace, reaching a peak in 2011, when they comprised 50.2 per cent of Brazilian imports (see Figure 7a.3). On the other hand, Brazilian exports to the developing world increased significantly from 2003 onwards. In 2002, they comprised 40 per cent of the country’s total exports. In 2009, they represented 56.1 per cent and in 2011 56.8 per cent (see Figure 7a.3). For the first time ever, the developing world surpassed the developed countries as a major destination for Brazilian exports.

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This trend reflects and confirms the premise that has oriented Brazilian trade policy since 2003: an increasing reliance on markets in the developing world could represent not only a source of commercial opportunities but would also provide an effective alternative to trade with the stagnant economies of most OECD countries. Trading with the developing world furthermore proved to be a key factor in helping overcome the externalities of the economic downturn brought about by the 2008 financial crisis, as Brazil has systematically accumulated trade surpluses with the developing world throughout the decade. In 2009, for example, during the most acute period of the financial crisis, Brazil achieved a US$26 billion surplus – that is, 103 per cent of its total trade surplus in that year.3 However, it is not only the overall performance of trade relations with the developing world which must be highlighted. The composition of Brazilian exports to those markets is also of utmost relevance. As mentioned above, Brazilian imports from developing countries have evolved positively, though at a slower pace if compared to the performance of exports, reflecting the moderate impact of the global recession upon the Brazilian economy and consequently upon its imports. However, the composition of Brazilian imports from the developing countries is also significant, as they primarily comprised agricultural and mineral commodities. Considering that the Brazilian currency was overvalued at the height of the crisis, thus spurring the competitiveness of imports in the Brazilian market, it becomes clear that there are additional structural constraints operating upon the import side of Brazilian foreign trade with the developing world. This is not the only concern lying behind trade statistics. A closer look demonstrates that a relatively small number of countries are really relevant in spurring Brazilian trade with developing countries (see Figure 7.a4). The G20 absorbed 14.5 per cent of Brazilian total exports in 1990, 26.2 per cent in 2003 and 39.6 per cent in 2011. That same year, 70 per cent of all Brazilian exports went to the developing world (see Figure 7.a5). The BRIC countries, in turn, accounted for only 1.8 per cent of Brazilian total exports in 1990, increasing to 9 per cent in 2003, and more than doubling in 2011 (20.2 per cent) (see Figures 7.a6 and 7.a7). That represents 36 per cent of  Brazilian exports to developing countries. In other words, over one third of Brazilian  exports to  the developing world are concentrated in three countries – China, India and Russia. The figure scales to over 40 per cent if South Africa is added to this grouping (see Figure 7.a10). Furthermore, there is a significant imbalance in favour of China, which has become Brazil’s major individual trade partner. In 2011, trade with China accounted for 18 per cent of total Brazilian exports and 32 per cent of those destined for the developing world (see Figure 7.a8). With respect to imports, the G20 provided 38.3 per cent of total Brazilian imports in 2011, a striking departure from the 3.8 per cent registered in 1990. But, again, China, India and Russia alone accounted for 48 per cent of imports in 2011, with China remaining in the top position (see Figures

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7.a5, 7.a7 and 7.a9). Meanwhile, traditional trade partners like Argentina and other South American countries occupy very modest positions as providers of imports to Brazil. As noted in the preceding paragraphs, Brazilian trade relations with the developing world have evolved very positively, notably from 2003 on. That coincided with the reorientation of Brazilian foreign and trade policies carried out by President Lula da Silva with the aim of reducing the excessive reliance on the American continent as a single destination for Brazilian exports. Throughout the nineties, the Americas absorbed nearly 50 per cent of total Brazilian exports, with the United States alone absorbing some 25 per cent and Canada, Latin America and the Caribbean the remaining 25 per cent (see Figures 7.a13 and 7.a14). As a result of the rise of China as a major export market for Brazilian products and the successful measures taken by the Brazilian government to diversify its trade partners, the European Union was displaced from its position as main trade partner. In 1999, the EU was the origin of 33.7 per cent of Brazilian imports. In 2010 that figure had dropped to only 20 per cent. The same happened regarding the United States, which absorbed 24 per cent of Brazilian exports in 1990, dropping to only 10 per cent in 2011. As a source of Brazil’s imports, the USA declined from 20 per cent in 1990 to 15 per cent in 2011. Therefore, the total share of the developed countries in Brazilian exports declined from an impressive figure of 72.5 per cent in 1990 to 41.3 per cent in 2011, while their supply of Brazilian imports improved slightly (from 56.7 per cent in 1990 to 63.8 per cent in 2000 and then falling to 53 per cent in 2009 and 49.4 per cent in 2011, as a reflection of the 2008 financial crisis) (see Figures 7.a13 and 7.a14). Both the increasing, although uneven, participation of developing countries in Brazilian foreign trade and the concomitant reduction of the share of the developed world in it reflect the reorientation of Brazilian foreign and trade policies and the privileged focus on the large emerging markets. They are also certainly associated with the vigorous emergence of China, India, Russia – and South Africa to a lesser extent – in global trade. It is important to note, however, that the growing importance of Southern markets for Brazilian foreign trade has not occurred according to a zero-sum pattern. Trade flows with the USA, the EU and Japan have increased in absolute numbers in the past eight years, but at a slower pace than those with developing countries. In fact, we can observe that the greater share of the developing markets in Brazilian exports is somehow balanced by the growing participation of OECD countries in Brazil’s total imports, a trend that was partially interrupted only in 2008/09, in the wake of the global financial crisis (see Figures 7.a15 and 7.a16).

The political background to the South–South trade priority Trade developments, particularly the growing importance of Southern markets for Brazil,

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as described in the previous section, were underscored by political motivations and objectives. They were consistent with the policy formulation introduced most clearly in 2003 by President Lula da Silva. The new trade strategy brought about a dramatic change of orientation away from the negotiation of regional and inter-regional trade liberalization agreements such as the Southern Common Market (MERCOSUR) and the Free Trade Area of the Americas (FTAA) (initiatives that had been at the core of trade policy in the 1990s), to a more universalistic and pragmatic approach. This new approach privileges multilateral negotiations within the WTO for trade liberalization and for dealing with highly politicized trade issues such as agriculture, services and investments. It also seeks to exploit trade opportunities in the developing world through political initiatives, such as the first summit with Arab countries, the presidential diplomacy actively exercised in the African continent and the creation of the G3, made up of India, Brazil and South Africa, rather than through trade liberalization agreements. Even though there have been clear priorities regarding the expansion of trade relations with key emerging markets such as China, India, Russia and South Africa, Brazil has pursued an effectively global trade strategy, as it has also prioritized regions such as South America and the Caribbean and sub-Saharan Africa. At the same time, as mentioned, trade relations with traditional partners in the developed world have also grown in absolute terms. By pursuing such a universalistic approach, Brazilian trade policy also responded to some key political objectives. As outlined earlier, even though Brazil portrayed itself as a global trader, both its exports and its imports were highly concentrated throughout the 1980s and 1990s. Particularly troublesome both from a political and an economic perspective in that context was the great reliance on exports from the Western hemisphere, and more specifically from the US market. What made this a particularly sensitive issue in the 1990s was the US engagement in trade liberalization arrangements such as the North American Free Trade Agreement (NAFTA), the FTAA and the bilateral agreements negotiated with various Latin American countries. All these initiatives threatened to cause trade diversion away from Brazilian exports. In particular, they pose a threat to Brazilian manufacturing exports, which were also particularly concentrated in other Latin American markets. In fact, from the mid-eighties, Latin America had become the most dynamic market for Brazil’s manufacturing exports, and the prospect of broad free trade arrangements with the USA in such a context represented not only a challenge but a threat to Brazilian interests. Obviously, this also reflected the lack of competitiveness in other more dynamic markets worldwide. Two other factors contributed directly to the defensive stance Brazil maintained towards trade liberalization initiatives in the Americas: the dim prospects of achieving important compromises in agricultural trade and US pressure to achieve regional commitments beyond the WTO disciplines in sensitive areas

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like services, investment, intellectual property and government procurement. Ultimately, this led Brazil to play a decisive role in halting FTAA negotiations in 2004, while reorienting the focus of its trade policy to new alternative markets, particularly those in the developing world. The same fate, though for quite distinct reasons, would befall the MERCOSUR–EU negotiations. Even though Brazil had always been interested in achieving an agreement with the EU through MERCOSUR for both economic and political reasons, achieving a balanced trade-off between the interests of MERCOSUR countries in agricultural trade liberalization and EU demands on market access for industrial goods, services and investments proved as hard a task as it had been both in the FTAA and the WTO negotiations. In such a context, in which regional and inter-regional agreements could not be achieved, exploiting broader trade opportunities in the developing world seems a natural development. However, it is not adequate to portray Brazil’s renewed interest in South–South trade as a second-best option to regional and inter-regional free trade agreements. In fact, the trade agreements negotiated by MERCOSUR did not envisage full trade liberalization in the short term; instead they paved the way for increasing trade flows through an incremental and managed approach to trade relations. On the other hand, the interest in exploiting South–South trade opportunities allowed Brazil to reconcile its cautious approach to liberalizing arrangements with the explicit concern to reshape the ‘world’s commercial geography’, an expression that has become common in Brazilian diplomatic discourse in recent years. Finally, it was consistent with the perceived need to redirect Brazilian trade flows in order to reduce the excessive reliance on a few major export markets, which was regarded as both an economic and a political vulnerability, particularly in times of global economic instability. With respect to the latter, Brazilian trade and diplomatic authorities determined that it would be in Brazil’s best interests to initiate and reinvigorate South–South trade in the face of key developments in the world trade scenario. The stagnant performance of the EU, a major trade partner, the susceptibility of the US markets to global economic imbalances and financial volatility, and the projected prominence of China in the world economy weighed heavily in that determination. Furthermore, all these developments were taking place at the same time that trade negotiations in the Doha Round had also reached deadlock, thus obliterating the remaining possibility of negotiating trade liberalization multilaterally (previously, Brazil’s preferred alternative). Therefore, by focusing on South–South trade and diversifying its export markets, Brazil would be seeking to reduce its own external vulnerabilities in times of economic uncertainty. Politically the option to actively engage and to help reinvigorate South–South trade brought with it the possibility of Brazil associating itself with other emerging countries and achieving greater influence in political dialogue on

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the broader agenda of global economic governance. This would be a feasible task, as Brazil could rely on its growing importance in its own region while crafting new mechanisms to engage with other key actors in southern Asia, southern Africa and the Middle East. This strategy would bring Brazil closer to developing the profile of an effective global trader. Brazil helped to develop an intense diplomatic effort both multilaterally and at the inter-regional level to devise the mechanisms to foster the intended reinvigoration of South–South economic relations and the reshaping of world trade dynamics. This effort resulted in the creation of international coalitions such as the G20 within the WTO, IBSA and the effort to formalize the BRIC coalition and bring South Africa into it, to name a few. Through these new efforts, Brazil associated itself with other strategic players from the developing world, in an effort to achieve greater presence and influence in global economic governance. Finally, another core concern for Brazil in the process of reinvigorating South–South trade is related to the articulation of a South American economic space based on three main pillars: (i) an encompassing network of trade arrangements centred on MERCOSUR; (ii) the integration of regional infrastructure for energy, transport and telecommunications; and (iii) advancing the integration of production chains, thus acting beyond trade regionalization. South America is a key dimension of both foreign and trade policies for Brazil. The region is viewed as the primary and privileged space for political and diplomatic action aiming at the pursuit of a stable political and economic environment. Commercially, it is the destination of 18 per cent of Brazilian exports, which mostly comprise manufactured goods, as already mentioned. Moreover, it has become a strategic space for the internationalization of Brazilian companies. Achieving greater economic presence and influence in its own immediate environment is also a basic way in which Brazil aims to limit US influence in the region, a political objective that Brazil has systematically and clearly pursued in recent years as part of its endeavour to strengthen multipolarity. In more recent times, growing concern has been raised about China’s economic and commercial presence in South America as well, even though no systematic policy has been initiated as a response to it. Despite the growing importance of extra-regional markets for Brazil, South America persists as a key one, having become even more important than the USA as a destination for Brazilian exports. This development has raised some controversy over trade policy priorities and partnerships and their mid- and long-term impact on the Brazilian economy. Neoliberal politicians and economists evaluate the reliance on South American markets as a clear and troublesome sign of an enduring lack of competitiveness of Brazilian exports in more dynamic markets. According to this perspective, deepening economic and trade ties with the region would be a misdirected response to contemporary trade and economic challenges at the global level, as it would only perpetuate an undesired dependence on

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unstable and constrained markets while driving Brazilian companies away from trade opportunities in the United States, the European Union and Asia. The commitment to regional markets would thus be an expression of an outdated and ideological bias as opposed to an active and deep engagement in the dynamics of open market economics and globalization. To those who are now directing foreign and trade policies, by contrast, taking full advantage of trade opportunities in the region (and elsewhere) is a pragmatic and opportune response that may enhance Brazilian exposure to the international economy. It could spur economic growth and development in times of fast changes in the world economy and align Brazil with current economic structural trends. It would be, above all, a clear recognition of new  economic and geopolitical realities to which the region and the country itself are entirely exposed. If these changes allow Brazil to safeguard its interests in the industrial sector, there would be no sound reason not to take advantage of them, especially if the emphasis on the regional markets does not preclude the possibility of advancing commercial ties with any other region or country. As seen in the previous paragraphs, there are both political and economic motivations spurring Brazilian interests towards its active engagement in South–South trade, and, so far, it can be said that the country has reaped some tangible benefits from it. The Southern dimension of its foreign trade has become as important as the major traditional destinations of Brazilian exports in the developed world. At the same time, the political opportunities that have followed the growth of South–South trade help Brazil project itself as a rising global actor with unprecedented international prestige. Thus far, Brazil has benefited from the political choices made regarding its trade strategy. However, it is necessary to question how enduring the trends are that led Brazil to assign strategic relevance to trade relations with other developing countries. The diversification of Brazil’s export markets reflects structural transformations in the world economy and is, therefore, more likely to be enduring. However, the selective approach to economic relations with Russia, China and India, and South Africa to a lesser extent, is a response to contextualized political incentives derived from global and domestic developments. So far, there are no clear signs that President Dilma Roussef will introduce a significant shift in trade policy orientation. On the contrary, owing to the assessment that Brazil’s relative protection from the negative impacts of the 2008 economic crisis had to do with the diversification of trade ties pursued since 2003, there have been no incentives to change such strategy. Such a strategy could be a strong and perhaps enduring lesson to other developing countries: seeking commercial opportunities in the global South along with the development of more balanced trade relations with the Northern countries helped to reduce external vulnerabilities and overcome the most immediate and acute consequences of the 2008 financial crisis. Besides its most immediate effects, such a strategy has also enhanced

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development opportunities, as it is not based solely on mercantilist considerations. Privileging economic opportunities in the developing world helps strengthen markets and promote growth and development and integration into the world economy.

Investment patterns and flows Trends in Brazilian investment, by contrast, have diverged significantly from the distinctly ‘Southern’ direction of Brazilian trade policy. The total amount of global investment flows reached US$1.2 trillion in 2010 – a substantial decrease compared with 2008, when it reached US$1.7 trillion. However, since 2000 the share of emerging economies both as destination and origin of global FDI flows grew steadily, regardless of the very negative impacts of the 2008 economic crisis. According to an UNCTAD survey (UNCTAD, World Investment Prospect Survey 2010–2012), considering the expectations of private investors for the period 2010–12, for the first time ever the BRIC countries are among the five top preferred destinations for private investments. When it comes to short-term expectations, China becomes the most preferred destination for private investments, followed by India and then by Brazil, which surpassed the United States, with Russia in fifth position. Mexico occupies sixth position. Even though the USA continues leading the ranks of actual FDI stock, it is followed closely by China, and India, Russia and Brazil remain among the first twenty major destinations for FDI. Developing and transition economies have become important as investors as well. According to that same source, out of the twenty most promising investor countries at the present, nearly half are developing and transition economies, with China, India and Russia being among the top ten. All this clearly underscores the growing importance of emerging economies in the flow of direct, productive global investment flows (see Figures 7.a19 and 7.a20). Brazil is keeping pace with other emerging economies in their growing importance in investment flows, particularly as a major global destination of FDI. Since 2003, Brazil has received increasing amounts of FDI. In 2010, it exhibited a considerable degree of internationalization (FDI inflow as a proportion of gross fixed capital formation), approximately 13 per cent, ahead of India (4.5 per cent) and China (4 per cent), but behind Russia (15 per cent). The economic downturn experienced worldwide in 2009 did affect FDI severely in the emerging economies, and Brazil was no exception. FDI inflows fell from US$45 billion in 2008 to US$25 billion the following year. Still, a fast recovery had been under way, and in 2010 the country registered an FDI inflow of US$48 billion. If there is a clear trend associating current Brazilian trade patterns with the emergence of Southern economies and markets, the same does not apply so clearly when it comes to direct investment flows. It is true that large emerging economies like China, India and Brazil have become hot spots for foreign direct investment, as seen above. However, the share of Brazilian FDI flow-

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ing to other developing markets is not huge. In fact, the growth of Brazilian direct investments is a relatively new phenomenon. It was in the region of US$2 billion in 2003 and rose strongly to nearly US$30 billion in 2006/07, then dropped to US$11 billion in 2010, in the wake of the crisis. More than half of it has been directed towards services and channelled to fiscal paradises like Bermuda, the Cayman Islands and Luxembourg. In 2009, 38 per cent of Brazilian direct investments targeted the industrial sector and most flowed to developed nations. Therefore, developing markets have not played the same role in Brazilian direct investments as they have in trade, which suggests an intriguing disconnect between trade and investment dynamics, and different economic and political criteria guiding policy formulation and investment decision-making. In this case, Southern markets seem to be more useful to Brazilian trade interests, especially when it comes to its exports and trade surpluses, while direct investments are focused on more rewarding opportunities in the developed economies. This also reflects the ease with which Brazil’s government makes trade policy decisions based on short- and medium-term considerations, while investment decisions are almost entirely subject to long-term assessment criteria and based on strictly economic considerations. This assessment is consistent with the current trends and patterns of internationalization of Brazilian corporations. Even though South America provided an immediate space of learning and an opportunity for them to internationalize, Brazilian capital abroad soon gained a more globalized profile in both its geographical and sectoral destinations. The government has been very active in supporting the internationalization of Brazilian companies, particularly by providing abundant credit through the Brazilian Economic and Social Development Bank (BNDES) to finance the export of Brazilian goods and services. However, its ability to influence investment decisions is not as decisive as it seems in the trade realm. So, if the growing relevance of South–South economic relations is to be more clearly reflected in the financial flows stemming from Brazil, corporate investment decisions must also be more influenced by the political drive emanating from foreign and trade policies. So far, the figures presented above do not provide any sound indication of that. No regional or Southern-directed trend can be identified in Brazilian investments abroad.

The place of the ‘second South’ Although ever present in political and diplomatic discourse, a concern for the less developed countries is not reflected in Brazilian economic relations. As seen in the first section, trade with the global South is concentrated in two major settings: Latin America (with a special focus on South America) and a very restricted group of large emerging economies (China, Russia and India). The markets of western and sub-Saharan Africa (with the exception of South Africa), the Caribbean and Central America

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receive only 9 per cent of Brazilian exports, a figure that might change eventually if the political and diplomatic efforts made in the past eight years in these regions pay off economically. So far, although positive, these efforts are not strong enough to introduce a meaningful shift in Brazilian export flows. As to investments, the relative position of the ‘second South’ is even weaker, as shown in the previous section. However, while the least developed economies are not important targets for Brazilian exports and investments, African countries have become favoured destinations for Brazilian development assistance. Currently, Africa (along with South America) enjoys top priority in this regard. In addition to its efforts to strengthen its international presence, Brazil has engaged decisively in international cooperation, having become a key donor among the developing nations, with a strong emphasis on poverty alleviation, health, agriculture and education. South–South cooperation has been integrally assimilated as a core component of Brazil’s international strategy to foster new development paradigms as a step towards the reconfiguration of the international order. The importance of South–South cooperation in Brazilian foreign policy is reflected in the expansion and diversification of its initiatives in this realm observed in the past years. There are no doubts in the coherent alignment of development assistance and foreign policy priorities and orientation from 2003 on. However, it would be simplistic to argue that by providing increasing development assistance to least developed countries in Africa, Brazil is somehow compensating for its weak economic ties with them. Brazilian foreign policy has demonstrated a genuine concern with the improvement of social and economic conditions in Africa. Through international cooperation it has attempted to share the policies and approaches that have been most successful domestically in addressing poverty reduction, education inclusion, combating HIV, and improving agricultural productivity and sustainability, with a special focus on biofuels. The fact that Brazil now has diplomatic missions in all African countries is a sound indication of Brazilian political interest in that region. There are obvious economic motivations as well, especially in countries like South Africa, Nigeria, Angola and Mozambique, where Brazilian economic presence has been growing through trade and investments. However, it would, again, be an oversimplification to connect the development assistance Brazil has provided to some African countries to economic interests when other relevant considerations underlying Brazilian initiatives towards that continent are at stake. In other words, South–South development cooperation has become a legitimate dimension of Brazilian foreign policy and is fundamentally related to its objectives and priorities, not exclusively in the economic realm, but in other areas as well. It may pave the way or provide incentives for deepening economic relations with least developed countries, but that is certainly a primary objective at the present. Finally, it is worth noting that the increasing Brazilian role in international development cooperation constitutes a trend that

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is expected to continue. It reflects not only the expansion of its economic capabilities, but also the political willingness to strengthen its commitment to the promotion of development and the reduction of social and economic asymmetries in South America and Africa. Challenges of forging mechanisms of economic governance

Brazil has been acknowledged as an increasingly important actor in international political dialogue and negotiations on development, trade, investment, finance, environment and other key issues of the global agenda. However, this recognition is still based, to a great extent, on its political and economic trajectory since the early nineties, the effectiveness of its diplomatic and political action in multilateral organizations and on the very positive expectations as to its economic performance in the short to medium term. It does not reflect, necessarily, its actual position in international trade, finance and investments flows. As noted, despite all the visibility it has achieved in recent years and the forecasts that it is bound to become the world’s fifth-largest economy by 2050, Brazil still occupies a marginal position in global output and exports, foreign direct investments flows, and science and technology developments. Even so, it has been very successful in asserting itself in the international debate on a wide range of issues, as mentioned above. In the international arena, Brazil seeks support and legitimacy for its desire for a profound reform of international order and has persistently criticized the uneven distribution of international power. Power asymmetries and the political-economic imbalances deriving from them have been a constant object of reference in Brazilian diplomatic discourse. After the Cold War, Brazil voiced its criticism of the even more acute concentration of power that emerged, and particularly of the US ability to act unilaterally, at the expense of multilateral institutions. It has also voiced concerns about the growing disparity between rich and poor nations, generated, in part, by globalization. Brazil has been uneasy with its own international status quo and, therefore, pledges to reform major multilateral institutions and international regimes so that they reflect not the outdated hegemonic order derived from the Second World War or the massive concentration of military power in the USA, but the complexities of the contemporary international politics of a truly globalized economy. Thus, Brazil has resorted to liberal institutionalism, aimed at strengthening multilateralism, while working politically and economically to foster a multipolar order, one that demands new mechanisms of governance at the regional and global levels. In order to promote it, Brazil has engaged in coalitions of like-minded countries in various contexts. Shared concerns among developing nations as to real advancements in the Doha Development Agenda spurred the creation of the Group of 20 developing nations (G20) in the World Trade Organization’s Doha Round. Led by Brazil, the

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G20 represented a breakthrough in advancing the interests of developing countries in the liberalization of agricultural trade on the occasion of the Cancún Ministerial Conference in 2003. Without breaking up the pre-existing Cairns Group, which was comprised of major agricultural exporters, the G20 brought together only developing countries and embraced a more all-encompassing agenda and a more offensive stance, particularly towards the reduction of subsidies applied by the USA and the EU to agricultural production and exports. Its initial success raised great optimism regarding the possibility of increasing the bargaining power of developing countries vis-à-vis the USA and the EU in quite sensitive and divisive issues of great significance for economic development and international trade, and even began to consider using its leveraged power in other areas of the Doha agenda. As part of a negotiation strategy, the initiative was successful in bringing together a very heterogeneous group of countries with differing and often competing views, but which found common ground in the need to reconfigure the terms of the agricultural trade negotiations. It was a crucial move in the sense that it resulted from a coordination initiative made up of developing countries with important political consequences. Furthermore, its importance transcends the particular and immediate context of the Cancún Ministerial Conference, as it expressed and demonstrated the need for new global governance initiatives to take into account and effectively incorporate the perspectives and concerns of emerging economies whose bargaining power had become influential in multilateral trade negotiations. Despite the difficulties and the deadlock that have led to the Doha Round being an unfinished and uncertain enterprise, as well as the setbacks encountered by the G20 itself, it has certainly become a necessary reference point in multilateral trade negotiations. Even though it was an initiative undertaken within the framework of the WTO negotiations, the G20 was also a by-product of political coordination among emerging countries, namely Brazil, India and South Africa, which would lead to the creation in June 2003 of the India, Brazil, South Africa Dialogue Forum (IBSA). IBSA is perhaps the first example of an international coalition of emerging countries embracing a more ambitious international agenda. The coalition capitalized on its political and economic attributes and its relative position in the world economy to foster a multilateral world order and a strengthened multilateralism. Originally conceived as a political dialogue forum between three large democracies, IBSA was also an attempt to shape new forms of participation in global governance and to gradually promote the representation of emerging countries in both political and economic arenas, traditionally dominated by a select group of developed countries. It was further intended to foster cooperation among the three countries in several issues of common critical relevance for social and economic development – inter alia, poverty alleviation,

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health, HIV, education, social reform and security. It reflected, to a great extent, Brazilian interest in introducing changes in international governance to favour an agenda that addresses the challenges of economic development in a globalized economy and in an asymmetric, unstable and insecure world order. In this sense, greater coordination among large emerging countries and their enhanced participation in international decision-making are rendered a critical condition for setting up effective governance mechanisms able to address those challenges. IBSA is, then, an important initiative in the sense that it was a step farther in bringing together countries from different regions with a strong grasp of issues related to their own regions and of key issues of the multilateral agenda. Beyond that, it is an innovative inter-regional mechanism driven by the global South and intended to address its needs and concerns through political dialogue and cooperation initiatives. It has had a positive, though limited, impact on economic and trade relations among Brazil, India and South Africa, as it has provided a political framework and incentives for strengthening economic ties without necessarily being an economic or commercial forum. However, the coalition that became the true landmark of the importance and visibility of emerging countries in the world economy and politics is the BRICS (Brazil, Russia, India, China, South Africa), made up of the four largest and most influential of them. In contrast to IBSA, which is more symmetrical in terms of the political and economic attributes of its members, the coalition of BRICS countries is a heterogeneous and asymmetrical arrangement, but a politically powerful one. Brazil may be the least powerful actor in it, but that position does not necessarily represent a liability for Brazil. Indeed, the BRICS coalition offers a valuable opportunity for Brazil to enhance its international profile as a global actor and to influence the political debate on global governance in different issue areas. Although no formal agreement binds the countries together, the country leaders have an agenda revolving around different global political and economic issues to those of the IBSA forum, which has a stronger emphasis on development. From a Brazilian perspective, therefore, both initiatives are compatible and offer unique possibilities to advance its own international views and interests and to promote and strengthen South–South relations within the broader scope of international politics. It has become usual to say that IBSA is about international cooperation while BRICS is about economics and high politics. Though this is not a precise account of these two initiatives, it adequately illustrates the different political, economic and strategic capabilities in each of them and the corresponding degrees of expectation as to the impact they may have on international politics and economy. Together they pose different, albeit complementary, possibilities for advancing governance initiatives, thus offering opportunities for Brazil’s assertive engagement in global affairs. Translating these possibilities into consequential outcomes for South–South

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relations is not an automatic step. Rather, it is a matter of political will and compromise, and is certainly a challenge that Brazil faces as these initiatives become truly entangled with policy- and decision-making at various levels. Concluding remarks

From the Brazilian perspective, strengthening South–South relations at both the political and economic levels has become more than an attractive and opportune idea. It is regarded as a political imperative to foster changes in the international order, to develop enduring and more representative governance mechanisms at the global level, and for the country to pave its own way as both a global trader and a global actor. As coherent as this might seem for a country that is willing to address development challenges and to change its own international status, a closer assessment of the economic and political aspects of Brazil’s engagement in South–South relations raises some issues that illustrate the tensions between its pragmatic foreign and trade policy orientation and the political bias implied in its active promotion of South–South relations as a strategy towards transforming the global order. Another visible tension stems from Brazil’s political orientation in favour of South–South relations and cooperation and the more selective and autonomous approach of the business community, particularly concerning investment decision-making, which is reflected in the visible gap between trade and investment patterns in the developing world. Finally, an evident difficulty lies in balancing Brazil’s profile as an emerging global actor, its privileged political and economic ties with that restricted group of emerging powers and the need to strengthen political and economic ties with less developed countries in its own region and beyond. The extent to which South–South relations become a core aspect of Brazilian foreign economic relations will largely be determined by how these tensions are resolved and by the responses of the Brazilian government and Brazilian corporations to the challenges they represent. So far, the trends in Brazilian trade and investment and the forging of governance mechanisms delineated in the present analysis do not seem likely to change in the near future, as they are closely associated with the current political and economic policy guidelines in Brazil under President Dilma Roussef. If external conditions become less favourable to the pursuit of the ongoing policies, a significant shift in trade and foreign policy orientation may become even more difficult to impose. As demonstrated by the 2008 crisis, a more restrictive economic environment may eventually reaffirm current foreign and trade policy orientations and the trends that have accompanied them. Given the rising importance of Brazil in the context of South–South relations, an enduring and eventually larger disconnect between trade and investment flows towards the developing world will hinder the potential of South–South economic relations to shape a new economic geography. Therefore, the pos-

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sibility of political cleavages and stalemates politicizing South–South economic cooperation owing to a differentiation and distancing of that core group of emerging economies from the so-called ‘second South’ – the least developed countries – should not be underestimated. Notes

Reference

1 The author would like to acknowledge Caio Paes Leme Lorecchio for his valuable research assistance and for preparing figures and graphs. 2 All figures can be found in the Annexe at the end of this chapter. 3 The total Brazilian trade balance with developed countries was negative in 2009, thus the surplus in its trade balance with developing countries was higher than the total surplus.

Veiga, P. da M. (2005) ‘Managing the challenges of WTO participation: case study 7: Brazil and the G-20 Group of Developing Countries’, World Trade Organization, www.wto.org/english/res_e/booksp_e/ casestudies_e/case7_e.htm, accessed 30 April 2012.

Annexe: figures and graphs

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8 | SOUTH–SOUTH TRADE AND THE ENVIRONMENT 1

Kathryn Hochstetler

As South–South economic relations gain new weight, will environmental protection be enhanced or endangered? Countries of the global South tend to rely heavily on natural resources and other primary products for their exports. Compared to countries of the global North, they have precarious national environmental protections and have vigorously resisted adding environmental clauses in multilateral trade negotiations. These observations might suggest that the increase in South–South economic exchange could only be harmful for the environment. While this chapter generally supports the common wisdom, it also stresses the great diversity among countries of the South, both as global economic actors and in their levels of protection of the environment. Some theories and empirical developments suggest the potential for enhanced environmental protection over the longer term. The environmental effect of South–South trade is fundamentally an issue of political economy. That is, both South–South trade and its environmental impact reflect the classic economic exchange process of matching supply and demand in accordance with comparative advantages. At the same time, both are also political processes. Some South–South trade is grounded more in political objectives, such as decreasing economic dependence on the North or trading with like-minded countries, than it is in economic advantages. The impact of trade on the environment is also mediated by the regulations that national governments are willing and able to apply. The political component helps to explain the fact that final outcomes cannot be straightforwardly read from countries’ positions in the global economy. The chapter begins with an overview of the relationship between the global South, trade and the environment, summarizing both a set of theoretical expectations and some basic data of particular relevance. I draw a distinction between the so-called emerging powers of the South and the rest of the developing world in the overview. My primary empirical focus in the chapter is a series of short illustrative case studies of trade–environment relations focused on Brazil, one of the emerging powers. The first case study looks at the environmental implications of the changes that stem from China’s rise as Brazil’s largest trading partner. The second examines Brazil in its regional context of South America, where it occupies a position of economic dominance and trades with its neighbours following both political and economic

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considerations. The final case examines a set of South–South trade relationships that are almost entirely about the international political ambitions of the members. IBSA is a very loose alliance among India, Brazil and South Africa with few direct trade or environment impacts. Trade and the environment: an overview

The baseline understanding of how trade affects environmental degradation was formulated in analyses of the North American Free Trade Agreement (NAFTA). Economists Gene Grossman and Alan Krueger formulated a widely cited model of three mechanisms – composition, scale and technique – that link changes in trade to environmental outcomes (Grossman and Krueger 1993; see also Copeland and Taylor 2003). The first mechanism involves the composition of economic activity. More liberalized trade means that countries will tend to produce more in the areas of their comparative advantage. In general, such compositional changes should lower aggregate environmental impact, since countries can produce more efficiently when they are producing in their areas of advantage. If a country’s comparative advantage stems from its lower environmental controls, however, then the composition effect of trade will mean increased environmental degradation (Grossman and Krueger 1993: 15). In North–South trade, a common assumption is that with increased trade, dirty industries will move to Southern countries with lower environmental protections – an assumption supported by case study evidence (e.g. Iles 2004; Roberts and Thanos 2003), but not statistically (Carson 2010; Gallagher 2004). The second mechanism linking trade and environment derives from the fact that trade is expected to increase the scale of economic activity, though it is not a guaranteed outcome. If composition and technique do not change, increased economic activity usually straightforwardly produces negative environmental effects by using larger quantities of resources and generating waste in production and after use of the product. The transportation inherent in trade also raises environmental costs. These negative effects are easily seen in Mexico’s maquiladora sector, which almost doubled under NAFTA (Liverman and Vilas 2006: 335). The problems come not just from industrial production, but also from massive population concentration in a region where services have not expanded nearly as rapidly. There is abundant evidence of the environmental hazards of North–South trade and investment beyond NAFTA as well (Díez and Dwivedi 2008; Roberts and Thanos 2003). Each of these direct effects from trade is potentially mediated by the third mechanism, the technique effect of trade. This is the idea that trade may change the ways that countries produce specific products, in ways that can lead to reductions in pollution or degradation per unit of production, and even possibly reduce overall degradation. Grossman and Krueger thought this could happen through foreign (presumably Northern) producers introducing

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more environmentally benign technology, or by generating increased societal wealth more generally (Grossman and Krueger 1993: 15). Wealthier citizens may demand more environmental protection from governments and some may be willing to pay more for products that have the environmental characteristics they want, introducing new techniques through the consumer market (Mol and Carter 2006: 158–9). Finally, trade and environmental concerns could be linked in trade negotiations, with access to Northern markets depending on environmental protection (Tussie 2000). These sub-mechanisms all promote changes in production techniques that potentially associate increased North– South trade with lower levels of pollution for many levels of wealth. Global debate has focused on the South’s production and process techniques, but ignores ‘the externalities stemming from lavish consumption and irresponsible disposal, usually by the North’ (Torres 2007: 8). Such a critique of imbalance does not actually deny there can be technique gains from trade, and they sometimes appear (Zeng and Eastin 2007; but see Stalley 2009). However, it is also quite possible – and demonstrated in the scale discussion – that the growth of an export market can lead to dissemination of more harmful techniques as well. Since this is the primary mechanism that might link growth in trade to improved environmental protection, North–South trade comes with varying environmental burdens. The technique arguments rested in turn on some rough empirical correlations that suggest that economic development levels affect levels of environmental protection. Grossman and Krueger (1993) also introduced the argument that environmental degradation follows an environmental ‘Kuznets curve’ (EKC), an inverted U relationship that sees higher levels of environmental degradation for incremental income increases up to some turning point, after which income increments are associated with less environmental degradation than just-lower income levels. The evidence about the EKC allows only the conclusion that increments of economic growth are not necessarily associated with higher levels of pollution (against the 1970s arguments of the ‘limits to growth’ school), and that trade does not necessarily make pollution worse (Carson 2010; Copeland and Taylor 2003; Dinda 2004). Cross-sectional analysis does show that ‘pollution levels typically fall at high-income levels’, but the hypothesized incremental relationship has only ‘scant, fleeting, and fragile evidence’ (Carson 2010: 19). Governance and technology play crucial intermediary roles between growth or trade and environmental outcomes. In the context of North–South trade, these rough patterns mean that the wealthiest countries that usually dominate trading relationships tend to have higher levels of environmental protection at home than do their poorer trading partners. In a South–South context, on the other hand, these empirical patterns mean the wealthiest countries in this smaller pool of countries tend to have quite high levels of environmental degradation, higher than their poorer South trading partners. This trend can be seen in Table 8.1, which presents

164 | eight table 8.1 Comparative outcomes for the emerging powers and the OECD

Brazil Emerging powers average OECD average Emerging powers range OECD range

PPP GDP/capita (US$) 2008

Bureaucratic quality 2006 (0–4)

Environmental Protection Index 2008 (1–100)

10,080 7,654 31,656 1,450–27,840 13,250–59,250

2 2.21 3.52 0–3 2–4

82.7 70.52 84.5 56.2–82.7 75.9–95.5

Sources: GDP from data.worldbank.org/indicator; bureaucratic quality from PRS Group; EPI from epi.yale.edu/Countries

data on a set of middle-income countries that have been singled out as the countries likely to become the largest and most dynamic economic powers of the twenty-first century by several influential Goldman Sachs studies (O’Neill 2001; O’Neill et al. 2005). Table 8.1 presents the BRICs – Brazil, Russia, India, China – as well as the ‘Next 11’ after them, collectively as the ‘emerging powers’, excluding only Russia, as it is not easily categorized as an emerging or ‘Southern’ power (Armijo 2007).2 It compares them to the more established powers of the OECD (Organisation for Economic Co-operation and Development). The emerging powers have per capita income that averages just one quarter of the OECD average, although it is well above the global average. The next column provides a measure of bureaucratic quality from the PRS Group, a private actor that evaluates the risk of doing business in countries around the world. This index assesses the ‘strength and expertise to govern without drastic changes in policy or interruptions in government services’ (PRS Group 2006), with 0 the lowest possible value and 4 the highest. It is meant here to approximately measure some of the regulatory qualities that might be associated with improved environmental protection techniques. The table indicates that the emerging powers have comparatively little ability to generate stable regulations and services, qualities that would tend to result in weaker environmental regulation and services as well. The final column supports exactly this argument. The Environmental Performance Index assesses environmental performance across an array of issue areas. The OECD countries are strongly clustered near the top of this index, while the emerging powers are well below them, on average. In accordance with the broader literature on the EKC, the emerging powers are scattered among the other countries of the South in ways that belie any easy correlation between growth, wealth and environmental outcomes below the highest levels of each.

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Table 8.1 supports the argument that trade within the South is led by a set of middle-income countries that are quite different from those that dominate North–South trade. With very little literature on how those differences affect trade, this chapter is intended to generate initial observations rather than to reach final conclusions. The shift from North–South to South–South trade appears unlikely to affect the scale mechanism itself, if the other mechanisms are unchanged. More growth is still likely to lead to more environmental degradation. The shift to South–South trade will affect the scale mechanism primarily if South–South trade has different growth effects. Composition effects would be more likely to change with the shift in trading partners. Participants in South–South trade hope that their trading strategy will change the composition of their production, helping them to break out of current market positions, and this seems likely to happen. In the smaller universe of South–South countries only, comparative advantage patterns will change and new economic actors will have advantages in industrial or postindustrial production that was previously the province of Northern producers. Thus the positive efficiency effects of trade’s compositional changes among just Southern countries are likely to be less than for the full set of countries. Whether these new comparative advantages will continue to be concentrated in a small set of countries – and the very existence of the ‘emerging powers’ suggests that they will – or are more broadly distributed remains to be seen. But countries that do acquire new trade advantages in industrial production will be moving up the left half of the EKC to greater environmental degradation, assuming no changes in technique. Countries that acquire new advantages in clean post-industrial sectors, on the other hand, will see environmental degradation level off or even fall. The strongest likely effects of a shift to South–South trade come in the technique mechanism. The technique effects depend on enabling sub-mechanisms like clean technology transfer, mobilized citizens and responsive governments, consumer demand for environmentally sound products, and trade negotiations that link market access to environmental improvement. All of these enabling processes are much more associated with Northern countries than with even the wealthiest Southern ones. Indeed, Southern countries often resist trade– environment links of any kind, arguing that they amount to thinly disguised protectionism (Cameron 2007: 13). There are counter-examples: exceptional Southern firms have introduced new green technologies at home and abroad (Pulver 2009); more than 600,000 environmental complaints were registered by Chinese citizens just in 2004 – albeit with minimal state response (Mol and Carter 2006: 161); and the all-Southern MERCOSUR trade agreement has an Environmental Protocol (Hochstetler 2003). On balance, however, these seem unlikely to add up to even the North’s minimal environmental leadership in transforming production mechanisms through trade. Thus a turn to South–South trade means comparatively less trade-generated innovation

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in techniques that might reduce environmental degradation, and on its own implies some rising of pollution levels over what would be generated by a counterfactual equivalent level of North–South trade. Understanding the full implications of rising South–South trade for the environment will require a great deal of new research. This chapter begins that process with several case studies of Brazil as it develops trade relationships with different parts of the South. Brazil is in the top third of the emerging powers in both income per capita and environmental protection, with a bureaucratic quality ranking that is just below average. It has been quite actively engaged in environmental debates both at home and abroad for four decades, and manifests a complex pattern of advances (and some retreats) in environmental protection (Hochstetler and Keck 2007). Thus case studies focused on scale, composition and technique effects of Brazilian trade presumably offer evidence at the higher end of the environmental protections that are likely as South–South economic relations continue to increase in importance over the next decades. Trading up: from the United States to China

The United States has long been an especially dominant trading partner for countries in Latin America and, of course, around the world. For almost as long, Latin Americans have pushed against that hegemony, making arguments similar to those that motivate South–South trade: when they trade with the North, Southern states are locked into unprofitable positions in the global political economy, exporting natural resources and agricultural goods in exchange for the products of the industrial and then post-industrial Northern economies. Southern states hope that trade that bypasses traditional powerhouses like the USA will open up new, more advantageous positions for them. Emerging trade patterns make clear that this may not be the case, as a few Southern states like China are moving into new positions of dominance in the historic ‘Northern’ role (Moreira 2007). In this section, I discuss the implications of China’s rise for environmental outcomes in Brazil. The US role in Latin American trade is large throughout the region, but differentiated. To quickly sketch the situation, Mexico and the smaller countries of the hemisphere geographically closer to the United States have strong and asymmetrical trade dependency on the USA, buttressed with a set of free trade agreements. In South America, trade dependence on the USA diminishes as distance increases, and Brazil joins other countries of the Southern Cone in having much more diversified trade relationships (Phillips 2010: 190). Beginning in the 2000s, the USA, the European Union and China have had increasingly equal weight in Brazil’s exports and imports, with the Chinese share increasing faster after the 2007 financial crisis. In a related development, China was the largest source of FDI in Brazil in 2010, with US$11 billion in investments planned (Estado de São Paulo, 1 August

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2010). Although diversification of trade partners is a long-time Brazilian aim, the new Chinese centrality reflects economic motivations rather than political initiatives on either side (Phillips 2010: 177). Chinese economic relations with Latin American countries also show two general patterns. In the first, China openly and successfully competes with Latin American manufacturing sectors, displacing them at home and in global exchange. Secondly, it offers a large and welcoming market for natural resource and agricultural sectors. Most Latin American countries can be identified with one or the other pattern, with South American countries generally falling into the latter category while Central America and the Caribbean fit the former (Fernández Jilberto and Hogenboom 2007; Phillips 2010: 189, 185). Brazil represents a third path, as it has both sectors, but had come to export its own manufactured products with comparatively high levels of domestic value-added. The most direct environmental impact of China’s rise as a Brazilian trading partner is in its effect on the composition of Brazilian exports and thus production. Primary products constitute roughly 30 per cent of Brazil’s total global exports, while making up 60 per cent or more of Brazil’s exports to China (Phillips 2010: 186). Increasing Chinese demand has had measurable effects on Brazil’s export profile – negative from the Brazilian perspective – causing primary materials to rise from 22.8 per cent of total exports in the first half of 2000 to 43.4 per cent a decade later. Industrial goods dropped from 74.4 per cent to 54.4 per cent (Folha de São Paulo, 11 July 2010). The asymmetry is clear in a comparison of their exports to each other: China sells Brazil machinery, equipment, textiles, plastics and toys, while Brazil sells China soybeans, vegetable oils, iron ore, wood pulp, timber and hides. Brazilians worry about their inability to compete with Chinese manufactured products, and brought fifteen anti-dumping cases to the World Trade Organization against China before 2008 (Hirst 2008: 99–100). The environmental consequences of primary goods exports are equally clear. In general, natural resource and agricultural exports show a greater negative impact on the environment than do industrial exports (Tussie 2000: 1–2). This is also true in Brazil in particular, since its environmental agencies have been most effective in controlling environmental degradation from industrial production, which tends to take place in Brazil’s coastal cities and states that have comparatively strong institutions and civil society organizations. In contrast, natural resource and agricultural production take place outside this more modern core of Brazil, in regions where environmental controls are weaker (Hochstetler and Keck 2007). The wood pulp and timber that Brazil sends China directly cause deforestation, as does iron ore mining, much of it in the Amazon region. The expansion of soybean cultivation has also become the most important source of deforestation (Hecht 2005). As a consequence, this aspect of this particular South–South trade relationship increases the environmental impact of Brazilian trade, shifting its composition to products

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that carry a larger environmental price tag. While the composition effect is clearly harmful for the Brazilian environment in particular, the aggregate environmental impact may be less if China would otherwise be producing in or importing its raw materials from locations that are even more damaging. The scale effects are harder to judge with any specificity. Historically, Latin American countries have argued that exporting products like those Brazil sends China are a recipe for long-term decreased growth and development, and some current observers agree (e.g. Moreira 2007). The technical version of the historic argument turned on the declining – they said structurally declining – terms of trade associated with exporting primary and agricultural goods. Yet one of the many changes brought about by the rise of China as an economic power is its quantitative impact on global demand: as it increasingly competes with Northern countries for energy and primary inputs, commodity prices have skyrocketed and a steadily larger pool of investment funds is available (Phillips 2010: 186–7). Thus, even though China actually gets many more of its natural resource inputs from Africa and Asia than Latin America, Latin American countries receive higher prices – and the accompanying development benefits of hard currency reserves – for their exports. Brazil has been able to use such reserves from past commodity sales and the continuing Chinese demand to weather the post-2008 global financial crisis in good form, with just two quarters of economic downturn. In these ways, the rise of China as a global trading powerhouse probably has had a positive scale effect on Brazilian production, at least in the short term – which magnifies the direct environmental consequences just outlined for the composition effect. In the neoclassical understanding of trade’s impact, the China-driven growth may still have a positive overall effect on the Brazilian environment, if it is translated into new environmentally protective techniques of production. The technique effects of China’s rise as a major Brazilian trading partner are, however, generally negative. The United States has hardly been a consistent voice for international environmental protection in recent years, but a series of domestic political constellations have required trade-promoting initiatives to be matched with environmental protection innovations. In NAFTA, the Free Trade Agreement of the Americas and bilateral agreements, the USA has consistently tabled clauses for environmental protection. Brazil and most other Latin American countries have just as consistently opposed such clauses, labelling them trade protectionism (Gallagher 2004; Hochstetler 2003). While the effectiveness of such clauses is widely debated, they are presumably not less effective than no clauses at all. China also resists joining trade and environment issues, and so trade with it will not involve negotiated agreements that push any innovations in techniques. China’s firms also resist such links in practice, with internationally oriented firms not systematically better in their environmental practices than domestically oriented firms are (Stalley 2009: 583). Similarly, China as a market will not force new pro-protection techniques.

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Several interesting examples emerge from soybeans, one of Brazil’s most important exports to China. As noted above, the expansion of soybean cultivation is one of the largest contributors to deforestation in the Amazon. European consumers and retailers forced Brazilian producers to accept a two-year moratorium in the mid-2000s on the export to Europe of soybeans grown on deforested land, but China raised no such restrictions. The story of genetically modified (GM) soybeans is even more interesting. Brazil and Argentina both introduced GM soy seed in the mid-1990s, but Brazil’s much stronger network of environmental and consumer activists used allies in the Ministry of Environment and legal tools to delay legal production for a decade. With the USA (GM), Argentina (GM) and Brazil (non-GM to 2005) exporting nearly all the world’s soybeans, their exports ended up in the corresponding markets, with Brazilian exports to Europe nearly tripling, while China accepted all the soybeans the Europeans would not (Hochstetler 2007: 162–3). In so doing, China helped undercut environmentalists’ arguments that maintaining export markets required a prohibition on GM production. As these examples show, the presence of China as a large market indifferent to the environmental costs of its imports not only directly provides a market for environmentally costly exports from Brazil and elsewhere, but also helps undermine other countries’ use of market mechanisms that might spur environmental protection. In summary, the emergence of China as a major Brazilian trading partner appears to have scale, composition and technique effects that all strengthen the link between increased trade and increased environmental degradation. While the composition effects will vary across the South, the technique effects will be similar for all China–South trade. In turn, since technique effects are the primary source of mitigation of the environmental costs of trade, China’s trading rise poses widespread and negative consequences. Trading down: Brazil in South America

South America belies the common wisdom that trade is more common among geographically contiguous countries. From colonial times, the infrastructure of this large continent (twice the size of Europe) was designed to move primary products from a sparsely populated interior to the coasts and then north to Europe and North America. The lack of internal infrastructure was a major reason intra-regional trade in 2004 was just 12 per cent of total trade (Moreira 2008: 117), although other factors such as comparatively small and closed domestic markets (outside Brazil) also reduced trade. In the Southern Cone, the Andes mountain range forms a natural barrier between countries that is difficult to bridge even with infrastructure projects, although the Amazon and Pantanal regions farther north are more easily bridged – albeit with costs to those ecosystems that are discussed below. Regional trade was further dampened by countries’ tendencies to specialize in just a few, often competing, export products. Despite this, countries in the region have been

170 | eight 14,000 12,000 Exports 10,000

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.8 1 Volume of trade between Brazil and its CAN neighbours, 1992–2009 (US$ millions) (source: IDB-Intal, /www.iadb.org/dataintal/)

trying to establish stronger trade ties since the 1960s. This section focuses on the most recent initiative, Brazil’s effort to join all twelve countries of the continent into a single unit known as UNASUR. UNASUR itself joins and builds on the two existing regional trade agreements, MERCOSUR and the Andean Community (CAN), while adding additional continental neighbours. UNASUR reflects Brazil’s determination to deepen South–South trade alliances in the wake of considerable frustration with the financial crises of the 1990s and the market opening that created new vulnerabilities (Burges 2009). Brazil invited its neighbours to an initial summit of South American presidents in 2000, choosing regional infrastructure projects as a carrot that would benefit Brazil, but also its neighbours (ibid.: 48–9). For the first time there would be a whole package of coordinated infrastructure projects to enable trade, known as the Initiative for the Integration of Regional Infrastructure in South America (IIRSA). The presidents enthusiastically agreed to make trans-frontier integration a priority, saying that ‘… South American boundaries should cease to constitute an element of isolation and separation and become a unifying link for the circulation of goods and people, in this way becoming a privileged space for cooperation’.3 Following IIRSA’s initial ten-year term, the governments of the region have agreed to continue their infrastructure integration through an organization now called the South American Council of Infrastructure and Planning (Cosiplan). The neighbours quickly came up with a list of projects on an Agenda of Consensual Implementation that included mostly bridges, roads and

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.82 Volume of trade between Brazil and its Mercosur neighbours, 1992–2008 (US$ millions) (source: IDB-Intal, /www.iadb.org/dataintal/)

border  crossing points, symbolizing the connecting power of infrastructure and literally crossing national boundaries. Thirty-one early Consensual projects totalled nearly US$10 billion in investments. As of 2008, IIRSA had 514 projects clustered in 47 groups with an estimated total investment of US$69 billion. Of these, 70 per cent had seen concrete advances, with 10 per cent completed, 38 per cent being executed and 20 per cent in the preparatory stage. The vast majority, 87 per cent, of all projects are transport projects, 11 per cent are energy focused, and 2 per cent communications.4 Figures 8.1 and 8.2 show that Brazil’s trade with the region has dramatically increased since 2000, and that it has most often posted a positive trade balance during that time. (Brazil’s trade overall during these years increased quite a bit, so the South American share is not much larger than it was originally.) The rise in trade with Brazil’s MERCOSUR neighbours reflects that agreement’s efforts to reduce barriers within MERCOSUR (see Chapter 1). Brazil’s only trade agreements with the Andean Community come in the context of UNASUR. Thus, not all of this increase can be directly traced to UNASUR and IIRSA, but they certainly encouraged movement in this direction, both in the new physical capacity for trade and through the way in which UNASUR represents a political reorientation of the region to itself rather than to historic trade ties with Northern countries. The composition of Brazil’s exports to South America places it in the position of China or the United States. It has by far the most diversified economy and export sectors of the continent, and sends its neighbours many different products, with manufactured products

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making up nearly 80 per cent of the total. The Andean countries of CAN, in contrast, had crude petroleum, gold, petroleum products, bananas, coal and coffee as their top exports in 2003 (Burges 2005: 441). Venezuelan oil, Bolivian gas and hydropower from Paraguay are all among Brazil’s energy sources, and Brazil has been seeking energy security regionally (ibid.: 443). The scale effects on environmental degradation presumably fit the classic patterns, although there is no direct evidence. Rising trade totals mean more degradation as Brazil’s neighbours produce the primary goods they send it, and more degradation as Brazil produces its manufactured exports. The trade has reinforced existing compositional dimensions of production in all the countries. The most novel aspect of the past decade is the rise in linking infrastructural projects. Some of these show up in the trade data itself, which includes growing exports of Brazilian services such as those of its construction firms and finance industry. Major Brazilian construction companies such as Odebrecht and Correa Camargo carry out large construction projects in other South American countries, exporting earth-moving equipment and other related heavy machinery as part of the package. Brazil’s national development bank, the BNDES, had its rules reformulated in the 2000s in ways that allow it to fund such projects (Sennes and Mendes 2010). The infrastructure projects have facilitated a rise in trade, with its environmental impacts, and have significant environmental impacts themselves. Indeed, of all the trade relations discussed in this chapter, only IIRSA has become the target of increasingly large and hostile civil society opposition. As their governments seek greater economic integration, South American citizens – indigenous movements, environmental and human rights activists, labour unions and others – are joining together in continent-wide mobilizations as well. They blame IIRSA for deforestation and other land-use change, contamination of water and soils, displacement of peoples, and a host of other environmental crimes (e.g. Almeida and Carvalho 2009). Twenty-nine organizations (many themselves networks of organizations) formed an IIRSA Articulation Group in Lima, Peru, in 2005. The Articulation Group stated its basic support for integration, but identified a number of reasons for questioning whether IIRSA’s projects would provide ‘the type of development we want’. The Articulation Group criticizes IIRSA’s projects for lacking adequate consultation and full economic, social and environmental sustainability studies. Do UNASUR and IIRSA introduce new techniques of production that might mitigate the environmental damage associated with increased trade between Brazil and South America? IIRSA has introduced potential technical innovation in the form of environmental licensing in the region. Environmental licensing processes operate unevenly in Brazil, but offer enough opportunities to citizens through the judiciary and public audiences that they can be effective in blocking projects that do serious harm to the environment (Hochstetler and Keck 2007). This is less true in Brazil’s neighbours beyond Chile, with

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Argentina adding a routine requirement for environmental impact assessment only in 2005. In general, South American countries do not expect projects to be blocked or modified for environmental reasons. IIRSA is far from exemplary in environmental terms, as many of the Consensual projects began without any formal environmental assessment process beyond the minimal national processes. Yet five regional workshops in 2008 trained government professionals from many different agencies in an assessment methodology known as EASE (Environmental and Social Evaluation with a Strategic Focus), the currently preferred approach of the World Bank and other development banks.5 It evaluates projects on a macro scale, introducing strategic and qualitative assessments of environmental impacts. The methodology is quite demanding and possibly beyond the capacity of many governments in the region, but it does help reinforce the expectation of environmental assessment of projects and policies, and offered concrete training in doing so. IIRSA’s development also coincided with a revitalization of the Amazon Cooperation Treaty (ACT). Traditionally oriented to navigation and protection of national sovereignty over resources, the organization turned to coordination of environmental protection efforts after 2004, this time with support from non-state actors (Hochstetler 2011). The scale of financing and activities is much smaller than that of IIRSA, but the ACT does provide an alternative model for regional integration. Brazil’s trade with its South American neighbours has skyrocketed in recent years, and there are certainly scale effects in the environmental impacts of the related production. On the other hand, the composition effects are less apparent, and to the extent that they exist, they are not obviously harmful to the environment. The strongest environmental impact of trade within South America is not from the trade itself, but from the infrastructure the continent is collectively building to facilitate trade. This has already sharply increased environmental degradation in the location of particular projects and will greatly enable scaling up future primary product production and trade and its attendant degradation. There are some countervailing regional initiatives in environmental licensing, civil society mobilization and Amazon protection, but they are currently smaller in scale and late in development. Over a longer time frame, these initiatives may provide the seeds for more promising developments. Trading across: Brazil with India and South Africa (IBSA)

The trade relations discussed so far reflect actual exchange. IBSA, Brazil’s ‘dialogue forum’ with India and South Africa, instead falls almost entirely into the aspirational category, being more about how Brazil hopes to trade than how it does. IBSA reflects its members’ vision of how solidarity among the South’s big regional powers might allow them to rework global rules in their favour. They are somewhat counter-intuitive as trading partners, but share

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deeper economic interests and a broader international agenda (Oliveira et al. 2009: 159). As outlined below, IBSA’s members have already jointly had an important influence on the Doha Round of trade negotiations through the 2000s, and IBSA’s most direct effect on the environment stems primarily from this. IBSA’s political rather than economic origin can be traced to particular presidents. While Cardoso, president of Brazil from 1995 to 2002, began the process of questioning Brazil’s Northern-oriented economy, his successor, Lula, made South–South relations a keystone of his foreign policy (Burges 2009). As an example, the Lula administration moved to create IBSA on its second day in office. Lula’s foreign minister, Celso Amorim, explained the logic of the grouping: ‘[IBSA] is three developing countries, three great multicultural, multiethnic, multiracial democracies, each in a continent’ (Amorim 2009: 114). IBSA thus carves a global space for them against China as well as the North. South Africa’s Mbeki responded with special enthusiasm, proposing a ‘butterfly strategy’ for South Africa that promoted trade with India and Brazil as the butterfly’s wings, while trade with Africa formed the body (Alden and Vieira 2005: 1083). India’s geopolitical as well as economic competition with China in Asia gave it reasons to join in (Singh 2009), although its lesser political commitment to IBSA means that it has been allowed to take the most rigid positions (Oliveira et al. 2009: 185). The political agenda has not yet translated into greatly increased trade (Alden and Vieira 2005: 1092). Figure 8.3 shows that Brazil’s trade with India and South Africa lagged well behind that with Argentina, Brazil’s largest trading partner in South America. Despite more than doubling after 2000, it continues at levels similar to that of Brazil’s trade with Chile. Between 1998 and 2005, trade with India was never more than 1.19 per cent of Brazil’s total trade, and Brazilian trade was never more than 1.16 per cent of the Indian total (Singh 2009: 325). On the other hand, both trade a mixed basket with the other, with India’s top exports to Brazil including diesel and petroleum as well as chemicals, pharmaceuticals and heavy machinery; Brazil sends India sugar and soybeans as well as high-end technology, ethanol and petroleum-based products (ibid.: 328–9). Trade with South Africa is incipient enough that no published information is available about its composition. One area where increased trade could see potential environmental dividends is if Brazilian exports of ethanol and biodiesel could help replace coal and petroleum, which currently form 88 per cent of India’s energy matrix (ibid.: 330) and are a significant part of South Africa’s as well – although biofuels can carry their own environmental price. Otherwise, the very complementarity of the trade and roughly similar production patterns mean that there are few obvious composition or scale effects. IBSA’s largest effect on trade issues so far appears to be at the level of technique, where the grouping has had quite a strong impact on trade rules through its involvement in the Doha Round of the World Trade Organiza-

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.8 3 Brazil’s total trade with India, South Africa and Argentina, 1992–2008 (US$ millions) (source: IDB-Intal, /www.iadb.org/dataintal/)

tion negotiations. The three negotiated together, with India taking a strong leadership role in insisting on special protections for small-scale farmers in developing countries (Narlikar 2006). While this was not an initial preference for Brazil and South Africa, which have liberalized and modernized their agricultural sectors, they supported India’s positions in order to maintain the coalition (Oliveira et al. 2009). This agricultural position was one of a set of issues that brought the Doha Round to a halt even though the IBSA countries were in the small club invited to participate in detailed side negotiations as erstwhile representatives of their regions (Alden and Vieira 2005). In this way, IBSA can be credited/blamed for preventing further liberalization of the agricultural sector. Most environmentalists actually prefer this outcome, given that liberalizing pressures generally reward the production techniques of the modern agricultural sector, which include heavy use of petroleum-based and chemical inputs and enable extensive land-use conversion. On the other hand, the trio also helped maintain India’s (and Brazil’s) comparatively high industrial protections by scuttling the Doha Round (Oliveira et al. 2009), and freer competition in that sector usually rewards environmental efficiency. Further evidence on the negotiating influence of these countries – and its ambiguous results for environmental protection – comes from the Copenhagen climate change negotiations in December 2009. In these, the IBSA countries joined with China to form the BASIC grouping that worked with the United States and other countries to draft a last-minute Copenhagen Accord that

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made voluntary political commitments to reduce climate emissions. Contingent on Northern countries keeping their commitments, Brazil and South Africa committed to reducing emissions by 36.1–38.9 per cent and 34 per cent, respectively, below the trajectory of their current emissions by 2020, while China and India pledged to reduce their projected emissions per unit by 40–45 per cent and 20–25 percent, respectively.6 The Brazilians passed a surprisingly tough new climate law within ten days of the end of the Copenhagen conference (Viola 2010), and all four made written voluntary commitments to reduce emissions within a few months of the conference. The Copenhagen Accord was rejected at that conference itself, but was adopted the next December in Cancún. In Durban, the BASIC coalition had considerable difficulty holding together as a negotiating coalition, as Brazil and South Africa were ready to undertake further international commitments that India in particular was not. A large part of the Brazilian rationale was that it had achieved effective control over deforestation rates after 2005, a change in production techniques of the kind that can make increased trade and growth compatible with greater environmental protection (Hochstetler and Viola forthcoming). The brevity of this section is symptomatic of the very limited actual effect that IBSA has had on the environment through the trade mechanism so far. Yet IBSA is important as a harbinger of both the kinds of South–South relationships that some emerging powers are deliberately trying to foster and the ways in which that kind of solidarity has already had a real impact on global rule-making in both procedures and substance. Their preferences are complex and far from uniform (Oliveira et al. 2009). There is no doubt, however, that those rules will affect the environment, and that the very ambiguity of the emerging powers’ commitment to environmental protection will be replicated at the global level. Conclusions

As South–South trade gains new weight in global exchange patterns, will environmental protection be enhanced or endangered? Case studies of Brazil as it trades up (with China), down (with its neighbours in South America) and across (with India and South Africa) present a mixed picture. The most negative comes from the trade with China, which promotes quantitative growth while pushing Brazil to more natural resource exploitation. China is unlikely to demand the development of new environmentally sound techniques, the route that most often links increased trade with improved environmental protection. These are patterns that are likely to hold for China’s trade with other Southern countries. Since China’s appetite for imports and exports is likely to grow rapidly for decades, growing environmental degradation is likely as a result of this feature of South–South trade. Brazil’s trade with partners in South America and IBSA holds less closely to the classic patterns of impact. To the extent that trade increases (scale),

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it is likely to have a negative impact – but the IBSA example shows that Southern countries may invest a fair amount of energy in relations that  have little quantitative impact on trade. Composition effects are not present, or are ambiguous in their environmental impact. The largest environmental impact of each set of trade relations comes from factors outside the standard scale/composition/technique triptych. In the case of South America, the most direct (and negative) effect so far has been from the infrastructure built to support trade. With the IBSA countries, their unpredictable insertion into global negotiations has had the largest effect, both positive and negative, for environmental protection. Looking beyond the current effects of South–South trade to the longer-run future, there is no clear reason to be enthusiastic about the probable effects of growth in South–South trade for environmental protection. Even so, there is evidence of some possibility of improvement. At its root, the scepticism about environmental protection in developing countries is grounded in their lack of the ‘government regulation, market forces, and civil society pressure’ thought to drive improvements (Pulver 2009: 194). All of those appear in fragmentary form in these case studies. We find Southern civil society mobilized against the environmental degradation they associate with regional integration infrastructure, new environmental licensing training accompanying the same, and a willingness by some in Brazil to meet market demands for greater environmental precautions in soybean production. The Amazon Cooperation Treaty and the actions by the BASIC countries in the climate change negotiations also suggest possible multilateral efforts for environmental protection. All of these are currently minority stances, outweighed by a greater urge towards conventional economic growth. In the long term, however, they may provide the building blocks for greater environmental protection. Notes 1 Paper prepared for presentation at the conference ‘The future of South–South economic relations’, at the Pardee Center, Boston University, 24 September 2010. Thanks to Sean Jiaming Low for research assistance. I also thank the editors, other workshop participants, the anonymous reviewer, and Eduardo Viola for helpful suggestions on this paper. 2 The ‘Next 11’ comprises Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, Philippines, Turkey, South Korea and Vietnam. 3 www.iirsa.org/BancoMedios/Documentos%20PDF/comunicado_brasilia_esp.pdf, Point 36. 4 www.iirsa.org/BancoEvento/C/cde10_x_ reunion_del_comite_de_direccion_ejecutiva/

cde10_x_reunion_del_comite_de_direccion_ ejecutiva.asp?CodIdioma=ESP&CodSeccion=60, especially Annex 8. 5 www.iirsa.org/BancoMedios/Documentos%20PDF/ease_metodologia_iirsa.pdf. 6 The commitments are online at unfccc. int/home/items/5265.php.

References Alden, C. and M. A. Vieira (2005) ‘The new diplomacy of the South: South Africa, Brazil, India and trilateralism’, Third World Quarterly, 26(7): 1077–95. Almeida, A. W. B. de and G. Carvalho (eds) (2009) O Plano IIRSA: Na Visão da Sociedade Civil Pan-Amazônica, Belem: FASE and Observatório Comova/UFPA.

178 | eight Amorim, C. (2009) ‘Os BRICs, o mundo pósDoha e a América do Sul’, in J. P. dos Reis Velloso and R. Cavalcante de Albuquerque (eds), Na Crise Global Como Ser o Melhor dos BRICs, Rio de Janeiro/São Paulo: Elsevier/INAE. Armijo, L. E. (2007) ‘The BRICs countries (Brazil, Russia, India and China) as analytic category: mirage or insight?’, Asian Perspective, 31(4): 7–42. Bank Information Center (2005) ‘Declaration of Lima’, www.bicusa.org/en/Region.Key Issues.100.aspx. Burges, S. (2005) ‘Bounded by the reality of trade: practical limits to a South American region’, Cambridge Review of International Affairs, 18(3): 437–54. — (2009) Brazilian Foreign Policy after the Cold War, Gainesville: University Press of Florida. Cameron, H. (2007) ‘The evolution of the trade and environment debate at the WTO’, in A. Najam, M. Halle and R. Melénez-Ortiz (eds), Trade and Environment: A Resource Book, Canada: IISD, ICTSD and The Ring. Carson, R. T. (2010) ‘The Environmental Kuznets Curve: seeking empirical regularity and theoretical structure’, Review of Environmental Economics and Policy, 4(1): 3–23. Copeland, B. R. and M. S. Taylor (2003) Trade and the Environment: Theory and Evidence, Princeton, NJ: Princeton University Press. Díez, J. and O. P. Dwivedi (eds) (2008) Global Environmental Challenges: Perspectives from the South, Peterborough, ON: Broadview Press. Dinda, S. (2004) ‘Environmental Kuznets Curve hypothesis: a survey’, Ecological Economics, 49: 431–55. Fernández Jilberto, A. E. and B. Hogenboom (2007) ‘Latin America and China under global neoliberalism’, Journal of Developing Societies, 23(4): 467–501. Gallagher, K. P. (2004) Free Trade and the Environment: Mexico, NAFTA, and Beyond, Stanford, CA: Stanford University Press. Grossman, G. M. and A. B. Krueger (1993) ‘Environmental impacts of a North American Free Trade Agreement’, in P. M. Garber (ed.), The Mexico–US Free Trade Agreement, Cambridge, MA: MIT Press, pp. 13–56 (also published as NBER Working Paper no. W3914, November 1991).

Hecht, S. B. (2005) ‘Soybeans, development and conservation on the Amazon frontier’, Development and Change, 36(2): 375–404. Hirst, M. (2008) ‘A South–South perspective’, in R. Roett and G. Paz (eds), China’s Expansion into the Western Hemisphere: Implications for Latin America and the United States, Washington, DC: Brookings Institution, pp. 90–108. Hochstetler, K. (2003) ‘Fading green: environmental politics in the Mercosur free trade agreement’, Latin American Politics and Society, 45(4): 1–32. — (2007) ‘The multi-level governance of GM food in Mercosur’, in R. Falkner (ed.), The International Politics of Genetically Modified Food: Diplomacy, Trade, and Law, Basingstoke: Palgrave Macmillan, pp. 157–73. — (2011) ‘Under construction: debating the region in South America’, in L. Elliott and S. Breslin (eds), Comparative Environmental Regionalism, London: Routledge, pp. 130–46. Hochstetler, K. and M. E. Keck (2007) Greening Brazil: Environmental Activism in State and Society, Durham, NC: Duke University Press. Hochstetler, K. and E. Viola (forthcoming) ‘Brazil and the politics of climate change: beyond the global commons’, Environmental Politics. Iles, A. (2004) ‘Mapping environmental justice in technology flows: computer waste impacts in Asia’, Global Environmental Politics, 4(4): 76–107. Liverman, D. M. and S. Vilas (2006) ‘Neoliberalism and the environment in Latin America’, Annual Review of Environmental Resources, 31: 327–63. Mol, A. P. J. and N. T. Carter (2006) ‘China’s environmental governance in transition’, Environmental Politics, 15(2): 149–70. Moreira, M. M. (2007) ‘Fear of China: is there a future for manufacturing in Latin America?’, World Development, 35(3): 355–76. — (2008) ‘Trade costs and the economic fundamentals of the Initiative for the Integration of Regional Infrastructure in South America (IIRSA)’, Integration and Trade, 28: 115–45. Narlikar, A. (2006) ‘Peculiar chauvinism or strategic calculation? Explaining the negotiating strategy of a rising India’, International Affairs, 82(1): 59–76. Oliveira, A. J. N. de, J. Onuki and E. de Oliveira

hochstetler | 179 (2009) ‘Coalições Sul–Sul e multilateralismo: países intermediarias e o caso IBAS’, in M. R. S. de Lima and M. Hirst (eds), Brasil, Índia e África do Sul: Desafios e Oportunidades para Novas Parcerias, São Paulo: Paz e Terra, pp. 157–205. O’Neill, J. (2001) ‘Building better economic BRICs’, Global Economics Paper no. 66, New York: Goldman Sachs. O’Neill, J., D. Wilson, R. Purushothaman and A. Stupnytska (2005) ‘How solid are the BRICs?’, Global Economics Paper no. 134, New York: Goldman Sachs. Phillips, N. (2010) ‘China and Latin America: development challenges and geopolitical dilemmas’, in L. Dittmer and G. T. Yu (eds), China, the Developing World, and the New Global Dynamic, Boulder, CO: Lynne Rienner, pp. 177–201. PRS Group (2006) ‘International country risk guide’, Codebook and researcher’s dataset, in Microsoft Excel format, Syracuse, NY: PRS Group. Pulver, S. (2009) ‘Introduction: developingcountry firms as agents of environmental sustainability’, Studies in Comparative International Development, 42(3/4): 191–207. Roberts, J. T. and N. D. Thanos (2003) Trouble in Paradise: Globalization and Environmental Crisis in Latin America, London: Routledge. Sennes, R. and R. C. Mendes (2010) ‘Políticas

públicas e as multinacionais brasileiras’, in J. Ramsey and A. Almeida (eds), A Ascensão das Multinacionais Brasileiras: O Grande Salto de Pesos-Pesados Regionais a Verdadeiras Multinacionais, trans. S. Holler, Rio de Janeiro/Belo Horizonte: Elsevier/Fundação Dom Cabral. Singh, N. (2009) ‘Re-discovering the new world: the potential for an expanded economic relationship between India and Brazil’, Journal of Developing Societies, 25(3): 309–37. Stalley, P. (2009) ‘Can trade green China?’, Journal of Contemporary China, 18(61): 567–90. Torres, H. (2007) ‘Expert opinion: the future of the trade and environment debate’, in A. Najam, M. Halle and R. Melénez-Ortiz (eds), Trade and Environment: A Resource Book, Canada: IISD, ICTSD and The Ring. Tussie, D. (2000) ‘Introduction’, in D. Tussie (ed.), The Environment and International Trade Negotiations: Developing Country Stakes, Ottawa: International Development Research Centre, pp. 1–9. Viola, E. (2010) ‘Impasses e perspectivas da negociação climática global e mudanças na posição Brasileira’, Breves Cindes, 30: 1–47. Zeng, K. and J. Eastin (2007) ‘International economic integration and environmental protection: the case of China’, International Studies Quarterly, 51(4): 971–95.

9 | LATIN AMERICA AND CHINA: TRADING SHORTTERM GROW TH FOR (CHINA’S) LONG-RUN PROSPERIT Y

Kevin P. Gallagher1

Although both China and Latin America and the Caribbean (LAC) have sought to reform their inward-looking economies towards integration into world markets for the last thirty years, the political economy of their two approaches is strikingly different. LAC nations, to varying degrees, deployed the infamous ‘Washington Consensus’ that emphasizes the rapid liberalization of trade and investment regimes and the general reduction of the state in economic affairs. China has taken a more gradual and managed approach to globalization. table 9.1 Growth and reform in China and LAC, 1980–2010

GDP in 2010 ($USD 2000, trillions) GDP growth (per cent) GDP per capita in 2010 (PPP $2005) Per capita growth (per cent)

LAC

China

2.85 2.6 9,911 1

3.25 10.1 6,816 8.9

Source: World Bank, World Development Indicators, 2012

In 1980, approximately when China and LAC began their reforms (1978 for China, 1982 for LAC), LAC’s economic output was seven times that of China’s and fourteen times that of China in per capita terms. As shown in Table 9.1, China’s GDP has now surpassed LAC’s, thanks to an impressive growth rate of 10 per cent per annum, compared to 2.6 for LAC. Per capita income has grown 1 per cent per annum on the LAC side – and has been very volatile and spotted with crises at that. In contrast, China has experienced a fairly steady increase in per capita income to the tune of 8.9 per cent each year. China’s impressive success in many ways has been good news for LAC, for it has provided a boost to primary commodities exports in Latin America and the Caribbean (LAC) that has played a role in generating economic growth in LAC – both before and in the aftermath of the global financial crisis. At the same time, however, there have been signs that China’s increasing ability to outcompete LAC in home and world markets in terms of manufactured

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goods may erode the level of diversity in the LAC export basket and threaten the region’s growth prospects in the longer run. The burgeoning economic relationship between LAC and China has been seen as significantly a geopolitical attempt on the part of China and LAC nations, with a stiff stance towards the USA, to circumvent the USA and other Western powers economically – suggesting a revival of the new international economic order literature of the 1970s. Indeed, Ellis (2009) remarks that much of the LAC–China economic cooperation has ‘taken place in countries with relatively anti-US foreign policy positions’. This chapter argues rather that Chinese–LAC cooperation is ‘all business’. LAC is looking for markets for its goods, as is China. The market is the primary institution facilitating this cooperation, and formal economic cooperation at the state level is set up to largely enhance what is being driven by market forces. That said, the ‘market forces’ that drive China’s growth are at least in part determined by a neo-developmental state that is looking to build long-run domestic capabilities. Rather than a grand geopolitical rationale for South–South cooperation with LAC, China’s is a pragmatic approach to secure the inputs it needs for industrialization and the markets it needs for its final products. With perhaps the exception of Brazil, most LAC nations are not only allowing markets to determine current patterns of trade and investment, they also allow the market to predetermine their long-run development path and lack the kind of neo-developmental comprehensive strategy for longer-run development found in China. Rather than seeing the Chinese–LAC economic relationship as a twenty-first-century model for South–South cooperation, it may be better to examine China’s neo-developmentalism versus LAC’s pursuit of the Washington Consensus. The one very important political component of the LAC–China trade and investment equation, on the Chinese side, relates to Taiwan. China aggressively tries to woo and win over the large number of LAC nations that have chosen to recognize Taiwan over China in the United Nations and beyond. The chapter is divided into three additional parts. The second part of the chapter discusses the rapidly changing trade and investment relationship between LAC and China. Part 3 analyses the formal economic cooperation ties  between the LAC region and China. Part 4 raises concerns over the implications of the emerging China–LAC economic relationship for the longer-range future. Part 5 summarizes the key points in the chapter and offers suggestions for future research and policy. Trade and investment

China’s miraculous growth has benefited LAC. Especially since China’s entry into the World Trade Organization (WTO) in 2001, LAC has seen its exports to China in a handful of primary commodities sectors surge. China’s demand for those commodities has also played a role in increasing the global prices

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of such commodities and has thus triggered a double boost to LAC exports that has not significantly declined in the wake of the global financial crisis.2 Before the crisis, Latin American growth was being fuelled by a commodities export boom. On average, GDP growth in LAC increased by more than 3.4 per cent per annum for a total of 21 per cent in real terms between 2000 and 2008. Exports grew almost 12 per cent each year and total export growth during the period was over 90 per cent. Between 2000 and 2008 LAC exports to China grew by almost 400 per cent. Between 2006 and 2008 alone, LAC exports to China continued to grow. Indeed, during that period they grew by 40 per cent and reached $72 billion in 2008, 5 per cent of LAC’s total exports. The benefits of LAC–China trade are highly concentrated in a few countries and sectors. Previous calculations by the author show that in 2006 just ten sectors in six countries comprised 74 per cent of all LAC exports to China and 91 per cent of all commodities exports to China. Indeed, the top five sectors – ores and concentrates of base metals (largely copper ores), soybeans, iron, crude petroleum and copper alloys – constituted 60 per cent of all exports to China and 75 per cent of commodities exports to China (Gallagher and Porzecanski 2010). As shown in Table 9.2, these trends accentuated through 2009. By 2009, these eight sectors comprised 95 per cent of all primary commodities (PRBP) exports to China, and 81 per cent of all exports to China. table 9.2 Five countries, eight sectors, dominate LAC trade to China (2009) Sector

Share of total LAC exports to China (%)

Copper alloys Iron ore and concentrates Soybeans and other seeds Ores and concentrates of base metals Crude petroleum Soybean oils and other oils Pulp and waste paper Foodstuffs

17.9 17.3 16.8 13.5 4.5 4.5 4.4 2.4

total

81.3

Country share of total LAC exports to China in sector (%) Chile 90 Brazil 89 Brazil 83, Argentina 16 Chile 47, Peru 39 Brazil 65, Colombia 20 Argentina 79, Brazil 0 Brazil 55, Chile 3 Peru 63, Chile 30

Source: Author’s calculations based on United Nations Statistics Division (2009)

The third column shows the percentage of total LAC exports to China in a particular commodity from a particular country – for 2009. Looking at the third line, then, for soybeans, Brazil (83%) and Argentina (16%) account for 99 per cent of all LAC soybean exports to China. In 2006, a mere handful of countries accounted for LAC exports to China in these ten commodities. By

gallagher | 183 table 9.3 Share of China exports in selected countries and sectors, 2008 Country, sector

Exports to China in sector (USD 2005)

% total country exports in sector

Argentina Crude petroleum Soybeans and other seeds Soybean oil and other oils

656,569,941 3,275,256,691 1,333,737,904

43 75 22

4,831,263,424 4,433,865,636 1,544,880,273 626,789,897 333,316,952

48 30 12 18 14

2,668,990,686 4,477,391,748 674,451,270 260,112,161

19 21 28 44

2,093,555,535 672,012,544

29 49

Brazil Soybeans and other seeds Iron ore and concentrates Crude petroleum Pulp and waste paper Tobacco unmanufactured; tobacco refuse

Chile Ores and concentrates of base metals Copper alloys Pulp and waste paper Non-ferrous base metal waste and scrap

Peru Ores and concentrates of base metals Foodstuffs

Source: Author’s calculations based on United Nations Statistics Division (2009)

2009, as exhibited in Table 9.2, these trends only accentuated. Not surprisingly, as they are among the largest in LAC, this table reveals that just six countries dominated the majority of LAC exports to China: Argentina,  Brazil,  Chile, Colombia, Mexico and Peru. Four of the countries, Argentina, Brazil, Chile and Peru, showed up as the most dominant exporters to China. Mexico and Colombia accounted for the majority of exports of non-ferrous metal waste and scrap metal to China, but did not make a significant contribution to China exports in any other sector. Other research that has compared the export basket of various LAC countries with the import potential of China found that for countries and sectors other than those on this list the potential to trade with China in the future is very low (Blázquez-Lidoy et al. 2006). Finally, for the four major countries and sectors in Table 9.2, I calculate the ratio of China exports in a sector to a country’s total exports in that sector for 2008 (exhibited in Table 9.3). For some sectors China exports were a very large part of a country’s total exports in a sector and a large percentage of total LAC exports in that sector.

Month

May June September September February April June December May May

February December March March March April May May May September

2005 2005 2005 2006 2007 2007 2007 2007 2008 2008

2009 2009 2010 2010 2010 2010 2010 2010 2010 2010

Resource-seeking

Year

Minmetals Minmetals CNPC and Sinopec Sinopec Zijin Mining Golden Dragon Chalco Minmetals and Jiangxi Copper Chinalco Jinchuan Group and China-Africa Development Fund Shougang Group Shunde Rixin State Grid East China Minerals (Jiangsu) CNOOC CNPC China Sci-Tech State Grid Sinochem Chongching Co.

Investor

Metals Metals Energy Energy Metals Metals Metals Metals Metals Metals Metals Metals Metals Metals Energy Energy Metals Power Energy Real estate

214 1,000 1,900 1,050 1,200 3,100 900 255 1,720 3,070 300

Sector

500 550 1,400 420 186 100 790 450 2,150

Quantity ($ million)

table 9.4 Chinese FDI in Latin America: major projects and motivations

Copper tubes Iron Iron Copper Iron   Oil Copper   Oil Soy land

  Copper Oil Oil Copper Copper tubes Copper Copper Copper

Subsector

Mexico Peru Chile Chile Brazil Argentina Venezuela Peru Brazil Brazil Brazil

Cuba Chile Ecuador Colombia Peru Mexico Peru Peru Peru

Country

184

May September November August September

 

total

 

Chery Auto Sinotex Hebei Zhongxin Foton Mexico

Lenovo State Construction Engineering Wuhan Iron and Steel Chery Auto Sany Heavy Industry

23,437

100 92 400 250

40 100 400 700 100

Transport Manufacturing Transport Manufacturing

Manufacturing Real estate Metals Transport Manufacturing

Autos Textiles Autos Autos

Electronics Tourism Iron Autos Metalworking

Uruguay Mexico Mexico Mexico

Mexico Bahamas Brazil Brazil Brazil

Sources: Chinese Ministry of Commerce (2010); Scissors (2010); Sinolatin (2010); Ellis (2009); author interviews and newspaper research

June April December April

2007 2008 2009 2010

Efficiency-seeking

2009 2009 2009 2010 2010

Market-seeking

185

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What stands out most is that 75 per cent of all soybeans exported from Argentina were destined for China and that 48 per cent of all soybeans exported from Brazil went to China as well. In addition, 30 per cent of all Brazil’s iron exports went to China. Indirectly, during the boom, increases in Chinese demand tightened supplies and raised global prices for many commodities, leading to a rise in exports. This drove up prices and increased overall demand for LAC goods (International Monetary Fund 2008; World Bank 2009). Gallagher and Porzecanski (2010) calculate the share of Chinese import growth as a percentage of world export growth in LAC’s top seventeen commodities sectors. For instance, Chinese imports accounted for 5.5 per cent of the growth in crude petroleum exports between 2000 and 2006. In many sectors, Chinese demand accounted for well over 10 per cent of total world export growth during the period and on average it accounted for 17 per cent of the rise in demand for LAC’s top exports. Base metals are the core LAC exports to China. Chinese demand for global exports in these products was quite high, with 54 per cent of the increase in world iron ore exports going to China, 57.8 per cent of all soy, and more than 118.9 per cent of pulp and paper.3 In other words, through demand and subsequent price increases, China was indirectly responsible for much of Latin America’s commodity export boom.

Foreign direct investment China’s foreign direct investment (FDI) in the region mirrors the trends in trade. Given that China is demanding primary products on the import side, it should come as no surprise that FDI, with a few exceptions, tends to be drawn towards the same sectors that China imports. Chinese FDI has been particularly strong since 2001. In the nation’s 10th Five Year Plan (2001–05) a call to ‘zhou chuqu’ or ‘go out’ was made that encouraged Chinese state and private firms to expand their operations overseas. Estimates of Chinese FDI into Latin America vary, but it was at least $10 billion between 2005 and 2010. Table 9.4 lists some of the major Chinese FDI projects in LAC during that period (the total exceeds $10 billion because many of the projects are multi-year and not all the pledged funds have been expended). The key motivations for Chinese FDI into LAC are both economic and political. As can be seen in Table 9.4, the greater part of FDI is characterized as ‘resource seeking’. China sees LAC as a very strategic source for primary commodities such as iron, copper, petroleum and soy. Indeed, LAC exports in these sectors constitute more than 25 per cent of all exports to China. The surge in FDI is also in part a function of China’s push to promote global ‘national champions’ such as Huawei and ZTE, telecommunications firms found in Venezuela, Mexico, Brazil and elsewhere, Lenovo (Mexico), and others. These firms are given incentives to invest overseas by setting up factories and purchasing property.

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A smaller but not insignificant amount of Chinese FDI can be characterized as ‘market seeking’. In addition to Huawei and ZTE, Chinese auto firms such as Chery and heavy machinery giant Sany have set up operations in Brazil to gain access to the Brazilian market. Chinese auto firms can be seen as ‘efficiency seeking’. Chinese auto companies in Uruguay and Mexico have located to serve the markets in these nations but also to serve as export platforms for their larger market neighbours (MERCOSUR and NAFTA). Finally, some Chinese FDI into LAC is driven by geopolitical concerns. Approximately twenty-five nations do not recognize the People’s Republic of China, but rather Taiwan, at the United Nations and elsewhere. China is very concerned about this, and has used investment in some countries to lure those nations to switch alliances. Costa Rica and Dominica have both switched alliances, Costa Rica doing so after the Chinese agreed to build a massive soccer stadium and purchase Costa Rican bonds. Formal economic cooperation

China’s increasing engagement with LAC is both market-led and a result of conscious efforts towards economic cooperation. Both LAC and China have increasing motivations for economic cooperation. China has interests in gaining more access to natural resources in Latin America, in gaining access for its manufactures to LAC markets and having LAC serve as an export platform for Chinese manufacturing firms, and in luring some LAC nations away from their alliance with Taiwan. LAC nations have an interest in gaining access to (and trade finance from) the growing Chinese market for primary commodities, in financing for infrastructure and services projects in LAC countries, among other factors. In large part trade and investment have been a function of Chinese demand and LAC supply. In other words, the market has been the primary institution driving Chinese–LAC economic cooperation. However, governments have increasingly played a role through facilitating trade and investment contracts (both diplomatically and through government financing mechanisms), and through trade and investment agreements. Before the turn of the century, LAC relations with China were fairly limited. There was a small flurry of activity in the 1970s when nations had to choose whether or not to recognize China in the UN. Chile was the first nation to recognize China and establish formal diplomatic relations (Ellis 2009). Since 2000, however, Latin Americans have flocked to China on economic missions on a daily basis, and are constantly inviting Chinese to LAC countries as well. During these and other trips, large entourages accompany heads of state to sign private and public trade and investment deals. Table 9.5 exhibits some of the major energy and services deals that have been negotiated since 2006. As can be seen, China has been awarded contracts to conduct major mining, energy and telecommunication activities in the region. Interestingly, China often

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provides the financing for the deals. What is typical is that China’s development bank, the China Development Bank (CDB), or China’s Export-Import Bank (Eximbank), will loan the LAC government funds for the project, with the funds to be paid to Chinese firms to conduct the work. China then structures collateral whereby payment is to be made in natural resources (oil, etc.). Such an arrangement helps China avoid the exchange rate risk that can be a factor in Latin America, and it is often the case that the CDB directly gives the funds to Chinese firms. The Eximbank offers buyer’s credits to importers of Chinese goods at favourable interest rates (China seems to have a similar financing approach in Africa; see Brautigam 2010). table 9.5 Selected major Chinese services contracts in LAC Year

Month

Investor

2006 2007 2008 2009 2010

April May January September July

Sinopec Chinalco Huawei Technologies Sinohydro China Northern and Southern Railway

Quantity ($ millions) 240 2,150 240 170 10,000

Sector

Country

Energy Copper Telecom Hydro power

Brazil Peru Costa Rica Ecuador

Transport

Argentina

Sources: Scissors (2010); Sinolatin (2010)

Indeed, China and Venezuela have what they have termed the ‘Heavy Investment Fund’ (Ellis 2009). The fund has been capitalized by both countries with $12 billion of hard capital, including a $6 billion revolving credit fund. Administered by China, voting on projects reflects the proportion paid in initial capital (40 votes China, 20 Venezuela). The majority of projects have been in petroleum, telecommunications and infrastructure. CDB provides the funds (in yuan) to the firm conducting the work (usually a Chinese firm). In other words, China ‘loans’ Venezuela funds that never reach Venezuelan shores but rather are given directly to Chinese firms for projects in Venezuela. Venezuela is responsible for the debt (ibid.). China has negotiated three trade treaties with LAC nations, Chile (2006), Peru (2008) and Costa Rica (2010). In these cases, as with investment treaties, there appears to be more South–South understanding of the need for special and differentiated treatment, with both LAC and China granting significant carve-outs to the other. Wise (2010) has written the first comprehensive treatment of the Chile and Peru treaties. The treaty with Chile was China’s first trade agreement with a LAC nation. Unlike more comprehensive trade treaties, such as those between the USA and LAC that cover goods, services, invest-

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ment, intellectual property, subsidies and beyond, China–LAC treaties most often focus on goods. The free trade agreement (FTA) between China and Chile allows for tariff-free entry for 92 per cent of Chile’s exports to China. Fifty per cent of Chile’s imports from China are tariff free. Chile managed to exempt 152 ‘sensitive’ products, including wheat, flour, sugar and some textiles/garments. In 2008 China and Chile signed the Supplementary Agreement on Trade in Services of the FTA. The agreement provides reciprocal market access for business, telecommunications and manufacturing services. This time, China has the more extensive set of exceptions, with numerous exceptions for financial instruments. The agreement with Peru reduces tariffs on 99 per cent of Peru’s exports to China, and 68 per cent of Peru’s imports from China. Again, China allowed Peru to exclude 592 sensitive products, including textiles, garments, shoes, and others (ibid.). However, it should be noted that the trade relationship between LAC and China is not always so rosy. Indeed, as Chinese imports of textiles, garments, auto-parts and more surge into LAC, Latin American nations have increasingly gone to the WTO to file anti-dumping cases against the Chinese.

The China–Brazil Earth Resources Satellite Perhaps the most interesting example of South–South cooperation is the ongoing collaboration between China and Brazil in satellite technology. The two countries have an extensive collaboration that has resulted in earth-imaging satellites to take images of agricultural production and land-use change, largely in Brazil. In addition to technological development, the project allows both nations to monitor the development of agricultural production in Brazil. On 6 July 1988, Brazil signed an agreement with China that called for the joint development of two earth-imaging satellites to be launched by a Long March Chinese rocket from the Shanxi launching site. The spacecraft is commonly referred to as CBERS (China–Brazil Earth Resources Satellite – Satélite Sino-Brasileiro de Recursos Terrestres) but also known in the People’s Republic of China as Zi Yuan (Earth Resources). The first China–Brazil Earth Resources Satellite (CBERS-1) was launched in October 1999, the second (CBERS-2) in October 2003, and the third (CBERS-2B) in September 2007. The first satellite generated by the scientific and technological cooperation between Brazil and China ceased operation in August 2003, after working almost two years beyond its planned lifespan. During its lifetime, CBERS-1 daily generated images and collected environmental data on the Brazilian and Chinese territories. Ground stations in China had received more than 400,000 images, and had provided various classes of image products to more than one hundred domestic users, contributing to agriculture, forestry, water conservancy, land utilization, resource and environmental investigation, etc. This data has become a major source of dynamic monitoring in the abovementioned fields and has provided important information for some large-scale

190 | nine

projects in China, such as water transmission from south to north and gas transmission from west to east. In September 2007, CBERS-2B was launched to maintain the supply of images between the end of CBERS-2’s operation and the launching of its successor. Both countries have completed feasibility studies on the construction of two more satellites, CBERS-3 and CBERS-4. Implications for the longer-run future

While China’s increasing economic ties with LAC have yielded significant economic benefits in recent years, it is not clear that such trends will benefit the longer-range future. There are two chief concerns. One is the extent to which China’s demand for LAC commodities will continue and expand, and if it does, whether such trends will trigger Dutch disease and environmental contamination for the region. Secondly, and related, is the extent to which China’s manufacturing strength will outcompete LAC manufactures exporters and contribute to the deindustrialization of the LAC economies – a ramification that could have the largest impact on LAC’s long-run growth possibilities.

Towards a resource curse? To what extent will China’s tug on the LAC export basket inflict the region with Dutch disease, whereby primary-commoditydependent countries do not develop strongly because they are victims of a ‘resource curse’. Nations overly dependent on commodities have been shown to deindustrialize because discoveries of such resources and their subsequent export raise the value of a nation’s currency and make manufactured and agricultural goods, as well as services, less competitive, eventually increasing imports, decreasing exports, creating balance-of-payments problems, and leading to poor economic performance (Sachs and Warner 1995). At this writing the prospects of LAC’s being inflicted with Dutch disease are speculative at best. However, such speculation is a result of a number of fairly plausible scenarios that are worth mentioning here, especially given the fact that once again LAC has gone through yet another commodities boom. If future demand from China and the indirect effect that Chinese demand may have on higher commodities prices in general rebound, it is possible that some Latin American countries will have larger shares of primary and resource-based products in their export baskets. During 2002–07 there was only slight (if any) evidence of a resource curse. If we were to observe Dutch disease, we would expect to see appreciating exchange rates and declining shares of manufacturing as a percentage of GDP. In the boom period, 2002–07, there was a significant appreciation of the currency in most LAC countries, except in the relatively more manufacturingcentred nation of Mexico. Figures for industrial structure reveal that at present there has been no significant change – except in the case of Chile. In Brazil and Peru, manufacturing as a percentage of GDP has remained unchanged since 1993, and in Argentina there has been an increase by almost five per-

gallagher | 191

centage points. In Chile, however, manufactures were 18.1 per cent of GDP in 1995 and 15.7 per cent of GDP in 2007. Of course, whether looking at exchange rate changes or changes in industrial structure, these trends may not be related to China in any way whatsoever. Such analyses are beyond the scope of this book but should be examined in detail in future research. The point here is that presently there are no noticeable changes that would make one cry ‘Resource curse’, but theoretically the possibility remains. Resource curse has traditionally been related to exchange rates, export diversity and growth – and not the environmental implications of resourcebased growth. Barbier (2004) extends the resource-curse analysis for Latin America and shows that this problem has plagued the continent in the past, and that because of LAC’s skewed distribution of wealth and poverty, it has also exacerbated environmental degradation and social inequity during commodity booms. Barbier shows how LAC has often experienced growth through ‘frontier land expansion’, but that in the end such expansion did not generate rents substantial enough to be reinvested in other productive activities, nor enough linkages and productivity spillovers to achieve broad-based, sustainable growth. How and why does this happen? LAC attracts investors in commercial agriculture, mining and timber extraction, and these investors tend to be among the more wealthy people in the country or across the globe. Such intensive extractive activity on the ‘frontier’, together with the  accompanying pressure from population increases and water use, leads to excessive resource conversion. According to Barbier, significant rents did not accrue over the long run – though there are undoubtedly booms – because the resources were depleted over time and because of government and market failures in the form of rent-seeking, corruption and open-access problems. The limited rents that did accrue were seldom redistributed for more dynamic economic activity (nor invested in natural capital or the poor) because the actors concerned benefit from rent-seeking activities resulting from further frontier expansion. What is more, for Barbier, resource-based activities essentially took place in rural enclaves far away from centres that could form significant backward linkages or knowledge spillovers. The rents that did accrue went to wealthy individuals, who have increased incentives for ‘rent-seeking’ behaviour that is in turn supported by policy distortions that reinforce the existing pattern of allocating and distributing natural resources. This may have occurred recently in Brazil with respect to frontier soy expansion, which expanded into the environmentally sensitive Amazon region between 1990 and 2005. As highlighted in Table 9.2, 42.7 per cent of all Brazilian soy exports (over 20 per cent of total soy production) is destined for China. In 1990, 88 per cent of all soy production was located in the state of Mato Grosso. However, by 2005 that figure was only 40 per cent, and soy production had expanded into Maranhão, Pará, Acre, Roraima and Rondônia.

192 | nine 900

8,000 China LAC World

800 700

7,000 6,000

600

5,000

500

4,000

400

3,000

300 200

2,000

100

1,000 2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

1989

1988

1987

1986

0 1985

0

9 .1 Manufacturing exports, billions of current dollars (source: Gallagher and Porzecanski 2010)

Alongside the possibility of exchange rate appreciation and environmental degradation, Dutch disease could also cause a lack of competitiveness in noncommodity sectors. Here a great deal of work has been conducted comparing China and LAC and the extent to which China will outcompete LAC in world markets. In other words, is China penetrating (or does it have the potential to penetrate) world export markets at a faster rate than firms in LAC? As China creates new markets for LAC commodities, it is also putting strain on the ability of LAC manufactures to compete with their Chinese counterparts in world markets. Based on measures of export similarity and market share, only a handful of countries presently compete with China: Argentina, Brazil, Chile, Colombia, Costa Rica and Mexico. LAC manufactures are still growing, but at a slower pace and in sectors where China is rapidly increasing its global market share. Over the past twenty-five years there has been significant growth in the world economy, and that growth has been propelled by a surge in global manufacturing exports. The experiences of China and LAC did not deviate from that trend. Indeed, they manifest it, and China’s growth has been nothing short of extraordinary. On the right-hand scale, Figure 9.1 exhibits the steep increase in world manufacturing exports from 1985 to 2006. The left-hand scale juxtaposes the experiences of China and LAC. While in 1985 the size of the global manufacturing export market was approximately $952 billion, in 2006 the market grew to more than $7 trillion – a 674 per cent increase. Within that growing market, both Chinese and Latin American manufacturing exports also grew significantly, albeit in a completely different order of magnitude. In terms of volume, Chinese manufactures exports grew even faster than world manufactures exports, by a factor of 24, between 1985

gallagher | 193

and 2006. LAC exports also bucked the global trend by increasing by a factor of 13. Part of this difference, of course, is explained by the fact that in 1985 Latin American manufacturing exports were significantly higher than Chinese exports. In 1985 Latin America exported more than $22 billion, and China exported only around $3.5 billion. However, that is only part of the picture.

Competition in world markets In just over a quarter century, China went from insignificance to becoming the most competitive manufactures exporter in the world. At the same time most LAC nations stayed insignificant and those that gained some ground have struggled to maintain it. Only Mexico seems to be (somewhat) holding on. Table 9.6 ranks the most competitive manufactures nations as measured by their share of total world manufactures exports from 1980 to 2009. In terms of relative competitiveness, a quick look at the evolution of China’s competitive position in comparative perspective highlights how dramatic China’s gains in manufacturing competitiveness have been (Gallagher and Porzecanski 2010). Chinese growth has driven China to second position in terms of manufacturing exports (Table 9.6 also shows the evolution of manufacturing exports for the United States and Germany, the other major players in the manufacturing export market). If Hong Kong is counted (and China certainly counts it!), China has leapfrogged to become the most competitive manufacturer in the world. Since 1980, China has steadily captured an ever increasing share of world manufacturing exports. While in 1986 China’s manufacturing exports represented only 0.4 per cent of world manufacturing exports, by 2006 China had become second only to Germany as an exporter of manufactures, with 11.5 per cent of the world total. Argentina and Brazil have largely maintained a small share of world manufacturing exports (around 1 per cent for Brazil, 0.2 per cent for Argentina) but have fallen down the export ladder as other countries have gained market share. Mexico, on the other hand, succeeded in increasing its share and climbing up the export ladder (going from 0.5 per cent of world manufacturing exports in 1990 to 3.3 per cent in 2000). Since 2000, however, Mexico’s share and position as a manufacturing exporter have suffered erosion again (declining to 2.5 per cent of world manufacturing exports in 2006). How have Latin American countries fared in term of China’s threat in the world, when unprotected by proximity and a web of preferential trade agreements? Not that well. Table 9.7 shows calculations of the percentage of all world exports under threat from China by country. For LAC as a whole we find that 52 per cent of manufacturing exports fall under Lall’s definition of a direct threat, and over 40 per cent as a partial. Those manufacturing exports under threat represent 92 per cent of all LAC’s manufacturing exports and 39 per cent of all LAC exports in 2009. For the largest manufacturers in the region, the threat level in world markets

3.7

2.9

2.7

Netherlands

Canada

Switzerland

Sweden

China, Hong Kong SAR Rep. of Korea Austria Spain Poland Denmark Singapore Finland Norway Ireland India Australia Portugal Malaysia

Switzerland

Sweden Spain Austria Singapore Brazil Denmark Finland Poland Ireland Norway Turkey Malaysia Portugal

2.1

Rep. of Korea China, Hong Kong SAR

Netherlands

1.8 1.6 1.5 1.2 1.0 1.0 0.8 0.6 0.5 0.4 0.4 0.3 0.3

2.5

Fmr Fed. Rep. of Germany

15.4 USA

17.9

0 19

2.2 1.6 1.4 1.2 1.1 0.9 0.7 0.6 0.6 0.5 0.5 0.4 0.4

2.2

2.9

2.9

3.1

aC in h Sweden Spain Singapore Austria Denmark Malaysia Brazil Finland Ireland Thailand Portugal Mexico

Switzerland

Rep. of Korea

Canada

Netherlands

14.8 Japan 6.9 France 6.7 Italy United KingUnited Kingdom 6.3 dom China, Hong Canada 4.7 Kong SAR

7.4

16.1

Italy

USA

Japan France United Kingdom

17.8 Japan

519 8

Fmr Fed. Rep. of Germany 14.5 USA 8.8 France 8.4 Italy

Fmr Fed. Rep. of Germany

0 8 19

7.1 2.0 1.9 1.8 1.6 1.0 0.8 0.7 0.7 0.7 0.7 0.6 0.5

2.5

3.0

3.1

3.4

3.7

6.5

Singapore Switzerland Spain Mexico Malaysia Sweden Austria Thailand Denmark Ireland Finland Brazil Portugal

Netherlands

Canada

Rep. of Korea

a in h C

3.0 2.0 2.0 1.9 1.7 1.6 1.3 1.2 0.8 0.8 0.7 0.7 0.5

3.1

3.2

3.5

5.6

Belgium Singapore Netherlands Spain Malaysia Sweden Switzerland Thailand Ireland Austria Philippines Denmark Indonesia

Mexico

Rep. of Korea

6 20

4.6

4.7

2.8 2.7 2.7 1.9 1.8 1.5 1.5 1.2 1.1 1.1 0.8 0.7 0.7

3.3

3.6

4.1

4.4

10.2 7.5 4.7

11.2

11.8

Singapore Canada Mexico Spain Switzerland Malaysia Sweden Austria Thailand Czech Rep. Poland Turkey Ireland

Netherlands

Belgium

2.7 2.5 2.5 1.9 1.6 1.5 1.4 1.3 1.2 1.0 1.0 0.9 0.9

2.9

3.2

China, Hong Kong 4.0 SAR Rep. of Korea 3.7

United Kingdom

Italy

10.2 USA 5.2 Japan 2.4 France

10.4 C a in h

14.4 Germany

China, Hong Kong 4.5 SAR Canada 3.7

United Kingdom

4.9

Italy

United Kingdom 5.4

12.6 Germany 6.3 France 6.0 C a in h

12.8 Japan

13.3 USA

20

China, Hong Kong SAR

13.5 Germany 7.3 France 7.0 Italy

13.6 Japan

16.4 USA

5 19

table 9.6 China: taking away the (manufacturing) ladder? Percentage of world manufacturing exports

2.8 2.5 2.0 2.0 1.5 1.5 1.4 1.4 1.3 1.3 1.1 1.0 0.8 0.7

Singapore

3.3

3.5

4.4

4.6

4.6

9.7 7.0 5.0

12.6

12.3

Mexico Canada Switzerland Malaysia Thailand Austria India Czech Rep. Sweden Turkey Ireland Denmark Brazil

United Kingdom

China, Hong Kong SAR Belgium

Rep. of Korea

Italy

USA Japan France

Germany

a in h C

9 20

194

0.0

0.0

Senegal

Ecuador

Source: Gallagher and Porzecanski, 2010

Zimbabwe

Peru

0.0

0.0

0.0

0.0 0.0

Uruguay

Mauritius Jordan

0.0

0.0 0.0

0.0

0.1

0.1

0.1 0.1

0.1

0.1

0.2 0.1 0.1 0.1 0.1 0.1

0.2

0.0

Colombia

Argentina Venezuela Philippines Saudi Arabia Indonesia New Zealand China, Macao SAR United Arab Emirates Hungary Bangladesh

Pakistan

0.2

0.4 4.1 0.4 0.3 0.3

Sri Lanka

0.0

0.0

Sri Lanka

Barbados Trinidad and Tobago Iceland Jamaica

Morocco

0.0 0.0

New Caledonia Kenya

0.0

0.0

Cyprus

0.0

0.0

Morocco

Syria

0.1 0.1 0.1 0.1 0.1 0.0

Tunisia China, Macao SAR Colombia Bangladesh Peru Indonesia

Mauritius

Tunisia

0.1

Saudi Arabia

Greece

0.1

Hungary

India aC in h Israel Australia Thailand

0.2 0.2 0.2 0.1 0.1

Greece Argentina Thailand Philippines New Zealand

Mauritius

Sri Lanka

Egypt Malta

Bangladesh

Colombia

Syria

Morocco New Zealand China, Macao SAR Venezuela

Tunisia

Pakistan Romania Greece Argentina Philippines Saudi Arabia United Arab Emirates

Indonesia

Israel

India Norway Turkey Poland Australia

0.0

0.0

0.1 0.0

0.1

0.1

0.1

0.1

0.1

0.1 0.1

0.1

0.1

0.2 0.2 0.2 0.2 0.1 0.1

0.3

0.3

0.5 0.5 0.4 0.3 0.3

Venezuela Dominican Rep. China, Macao SAR Morocco

Colombia

Bangladesh

New Zealand

Croatia

Tunisia

Greece Saudi Arabia

Romania

Slovakia

Norway Hungary Philippines Pakistan Slovenia Argentina

Israel

Australia

Indonesia India Czech Rep. Turkey Poland

0.1

0.1

0.1 0.1

0.1

0.1

0.1

0.1

0.1

0.2 0.1

0.2

0.2

0.3 0.2 0.2 0.2 0.2 0.2

0.3

0.4

0.5 0.5 0.5 0.5 0.5

0.2

0.2 0.2

0.2

0.2

0.5 0.4 0.4 0.3 0.3 0.2

0.5

0.5

0.7 0.7 0.6 0.6 0.6

Morocco

Belarus

Bangladesh Greece

Luxembourg

0.1

0.1

0.1 0.1

0.1

Slovenia 0.2 United Arab Emir0.1 ates Vietnam 0.1

Romania

Pakistan Argentina

Ukraine

Slovakia

Russian Federation Turkey Israel Portugal Australia South Africa Norway

Poland

Finland Brazil India Hungary Czech Rep.

0.3

0.5 0.4 0.4 0.3 0.3 0.3

0.5

0.5

0.8 0.8 0.8 0.7 0.7

Belarus

Luxembourg

Bangladesh Greece

Argentina

Pakistan

Slovenia

Saudi Arabia

Norway

0.1

0.1

0.1 0.1

0.2

0.2

0.2

0.2

0.2

United Arab Emir0.3 ates Australia 0.3 Vietnam 0.3

Israel

Indonesia Slovakia Portugal Ukraine Romania South Africa

Philippines

India Brazil Hungary Denmark Finland Russian Federation

New Zealand

Estonia

Croatia Kazakhstan

Colombia

Morocco

Bulgaria

Lithuania

Belarus

Tunisia Luxembourg

Pakistan

Saudi Arabia

Portugal Norway South Africa Australia Slovenia Argentina

Romania

Russian Federation Indonesia Finland Philippines Israel United Arab Emirates

0.1

0.1

0.1 0.1

0.1

0.1

0.1

0.1

0.1

0.1 0.1

0.2

0.2

0.4 0.3 0.3 0.3 0.3 0.2

0.4

0.5

0.6 0.6 0.6 0.5 0.5

195

196 | nine table 9.7 Exports to the world, percentage under ‘threat’ from China Direct

Partial

Total

20 6

53 15

73 21

30 10

54 18

84 27

21 1

70 4

91 6

27 6

62 14

88 21

48 21

51 22

99 43

52 38

45 33

97 71

52 22

40 17

92 39

Argentina As % of manufacturing exports in 2009 As % of all exports in 2009

Brazil As % of manufacturing exports in 2009 As % of all exports in 2009

Chile As % of manufacturing exports in 2009 As % of all exports in 2009

Colombia As % of manufacturing exports in 2009 As % of all exports in 2009 Costa Rica As % of manufacturing exports in 2009 As % of all exports in 2009

Mexico As % of manufacturing exports in 2009 As % of all exports in 2009

LAC As % of manufacturing exports in 2009 As % of all exports in 2009 Source: Gallagher and Porzecanski (2010)

is significantly higher than the threat level in LAC markets. Consistent with the literature on the subject, the situation for Mexico is among the most grave. Ninety-seven per cent of Mexico’s manufacturing exports are under threat from China, representing 71 per cent of Mexico’s entire exports. Ninety-nine per cent of Costa Rica’s manufacturing exports are under threat, comprising 43 per cent of all Costa Rica’s exports. Brazil and Argentina also see over 70 per cent of their manufactures exports under threat, but those exports under threat represent less than the LAC average at 27 and 21 per cent respectively. Summary and conclusions

This chapter has shown how a virtually non-existent economic relationship has in ten years become one of the most strategic and watched economic relationships on both sides of the Pacific. China is increasingly a destination for

gallagher | 197

LAC exports; LAC is increasingly a destination for Chinese foreign investment. The short-term benefits for each party have been quite positive over the past decade. For LAC, China has not only served as a destination for its exports, but China’s overall demand for commodities has bumped up the prices of commodities so as to give LAC a double benefit from China’s rise – Chinese imports and a China price effect on key LAC exports. For China, LAC has been a source of key raw materials, energy and foodstuffs, which China has then used as inputs into its dynamic industrialization machine. In the longer run, the distribution of the benefits of this relationship is more worrying. China’s strategic interests in LAC are securing access to natural resources and to LAC and US markets. China pragmatically views LAC as strategic because it provides inputs into its industrialization efforts and an outlet for its final products. Such a strategy is part and parcel of a neo-developmental state approach to economic development which is decidedly not consistent with the Washington Consensus. LAC lacks a comprehensive longer-run strategy for economic development. If current trends continue, LAC’s strategy could put it at a serious disadvantage. China’s double effect on primary commodities may be positive for economic growth in the present, but may result in Dutch disease and costly environmental destruction in the future. Moreover, the incentives for primary commodities production, if not complemented by development of endogenous productive capacities in manufactures and modern services, could accentuate LAC’s trend towards deindustrialization. This chapter has shown how China is already fast outcompeting LAC in world manufactures markets. Thus, rather than confirming a mutually beneficial South–South regime between LAC and China, the evidence presented in this chapter suggests that China’s pragmatic approach to LAC is helping China in both the short term and the longer run, whereas LAC’s market-led approach to China may jeopardize its longer-run development. LAC has significant leverage in economic cooperation with China, given that it is the source of key resources that China needs to develop. To date, the region has not bargained to gain long-run advantages. LAC has much to learn from China’s economic development policy, both domestically and globally. Notes 1 Much of the data in the following chapter was recorded prior to the first submission of this paper in 2010. As the updated sources would take many months to compile, we are unable to update some of the country data. In future editions, we would hope to bring the data more up to date. 2 For the majority of the calculations in this chapter, I use trade data from the United Nations Statistics Division’s Commodity Trade

Statistics Database (COMTRADE) (United Nations Statistics Division 2009). We download data at the three-digit level (SITC Rev. 2) and classify it using Sanjaya Lall’s ‘Technological classification of exports’, developed in Lall (2000). 3 The reason why this percentage can exceed 100 is that our analysis actually divides the change in Chinese import demand by the change in world exports. Even though Chinese

198 | nine imports could never exceed world exports, in some cases the growth in Chinese imports exceeds the growth in world exports, as a result of a reduction of imports in other markets.

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relationship in electronics. A case study of the PC industry in Jalisco’, in R. Jenkins (ed.), The Impact of China’s Global Economic Expansion on Latin America, Norwich: University of East Anglia. Ellis, R. E. (2009) China and Latin America, Boulder, CO: Lynne Rienner. Freund, C. and C. Ozden (2009) ‘The effect of China’s exports on Latin American trade with the world’, in D. Lederman, M. Olarreaga and G. E. Perry (eds), China’s and India’s Challenge to Latin America: Opportunity or Threat?, Washington, DC: World Bank. Gallagher, K. P. and R. Porzecanski (2010) The Dragon in the Room: China and the Future of Latin American Industrialization, Palo Alto, CA: Stanford University Press. Gallagher, K. P. and L. Zarsky (2007) The Enclave Economy: Foreign Investment and Sustainable Development in Mexico’s Silicon Valley, Cambridge, MA: MIT Press. Hanson, G. H. and R. Robertson (2009) ‘China and the recent evolution of Latin America’s manufacturing exports’, in D. Lederman, M. Olarreaga and G. E. Perry (eds), China’s and India’s Challenge to Latin America: Opportunity or Threat?, Washington, DC: World Bank. Hirschman, A. O. (1958) The Strategy of Economic Development, New Haven, CT: Yale University Press. — (1970) Exit, Voice, and Loyalty, Cambridge, MA: Harvard University Press. — (1986) A Bias for Hope: Essays on Development in Latin America (Westview Encore edn), Boulder, CO: Westview Press. International Food Policy Research Institute (2008) The World Food Situation: New Driving Forces and Required Actions, Washington, DC: International Food Policy Research Institute, www.ifpri.org/sites/default/files/ publications/pr18.pdf. International Monetary Fund (2006) World Economic Outlook, Washington, DC: IMF. — (2008) World Economic Outlook, Washington, DC: IMF. Jenkins, R. (2008) ‘Measuring the competitive threat from China for other Southern exporters’, The World Economy, 31(10): 1351–60. — (2009) ‘The economic impacts of China’s global expansion on Latin America’, in World Economy & Finance Research Programme, ODG DEV, ESRC.

gallagher | 199 Jianwu, H., S. Li and S. Polaski (2007) ‘China’s economic prospects, 2006–2020’, Carnegie Papers no. 83, Washington, DC: Carnegie Endowment for International Peace, carnegieendowment.org/files/cp_83_polaski_final1.pdf. Lall, S. (2000) ‘The technological structure and performance of developing country manufactured exports, 1985–98’, Oxford Development Studies, 28(3): 337–69. Lall, S. and J. Weiss (2005) ‘People’s Republic of China’s competitive threat to Latin America: an analysis for 1990–2002’, Oxford Development Studies, 33(2): 163–94. López, A. and D. Ramos (2008) ‘A study of the impact of China’s global expansion on Argentina’, in The Impact of China’s Global Economic Expansion on Latin America, Working Paper no. 1, World Economy and Finance Research Programme, www.uea.ac.uk/ polopoly_fs/1.113467!1%20ARGENTINA% 20General.pdf. Mesquita Moreira, M. (2007) ‘Fear of China: is there a future for manufacturing in Latin America?’, World Development, 35(3): 355–76. Naughton, B. (2007) The Chinese Economy: Transitions and Growth, Cambridge, MA: MIT Press. Ocampo, J. A. (2007) ‘The macroeconomics of the Latin American economic boom’, CEPAL Review, 93: 7–28. Ocampo, J. A. and M. A. Parra (2003) ‘The terms of trade for commodities in the twentieth century’, Cepal Review, 79: 7–35. — (2010) ‘The terms of trade for commodities since the mid-nineteenth century’, Journal of Iberian and Latin American Economic History, 28(1): 11–43. Paus, E. (2009) ‘The rise of China: implications for Latin American development’, Development Policy Review, 27(4): 419–56. Pérez, M., S. Schlesinger and T. A. Wise (2009) The Promise and the Perils of Agricultural Trade Liberalization: Lessons from Latin America, Medford, MA: Tufts University Global Development and Environment Institute, carnegieendowment.org/files/ Promise_and_Perils.pdf. Prébisch, R. (1951) ‘Growth, disequilibrium and disparities: interpretation of the process of economic development’, in Economic Survey of Latin America 1949, Santiago: ECLAC. Sachs, J. D. and A. Warner (1995) ‘Economic

reform and the process of global integration’, Brookings Papers on Economic Activity, I: 1–95. Scissors, D. (2010) ‘China global investment tracker’, Washington, DC: Heritage Foundation, www.heritage.org/research/ reports/2010/02/china-global-investmenttracker-2010. Sinolatin (2010) Sinolatin Capital, Shanghai, www.sinolatincapital.com. Thrasher, R. D. and K. P. Gallagher (2010) ‘21st century trade agreements: implications for development sovereignty’, Denver Journal of International Law and Policy, 38(2): 313–50. United Nations Statistics Division (2008) United Nations Commodity Trade Statistics Database (COMTRADE), comtrade.un.org/db/. — (2009) United Nations Commodity Trade Statistics Database (COMTRADE), comtrade. un.org/db/. Wilson, P. (1992) Exports and Local Development: Mexico’s New Maquiladoras, Austin: University of Texas Press. Wise, C. (2010) Trade Liberalization a la Carte: The Political Economy of Latin America’s Free Trade Agreements with China and the US, School of International Relations, University of Southern California. Wise, T. (2009) ‘Promise or pitfall? The limited gains from agricultural trade liberalisation for developing countries’, Journal of Peasant Studies, 36(4): 855–70. World Bank (2009) Global Economic Prospects 2009: Commodities at the Crossroads, Washington, DC: World Bank, siteresources. worldbank.org/INTGEP2009/Resources/10363_WebPDF-w47.pdf. — (2010) World Development Indicators, Washington, DC: World Bank, data.worldbank. org/data-catalog/world-developmentindicators. Yongzhong, W. (2010) ‘Effectiveness of capital controls and sterilizations in China’, China and the World Economy, 18(3): 106–24. Yu, Y. (2008) ‘Managing capital flows: the case of the People’s Republic of China’, ADB Institute Discussion Paper no. 96, Manila: Asian Development Bank, www.adbi.org/ files/dp96.managing.capital.flows.prc.pdf. Zhao, Y. (2005) ‘The 2002 Space Cooperation Protocol between China and Brazil: an excellent example of South–South cooperation’, Space Policy, 21: 213–19.

10 | GROWING ECONOMIC RELATIONS BET WEEN THE GCC AND CHINDIA

Nader Habibi

Up until a decade ago the economic relations among Middle Eastern and Asian countries were limited and mostly dominated by oil and gas exports. In both regions, a growing number of countries were opening up their economies and introducing economic reforms, but trade and investment relations were primarily oriented towards advanced industrial nations. Europe and the United States were the main importers of oil from the Middle East, and they also provided most of the goods and services that Middle Eastern countries imported. The only Asian country with significant economic ties to the Middle East was Japan. Europe and North America were also the main economic partners of Asian countries which relied on exports of low-cost manufacturing products to this region for their economic growth. Gradually, over the past decade, the two regions have discovered many areas of trade and economic cooperation. Asia’s demand for oil has sharply increased, which forced many Asian countries to expand their economic ties with the Middle East. At the same time a number of political and economic developments have encouraged Middle Eastern countries to ‘Look East’ for both trade and investment. As a result, the level of economic interdependence between the two regions has increased. Among Middle Eastern countries the six oil-rich countries of the Gulf Cooperation Council (GCC) have taken the lead in the development of economic ties with Asia. The GCC member countries are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates. While oil has traditionally been the most important parameter in Asia– GCC relations, and will remain so for many years, other dimensions of this relationship are also worth noting. Both regions are enjoying strong economic growth, leading to a rapid increase in bilateral investment and (non-oil) trade. In an attempt to diversify their investment portfolios, the GCC governments and private investors increasingly look at investment opportunities in fastgrowing Asian economies such as China and India (Chindia1). At the same time the recent economic reforms and rapid economic growth have created many attractive investment opportunities in GCC economies for Asian firms. This chapter focuses on recent and future trends in economic ties between Chindia and GCC countries. Although the GCC is a very small region with

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a combined population of approximately 39 million, it has accumulated a large amount of oil revenue reserves since 2002. As a result, it has emerged as a major import market and a major source of investment capital in the global economy. The current global financial crisis has adversely affected both Asia and the GCC. The value of foreign investments in both regions has declined since 2008. For GCC countries this decline was triggered by the rapid fall in oil prices after June 2008. For Asian countries the decline was brought about by the global financial and real estate price decline. However, the adverse economic impact of the global crisis on China, India and GCC countries has been significantly milder than on Western countries. Potential for economic growth and prosperity remains strong in both regions and creates a positive environment for expansion of bilateral economic ties in the long run. The origins of mutual attraction

While there were strong trade relations between East Asia and the Middle East before the rise of European colonialism, these relations diminished sharply after the seventeenth century with colonial as well as economic pressures. After the Second World War, the regions had little to offer each other as they were both in need of industrial goods and machinery. China’s communist government further discouraged Middle Eastern countries interested in trade during the Cold War. The situation gradually changed as both China and India enjoyed fast economic growth and produced a more diverse array of products for export in the 1980s. A glance at the number of diplomatic visits made and bilateral economic agreements recently signed between GCC countries and leading Asian economies clearly points to the emergence of an unprecedented mutual attraction between the two regions. Since 2005 several high-ranking delegations from GCC countries have visited the capitals of China, India, Indonesia, Malaysia and other Asian countries. The most visible among these visits was the June 2006 trip of Saudi Arabia’s King Abdullah to China, India, Indonesia and Malaysia. Such visits have led to the establishment of formal economic ties like the GCC–China Framework Agreement on Economic Cooperation.2 There are several important reasons for this mutual attraction. The leading Asian countries, particularly China and India, see the GCC as a reliable source of the oil and natural gas needed for economic growth. Consequently, they are eager to sign long-term energy contracts with GCC oil exporters. In addition to oil, the Asian countries are also interested in other investment and trade opportunities. The GCC real estate development market and the massive investments in large infrastructure and manufacturing projects have created many opportunities for Asian firms. The GCC countries, on the other side of this equation, are looking at Asian economies as valuable long-term customers for their oil and gas exports and

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are equally eager for long-term oil export contracts. These countries are also interested in the cost-effective export products of Asian countries. The GCC countries are also blessed with large quantities of oil revenue surpluses, which they would like to invest in the fast-growing Asian economies. Aside from economic and financial factors, the geopolitical parameters have also contributed to this rapid increase in bilateral relations between Emerging Asia and the GCC. The September 11th attacks in New York and the US invasion of Iraq have had an adverse effect on trade and investment relations between the West and the Arab world. These tensions have encouraged some Arab investors to diversify their investment portfolios, which were traditionally heavily oriented towards Europe and the United States. These investors are increasingly looking to Asia for investment opportunities. Trade relations

Solid economic growth and the large hard currency revenues of China and India on one side, and the GCC countries on the other, have allowed the two sides to expand their economic trade substantially in the past two decades. Furthermore, for the reasons that were explained in the previous section, the political leaders on both sides have strongly encouraged the expansion of trade relations through various diplomatic initiatives, trade negotiations, exhibitions and trade shows. Figures 10.1 and 10.2 offer an overview of aggregate trade between the GCC and Chindia. These graphs reveal that the volume of GCC trade with both China and India was relatively small and stable during the 1990s and with any visible growth realized after 2000. GCC exports to China and India are dominated by crude oil, whose rising price is partly responsible for the increased value of GCC exports to these countries. Another contributing factor is the sharp increase in the volume of crude oil that the GCC has exported to China and India. The demand for oil in both India and China has increased steadily since 2000, and both countries have increased their crude oil imports from the GCC. The total volume of GCC exports to China rose by more than thirteen-fold from $5.9 billion in 2000 to $78.9 billion in 2011. GCC imports from China grew at an even faster pace during 2000/11 – up 1,350 per cent, from $3.8 billion to $51.6 billion. As shown in Figure 10.2, the annual trade imbalance between China and the GCC has remained very small, with the exception of 2008, when record high oil prices led to a $6.8 billion trade surplus for the GCC. This surplus evaporated in 2009 with the sharp decline in oil prices, but grew to $27.5 billion in 2011. While GCC imports from India enjoyed steady growth from 2001, the GCC exports to that country remained stable until 2005 (Figure 10.1). In 2005, however, they took off sharply, exceeding imports during 2006–11. As a result, after suffering moderate trade deficits in its bilateral trade with

habibi | 203 90 80 70

Exports to India

60 50 40 30 Imports from India

20 10 0

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10 . GCC trade with India (billion $US) (sources: Country-level trade data: IMF, Direction of Trade Statistics; GCC-level aggregations calculated by the author

India during 2002–05, the GCC enjoyed record surpluses in the next six years. Although India’s economy is several times smaller than China’s, the volume of GCC exports to India have risen faster than exports to China in recent years, and in 2007 the GCC exported more to India than to China (a difference of $9.7 billion). The large community of Indian workers and professionals in the GCC has made a positive contribution to the growth of bilateral trade and investment.

90 80

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GCC trade with China ($US billions) (source: IMF, Direction of Trade Statistics)

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Exports 2000

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30 25 20 15 10 5 0 UAE 10 .3

Bahrain

Kuwait

Qatar

Oman

Saudi Arabia

India’s trade with GCC countries ($US billions) (source: IMF, Direction of Trade Statistics)

The sharp increase in bilateral trade between the GCC and Chindia is not evenly or proportionately distributed among GCC countries. As demonstrated in Figures 10.3 and 10.4, Saudi Arabia and the United Arab Emirates (UAE) account for most of the GCC trade with India and China. In 2011, the UAE and Saudi Arabia, together, accounted for 89 and 88 per cent of GCC imports from India and China respectively. The combined share of Saudi Arabia and the UAE in GCC exports to India and China during the same year was 55 and 67 per cent respectively. 50 45 40

Exports 2000

Imports 2000

35

Exports 2011

Imports 2011

30 25 20 15 10 5 0 Saudi Arabia 10 .4

Qatar

Bahrain

Kuwait

UAE

Oman

China’s trade with GCC countries ($US billions) (source: IMF, Direction of Trade Statistics)

habibi | 205 0.12 Share of China 0.10 0.08 0.06 0.04 Share of India

0.02 0

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10 .5 Shares of India and China in Saudi Arabian imports (%) (source: Calculated by the author based on data from IMF, Direction of Trade Statistics)

Despite its much smaller population in comparison to Saudi Arabia, the UAE is the largest GCC importer of goods from India and China. In 2011, the UAE accounted for 77 and 57 per cent of GCC imports from India and China respectively. These large imports, however, are partly re-exported from the UAE to other Middle Eastern countries. In the past two decades the UAE has emerged as a major re-export centre in the Middle East, a role facilitated by the creation of several free trade zones (FTZs) such as the Jebal Ali Free Zone Area.3 The GCC–China and GCC–India bilateral trade has not only grown rapidly in absolute terms but it has also increased in relative terms. Figures 10.5 and 10.6 show the relative shares of China and India in total imports of the UAE

0.25 0.20 0.15 0.10

Share of India

0.05 Share of China 0

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10 .6 Shares of India and China in UAE imports (%) (source: Calculated by the author based on data from IMF, Direction of Trade Statistics)

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Share of India 1994

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10 .7 Shares of India and China in Saudi Arabian exports (%) (source: Calculated by the author based on data from IMF, Direction of Trade Statistics)

and Saudi Arabia, which are responsible for the bulk of GCC trade with Asia. In Saudi Arabia China’s share has risen steadily from 4 per cent in 2000 to 11 per cent in 2010 (Figure 10.5). This growth has come at the expense of the United States and the European Union whose shares have gradually declined over the same ten-year period. The market share of India in Saudi imports grew at a slow pace until 2005, but has grown faster ever since and exceeded 4 per cent during 2007–10. The growth in the market shares of India and China in UAE imports is even more impressive. As shown in Figure 10.6, after remaining stable in the 4–6 per cent range for several years, the market shares of both Asian countries rose sharply during 2003–10, standing at 14 and 19 per cent respectively in 0.14 0.12 Share of India 0.10 0.08 0.06 0.04 Share of China

0.02 0

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10 .8 Shares of India and China in UAE exports (%) (source: Calculated by the author based on data from IMF, Direction of Trade Statistics)

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2010. The rising market shares of China and India in GCC imports point to a reorientation of GCC trade towards emerging Asia. The shares of India and China in GCC goods exports have also increased in the past decade. This growth is particularly noticeable for Saudi Arabia, as shown in Figure 10.7. China’s share rose to 11.9 per cent in 2010, making China one of Saudi Arabia’s largest oil clients. Together China and India accounted for nearly 14 per cent of Saudi exports in 2010 compared to only 3.7 per cent in 2000. While compared to India China has emerged as a larger export market for Saudi Arabia, the opposite is the case for the UAE. India’s share of UAE exports reached a peak of 11.9 per cent in 2010 compared to 1.7 per cent for China (Figure 10.8). Overall, China and India are less important for UAE exports than for Saudi Arabian exports because oil is a smaller component of UAE exports. Investment relations

During the decade 2000–09, China and the GCC both enjoyed considerable foreign surpluses, which allowed them to accumulate large reserves of foreign currency.4 They have gradually converted a sizeable portion of these reserves into different types of foreign assets, and both regions are considered leading sources of investment capital for the global economy. Although India’s foreign trade did not generate a significant amount of trade surplus during 2000–09, the country’s strong economic growth attracted a large amount of foreign investment from GCC members and other countries. These abundant resources, and the growing mutual attraction that was described earlier, have led to a steady increase in investment flows between the GCC and Emerging Asia since 2000. Both India and China have eagerly sought to expand their investment relations with GCC countries, and these efforts have resulted in a number of bilateral investment treaties that are listed in Table 10.1. table 10.1 Bilateral investment treaties

china

Bahrain Kuwait Oman Qatar Saudi Arabia UAE

india

Date treaty was signed

Entry into force

Date treaty was signed

Entry into force

1999 1985 1995 1999 1996 1993

2000 1986 1995 2000 1997 1994

2004 2001 1997 1999 2006

2003 2000 1999

Source: UNCTAD, Country Specific Lists of BITs

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GCC foreign assets go far beyond their official foreign reserves and include a large array of financial and physical assets. Up until recently GCC countries were investing a significant portion of their foreign assets in western Europe and the United States, managed largely by GCC central banks or their sovereign wealth funds (SWFs). While the GCC governments do not release any formal data about the size and allocation of these assets, several sources estimated the value to be between $1.275 and $1.5 trillion at the end of 2006 (Toloui 2007; Habibi 2008; Lane and Milesi-Ferretti 2006). table 10.2 Estimates of total foreign assets in December 2006 ($US billions) Country Oman Bahrain Qatar Kuwait Saudi Arabia UAE

Total foreign assets 10 20 70 400 450 600

Source: IIF (2007)

An important issue for Asia–GCC investment relations is the geographic allocation of the GCC’s foreign assets. The International Institute of Finance study (IIF 2007) uses data from the US Treasury International Capital System, the Bank for International Settlements, and Bloomberg’s database on mergers and acquisitions to determine that from 2002 to 2006, GCC countries earned $542 billion in current account surplus and invested the lion’s share ($300 billion) in the United States. This contrasts with the meagre $60 billion (11  per cent) invested in Asian countries.

GCC investments in Asia It is difficult to find accurate formal statistics on flow of GCC investments into Asian countries. A large number of these investments are made by small private investors for whom accurate public data is not available. However, based on the growing number of news reports on GCC-based investment projects in China and India, we can speculate that the volume of GCC investments in these countries has steadily increased since 2000. By reviewing the available public information about GCC investment projects in Asian countries we are able to observe several key features. A majority of these investments are directed at three economic sectors: energy, real estate and financial institutions. China has received more GCC investments than any other Asian country up until now. However, in the coming years China might face strong competition from India, Indonesia and Vietnam. A recent World Bank study has used survey data on FDI outflows from

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Middle East and North Africa (MENA) countries to investigate why MENA investors, dominated by GCC countries, are attracted to China and India (World Bank 2008: 56).5 The most important reasons, as reported by these investors, were: participation in industrial clusters, strong growth potential of the domestic market and low production costs. Other, less frequent, explanations were: opportunities for joint venture partnerships, proximity to markets, and access to technology or innovation. While the Indian government has made significant reforms to its foreign investment laws in recent years to boost FDI inflow, the Chinese government has done the opposite. China has become a magnet for foreign investment, and the Chinese government is worried that too much money is coming in. Chinese policy-makers believe that excess FDI led to speculation in the real estate and stock markets during 2000–08, as well as the Asian crisis of 1997. Furthermore, domestic Chinese firms are now more competitive and the government, which has already accumulated more than $1.8 trillion in financial reserves, is not as eager for foreign investment as it was a few years ago. These changes make it more difficult for GCC investors to invest in Chinese real estate projects.6 For strategic energy-related reasons, however, the Chinese government is likely to ease these restrictions for GCC countries. investment projects in oil and petrochemicals Saudi and Kuwaiti investors have dominated GCC’s energy-related investments in Asia. In March 2007, China Petroleum & Chemicals Corporation (SINOPEC) signed an agreement with Saudi Arabia’s oil company (Aramco) and ExxonMobil for a $3.6 billion refinery project in Fujian province in southern China. The three firms also signed an agreement to operate 750 filling stations and several oil terminals in Fujian province. Aramco and ExxonMobil will each own 25 per cent of the refinery and 22.5 per cent of the fuel filling stations.7 In both projects, the Chinese partner holds a majority share and hence provides the Chinese government with considerable supervisory power over their operation. In addition to the Fujian refinery, Saudi Aramco is also a 25 per cent stakeholder in another SINOPEC refinery project in Shandong province, which came online in June 2008. Aramco has also been engaged in negotiations with several Indian oil companies for partnerships in refinery projects. India has offered Aramco minority stakes in three refineries that are near completion. However, these negotiations, which began in 2005, have slowed owing to disagreements about the terms of Aramco’s participation. The targeted refineries belong to Hindustan Petroleum Corporation Limited (HPCL) and Bharat Petroleum Corporation Limited (BPCL). This initiative is part of India’s new policy of opening its energy sector to international investment. India’s motivation for seeking GCC participation in its refineries is similar to China’s; to secure a long-term supply of crude oil (Hanware and Ramkumar 2007).

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Building refineries in China and India has an important strategic advantage for Saudi Arabia, which produces both light and heavy crude oil. While demand for light crude (which is easier to refine) is strong, Saudi Arabia has had difficulty finding reliable customers for its heavy crude. The joint venture Chinese refineries that Aramco has participated in (and the Indian refineries that it is currently negotiating) are being specially designed to handle Saudi heavy crude. Hence, by investing in these projects, Saudi Arabia is strengthening the demand for its own heavy oil, which many refineries are reluctant to buy. Kuwait is also seeking energy-related investments in Asia. In June 2006, China offered primary approval for construction of an oil refinery in southern Guangdong province as a $5 billion joint venture between SINOPEC and Kuwait Petroleum Corporation (KPC).8 Dow Chemical and Kuwait Petrochemicals Company are junior partners in this project which, once operational, will have a 300,000–350,000-barrels-per-day refining capacity (Chen 2008). The unit will include a 1-million-ton-a-year ethylene cracker. Kuwait has also expressed interest in developing a 100,000-barrel-per day refinery in Pakistan’s Port Said Authority. A memorandum of understanding for this project was signed between the governments of Kuwait and Pakistan in 2006. real estate In a 2007 study, Kuwait Investment House predicted a sharp increase in GCC investments in India during 2007–10, with most of these investments going into real estate development projects (Percept Profile Gulf 2007). Several GCC-based real estate development firms have gained considerable experience and expertise in large-scale construction activities. These companies are taking the lead in GCC’s real estate investments in Asia. As in the energy sector, the preferred mode of operation for GCC real estate firms is joint venture partnerships with suitable domestic partners in targeted Asian countries. Among Asian countries, India has been more successful than others in attracting GCC investments in real estate development. This is partly because of the 2004/05 FDI reforms, which allowed for automatic foreign investment of up to 100 per cent in construction development projects.9 The leading GCC real estate developer, Emaar, for example, partnered with MGF Development, a leading Indian property development firm, to establish Emaar-MGF Land Limited in February 2005. This joint venture firm has resulted in the largest infusion of foreign investment in the Indian real estate sector.10 Real estate development opportunities in China are also attracting GCC investors. In 2008 the Abu Dhabi Investment House (ADIH) entered into a partnership with the Chinese firm Shanghai Construction (Asia) Co. Ltd (SCAC) for investment in China’s property market. The two parties have invested $6.5 billion in this joint venture (ZAWYA 2008). Some GCC investors are also taking advantage of the recent decline in China’s real estate values to purchase investment properties. The ADIH is also planning a $1.5 billion China Fund for investment in manufacturing and real estate projects (Reuters 2008).

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financial investments In addition to oil and real estate, GCC investors have a strong preference for investment in the financial sector, for two reasons. First, since the 1970s, some GCC investors have acquired significant knowledge of and experience in financial investments. Secondly, in emerging market economies, the financial sector offers relatively more liquid investment opportunities. It is therefore no wonder that GCC investors have shown a strong interest in initial public offerings (IPOs) of major Chinese banks. During the IPO of the Bank of China (BoC) in May 2006, a group of Saudi investors purchased a $2 billion stake, equivalent to 2.7 per cent of BoC’s total value. The most prominent among these investors was the Saudi billionaire Prince Alwaleed ibn Talal, whose share in this purchase was $1.2 billion (Hassan 2007). In most Asian countries the financial sector is still subject to strict government regulations, which often put independent foreign investors at a disadvantage. As a result, most foreign investors, the GCC included, prefer to establish joint ventures with local partners or purchase equity stakes in existing financial firms. Among GCC financial institutions, UAE banks have shown a strong desire to invest in India. In addition to India’s strong economic growth, they are also interested in its financial service market owing to the presence of a large expatriate Indian community in the UAE. By establishing branches in major Indian cities, the UAE banks are trying to serve the financial needs of this community. Currently the Abu Dhabi Commercial Bank (ADCB) is the only GCC bank with an active presence in India, having several branches in Mumbai and Bangalore. Other UAE banks have sought partnerships with Indian banks. The Dubai Bank, for example, has a cooperation arrangement with ICICI Bank which dates back to 2003 (Vasan 2003). Some Asian countries have successfully attracted GCC investment funds by offering Islamic financial services. Islam is the dominant religion in GCC countries, and a large majority of citizens are devout Muslims who adhere to Islam’s prohibition on interest charges. Consequently some high-net-worth individuals in the GCC stay away from investment opportunities that violate the anti-usury principle or which invest in prohibited activities such as gambling and alcoholic beverages. Ever since the 1970s Islamic banks and Islamic investment funds have operated in some Asian countries with the dual objective of serving the financial needs of their domestic Muslim population and attracting funds from international Muslim investors. India, which is home to a 140-million-strong Muslim minority, is likely to attract a considerable amount of Islamic investment from the GCC in the coming years.

Investments of China and India in the GCC The large financial resources and rapid economic growth of GCC countries will result in a strong demand for investment in both energy and non-energy projects. According to a 2006 study by Shihab-Eldin, GCC countries will invest approximately US$198 billion

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in energy industry expenditures (Shihab-Eldin 2006). A significantly larger amount will be invested in real estate, manufacturing and infrastructure in the long run, although the exact amount will depend on the price of crude oil and these countries’ export revenues. The GCC countries are projected to spend $1.4 trillion on infrastructure and construction projects between 2009 and 2015 (McKinsey Global Institute 2009). This abundance of investment activities will create significant opportunities for Asian firms. Most of the Asian investment in GCC countries is expected to originate in China and India. Ever since 2002, the Chinese government has encouraged private and government-owned firms to invest in other countries. As a result of this policy, more than five thousand Chinese firms were involved in foreign investment activities by the end of 2006, and the volume of outward FDI rose to $91 billion.11 India’s interest in foreign investment goes back to the 1970s, but initially it was politically motivated. After the market-oriented reforms of the 1990s, private multinational Indian firms took the lead in promoting foreign investment (World Bank 2008: 55). Currently FDI flows from India and China to GCC countries are only a small fraction of their worldwide foreign investment flows. For India, the MENA region accounted for only a small percentage of its global investments during 2002–08. A large portion of India’s FDI investments in MENA, however, were invested in the UAE, which accounted for 3 per cent of its total FDI outflows in this period.12 During 2003–06 only 2 per cent of China’s FDI flows were allocated to MENA countries, but Saudi Arabia, the UAE and Oman received 22, 11 and 5 per cent of China’s investment in MENA countries during this interval (Ministry of Commerce 2007). oil and gas sectors Chinese and Indian oil firms are eager to invest in oil and gas projects in GCC countries. Their investments in the energy sector are intended to gain access to oil reserves and create long-term bilateral dependencies which can ensure access to MENA’s oil and natural gas in the long run. The GCC governments are fully aware of China and India’s motivations and have found it in their own interests to welcome a limited amount of investment from these two countries. In all GCC countries foreign investment in the energy sector is restricted and highly regulated. Only Qatar and to a lesser extent the UAE allow partial foreign ownership in the context of production-sharing arrangements. In other GCC countries foreign participation in the energy sector is limited to a) service and maintenance contracts, and b) exploration for oil and gas, which if successful will be followed by a buy-back contract. At present the investment restrictions will limit the size and nature of Asian investments in the GCC’s energy sector, but some GCC countries, such as Kuwait, might create more opportunities for foreign participation. Currently the American and European oil companies dominate oil and gas sector service

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and production contracts in GCC countries. The arrival of Asian firms poses new competition for Western oil interests. While all GCC countries might welcome this Asian competition for economic reasons, Saudi Arabia might also be mindful of its geopolitical and strategic implications. Availability of Asian competition for oil- and gas-related service contracts will give Saudi Arabia more leverage in diplomatic relations with the United States and Europe. China’s energy investments in other countries are carried out by its three state-owned oil companies – SINOPEC, CNOOC and CNPC. China’s energy sector investments in GCC began with Oman. In 2002 Oman awarded a small production maintenance contract to CNPC. Good performance on the part of CNPC encouraged the Omani government to award an exploration and output-sharing contract to SINOPEC in August 2004 (Eurasia Group 2006). SINOPEC also won a major project in Saudi Arabia in 2004, which involved exploration for gas in the desert region known as the Empty Quarter (Rub’ al-Khali). SINOPEC has established a joint venture for this purpose called Sino-Saudi Gas Limited (SSGL). In December 2007, SSGL discovered gas at one of its exploration sites. China’s energy investments in Saudi Arabia accelerated after a January 2006 visit by King Abdullah to China. Like China, India is trying to secure GCC oil and gas supplies by encouraging reciprocal energy investments. After his tour of China in January 2006, the Saudi king paid a formal visit to India and signed an agreement for promotion of trade and investment between the two countries. Indian oil companies, however, have found it difficult to penetrate the GCC energy sector. They are facing the same barriers as the Chinese firms. In March 2005, India’s ONGC won an oil acreage in Qatar (the Najvat Najem oil block) but the project was abandoned because the discovered reserves were too small (Mishra 2008). There seems to be a visible difference between Chinese and Indian firms’ approach to investment in Middle East. Chinese firms (CNPC, SINOPEC and CNOOC) have received more support from the Chinese government in terms of attractive financing for their MENA investments. As a result, they have been more willing to take independent initiatives. The Indian firms (ONGC, the Indian Oil Corp. and Oil India Ltd), on the other hand, have received less financial backing from the Indian government and have been forced to opt for partnership (joint venture) agreements, which require less financial capital. A successful example of these joint venture investments is the Oman–India Fertilizer Company, which cost $969 million and became operational in January 2006. Equity investment in this project covered less than one third of the cost, while financing from several international banks covered the rest. We expect the flow of Asian investments in GCC’s energy sector to increase in the coming years. The main reason is that, with the support of their respective governments, the oil and gas companies of China and India are

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becoming more competitive and expanding their technical capabilities. At the same time, it must be noted that GCC opportunities will mostly be limited to service contracts. The GCC governments will closely safeguard the ownership of their oil and gas assets. Production sharing will be their preferred mode of engagement with foreign oil companies. non-energy sectors The GCC’s massive development projects have also created many contracting and subcontracting opportunities for foreign firms. Western firms have long had a presence in GCC markets, but Chinese and Indian firms are gradually establishing a presence. Most Chinese and Indian investments, however, are directed towards nontradable goods, such as real estate. Ever since the Dubai government relaxed the existing restrictions against foreign investment in real estate in 2002, both Indian and Chinese investors have invested heavily in Dubai real estate. A 2008 report by a Dubai-based real estate research firm indicated that Indian nationals held the largest volume of real estate assets ($1.42 billion) in the Dubai market (Gowealthy.com 2008). Pakistani nationals ranked fourth, with $776 million invested in Dubai, after Saudi Arabia and the UK. Both Chinese and Indian firms have benefited from subcontracting opportunities that have been passed to them by Western and domestic (GCC) firms for large-scale construction projects. In more recent years they have also operated as prime contractors for several projects. For example, two Chinese firms, Sinomach and NFC, are building two aluminium processing plants in Jazan Economic City (a city in south-eastern Saudi Arabia) ( Jazan Economic City 2007). The Asian firms are also aggressively investing in the growing financial sector of GCC countries, particularly Qatar and Dubai. In 2008, China’s leading bank, ICBC, opened branches in Doha and Dubai and announced that the Dubai branch will serve as the lead office for its operations throughout the Middle East. As mentioned earlier, several GCC investors have invested in ICBC, and it is a common strategy among GCC investors to encourage the firms that they have invested in to operate in the GCC. The Indian banks have an even longer history of presence in the Middle East. The State Bank of India (SBI) opened an offshore branch in Bahrain in 1977. The presence of a large Indian community in the GCC has played an important role in promoting investment flows in both directions. It has led to a large number of small to medium-sized investments by Indian investors in the retail and re-export sectors of the GCC. Indian information technology (IT) firms also have a strong presence in the GCC, particularly in outsourcing services. The UAE government has actively encouraged this process by creating outsourcing free zones in which American and European firms can partner with Indian firms to offer outsourcing services to Western clients. Among GCC countries, the UAE has attracted the largest number of

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Asian firms. Approximately one thousand Chinese firms were active in the UAE during 2006 (Carvalho 2006). In contrast, only fifty-five Chinese firms were active in Saudi Arabia, and of these forty-two were involved in non-oil sectors by 2008 (Chinese Embassy 2008). The same applies to Indian firms. According to the UAE foreign company registration statistics, 12,359 Indian companies had registered with the Dubai Chamber of Commerce as of February 2008 (Aneja 2008). Asian migrant workers in the GCC

As mentioned above, an important dimension of GCC–Asia relations is the presence of large groups of Asian workers in GCC countries. The sudden surge in oil revenues of GCC countries in the 1970s led to a large investment boom in infrastructure and real estate. Faced with significant domestic labour shortages, GCC governments imported large quantities of foreign workers. Initially they filled most of these jobs with migrant workers from other Arab countries. For political and security reasons, however, the GCC governments grew sceptical of Arab workers and gradually switched to Asian workers (mostly from India, Pakistan and Bangladesh). According to the Ministry of Overseas Indians (Government of India), 4.23 million Indians currently reside in GCC countries. The population of Chinese workers in GCC countries is significantly smaller, but it has been on the rise in recent years. The compensation and living conditions of unskilled Asian workers in GCC countries have been criticized by international human rights and labour rights organizations. These organizations accuse GCC employers of exploiting these workers and denying them decent living conditions during the course of their employment. They tend to live in separate residential compounds in crowded living conditions and employers often restrict their travel rights through the worker sponsorship regulations. Since these employment opportunities and the resulting remittances are very important to the sending countries, the Asian governments have generally been cautious in their efforts to secure better terms for their workers in the GCC. Nevertheless the international outcries have had a gradual effect on GCC governments, and they have taken some steps to address these issues.13 Migrant worker remittances are a significant source of income for millions of households in India and China. According to a 2008 World Bank report, the remittance revenues of India and China stood at $27 billion and $25.5 billion respectively, in 2007. These figures rose to approximately $30 billion and $27 billion in 2008, placing India and China in first and second place among all remittance-receiving nations in that year (Ratha et al. 2008). The Indian workers in GCC countries generate close to $5 billion in remittance income annually (Ramkumar 2009). GCC remittances are an important source of external private income for Pakistan and Bangladesh as well. According to World Bank estimates, the GCC accounted for 63 and 52 per cent of

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total remittance incomes in Bangladesh and Pakistan, respectively, in 2008 (Ratha et al. 2008: 9). Another study by Amjad has shown that inflow of remittances by Indian workers in GCC countries has made a visible and significant contribution to the economic development of several Indian states (Amjad 1989). Asian migrant workers make an important contribution to GCC economies as the largest group of foreign workers in all GCC countries. In 2005 the share of Asian workers in the foreign labour force of GCC countries was as follows: Bahrain (80 per cent), Kuwait (65 per cent), Oman (92.4 per cent), Qatar (45.6 per cent), Saudi Arabia (59.3 per cent) and the UAE (87.1 per cent) (ILO 2009). In some GCC countries the non-Arab population constitutes a large share of the total population, and the presence of such a large group of immigrants has raised some concerns in these countries. The GCC governments are worried that large immigrant communities can pose a cultural, as well as a security, threat in the long run. Some GCC political leaders have tried to address these threats by calling for diversification of the origins of foreign workers and a requirement to limit the duration of work for each worker to six years. If these policies are implemented we might see limits on the number of Indian workers, which constitute the largest expatriate communities in all the GCC countries. The total number of Asian workers in GCC countries, however, is not expected to decline. Another trend that we are likely to observe in the coming decade is an increase in the sophistication and skills of the Asian workers in GCC countries. As these economies become more diverse, the set of skills that they require will also become more sophisticated. Since the construction and real estate boom is expected to continue in the long run, the demand for unskilled Asian workers will remain strong, but the demand for skilled workers and technicians will increase. Western engineering firms that operate as prime contractors for large-scale projects tend to subcontract many aspects of their projects to Asian firms, which will create jobs for Asian skilled workers. There will also be many opportunities for Asian financial experts in the multiple financial hubs that have recently emerged in GCC countries. These are best exemplified by the Dubai International Financial Centre (DIFC). The international financial institutions that have established branches in DIFC have attracted thousands of Indian bankers and financial experts in recent years. What lies ahead for GCC–Chindia economic ties?

Expansion of economic ties between the GCC and Chindia is a good example of the growing South–South economic cooperation that has been noticeable in other developing regions as well. Among the many factors that have contributed to the growth of South–South economic links in recent years, two are worth mentioning here. First, industrial and technological advances

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of some developing nations, such as China, have increased the types of goods and services that they can offer to other developing nations. This development stands in sharp contrast to a few decades ago, when developing countries could meet their need for capital goods and manufactured products only by trading with advanced nations. Secondly, in many parts of the world the political domination of powerful industrial nations has significantly diminished, and developing countries have enjoyed more freedom to determine their political and economic relationships. This increased freedom has allowed them to develop closer bonds with each other. Furthermore, some smaller developing nations proactively seek closer ties with China and India to reduce their economic dependence on Western nations. These strategic considerations have contributed to the ‘Look East’ policy of GCC countries. Will the current mutual attraction between the GCC and Chindia endure or will it fade away over time? Several factors suggest that the GCC–Chindia ties will be durable and their economic relations will continue to expand in the coming decades. Energy will serve as the most important durable link between the two regions. India and China have both grown dependent on GCC oil, and this dependency is likely to intensify as sustained economic growth increases their need for imported oil in the next two decades. The leading GCC countries are also expected to encourage this dependency as they realize that China and India will be more reliable consumers of their oil in comparison to the United States and Europe, which are under growing domestic political pressure to reduce their consumption of fossil fuels. This long-term perspective has encouraged both sides to invest in each other’s energy sector. China and India are investing in upstream projects in the GCC, while GCC petroleum firms are investing in refinery and distribution projects in China and India. Once Saudi Arabia’s refinery and petrochemical projects in China become operational, it will put the two nations in a position of mutual interdependence. The joint venture Saudi refineries in China will be primarily suitable for the heavy Saudi crude oil and will ensure long-term energy relations between the two countries. Beyond Chindia’s energy needs, the bilateral economic relations will be sustained by the growing sophistication of goods and services that China and India have to offer to the GCC. Both countries are expected to expand the range of their export products from low-end manufactured goods to more advanced industrial products. The high oil revenues of GCC countries will turn them into important export markets for India and China. In this market, however, they will face strong competition from other Asian countries as well as Europe and the United States. In order to protect their trade and investment interests in this fast-growing market, both China and India are seeking free trade agreements with the GCC. Negotiations are under way between the GCC and both nations, but progress has been slowed by the current global

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financial crisis. These negotiations are expected to bear fruit in the coming years and further solidify their economic ties. A third economic linkage between the GCC and Chindia that will remain strong in the coming decades is the GCC’s need for Asian workers. GCC demand for foreign labour is expected to continue, and South Asia will continue to serve as the largest source of affordable unskilled and skilled labour. As India’s economic growth raises the domestic wage rates in that country, GCC demand for Indian unskilled workers might diminish as GCC employers switch to less expensive labour in other Asian countries, but Indian and Chinese semi-skilled labour will remain competitive. Since remittances of migrant workers are important to Indian and Chinese governments they will support the employment of their nationals in GCC countries. The presence of these workers will further facilitate trade and investment relations between Chindia and the GCC. It must be noted that the current surge in trade and investment between the GCC and Chindia is not driven by ideological or political motives such as a deliberate interest in promotion of South–South relations. Rather, it is driven by economic and commercial interests on the part of governments and the private sector in both camps. This interest is rooted in the fact that the economic resources of the GCC and Chindia are highly complementary and each side has a good or service that the other side needs. As a result, expansion of GCC–Chindia relations enjoys strong political support from various interest groups in both regions, making these relations more durable in the long run. It must be noted that this commerce- and profit-driven expansion of GCC– China relations is also visible in recent China–Africa and China–Latin America economic relations. In all of these cases China’s growing need for natural resources is a dominant factor. This factor is complemented by these regions’ strong appetite for China’s inexpensive exports of manufactured products. What sets the GCC–China relations apart is the strategic value of the GCC region as home to the largest reserves of oil and natural gas in the world. The GCC countries are well aware of their unique position, and while relying on the USA for their external security and for protection of their oil assets, they like to diversify their economic relations, partly to increase their leverage with the United States. For this purpose they are looking to China (and to a lesser extent India). Consequently the growth of GCC–China relations has a strategic dimension that will set it apart from China’s relations with other developing regions in the coming decade. It will not only affect US–GCC relations but will also be an important factor in US–China relations as these are the two economic powers with largest demands for oil. Another factor that is unique to the GCC–Chindia economic relations and cannot be easily emulated in other South–South relations is the fact that the GCC is a very rich region with a small endogenous population and a limited

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domestic manufacturing base. As a result its economic status enjoys a high degree of complementarity with the economies of China and India. Unlike some Latin American countries that have found themselves competing with China for manufacturing exports to other markets, GCC countries face very little economic competition from China and India. The large size difference between the GCC and both China and India also implies that there will be a very limited degree of geostrategic competition between the two regions, which might otherwise cause diplomatic tensions with adverse consequences for economic relations. An important lesson that other developing countries can draw from GCC– Chindia economic relations is that mutual goodwill and cordial diplomatic relations play an important role in the promotion of economic ties. Despite their countries’ significant size difference with small GCC nations, Chinese and Indian political leaders have engaged in a high level of diplomatic courtship of GCC leaders. The political and business leaders of more advanced developing countries must not underestimate the sophistication and managerial skills of their counterparts in other Southern countries. This is particularly the case in GCC countries, where some enterprises have acquired a high degree of managerial and technical skills. Notes 1 The word Chindia was originally coined by an Indian politician, Jairam Ramish, in a 2005 book entitled Making Sense of Chindia. Ever since, it has been conveniently used by some writers and speakers when focusing on China and India combined. See: en.wikipedia.org/ wiki/Chindia. 2 During this trip President Jintao visited only one other Middle Eastern country, Morocco. The decision to visit Saudi Arabia points to the significance of China–Saudi relations for the Chinese government. 3 The Jebal Ali Free Zone Area was established in 1985 and it is currently considered the largest free trade zone in the world. It covers a 48-square-kilometre area and is home to many assembly plants and warehouses which contribute to the UAE’s large volume of re-exports. 4 China’s international reserves rose from $165 billion in 2000 to $2,399 billion by December 2009. This data reflects foreign reserves minus gold, as reported by the International Monetary Fund. 5 The survey data used in this analysis was produced by OCO Monitor. 6 For a review of these revisions to the foreign investment and exchange rate policies

in China, as well as links to the original Chinese text of the revised laws, see Law Library of Congress (2008). 7 For more details on this project, see Hassan (2007). 8 China is highly interested in investing in Kuwait’s oil industry but the Kuwaiti parliament has successfully blocked all efforts to open the country’s northern oilfields to foreign investment. The government of Kuwait has tried for more than ten years to gain parliamentary approval for ‘Project Kuwait’, which will allow major international firms to develop the northern fields, but so far it has not made significant progress. Most experts believe that Project Kuwait will eventually be replaced by more traditional service agreements, which will still offer Chinese firms a chance to win contracts in Kuwait’s oil industry. 9 The details of this new FDI regulation can be found on the website of the Indian Ministry of Commerce and Industry (Government of India 2005). 10 Emaar-MGF Land Limited began operation in 2005 with an initial foreign investment of half a billion dollars and capital outlays of $4 billion (AMEinfo.com 2005).

220 | ten 11 Ministry of Commerce (2007). 12 See Gopalan and Rajan (2010: Fig. 4a). 13 The government of Qatar, for example, has pledged to improve its labour laws and legalize the formation of labour unions to deflect the international criticism that it has faced after being selected to host the 2022 FIFA World Cup.

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com/gowealthy/wcms/en/home/ real-estate/property- digest/may/ Digest-29-05-2008-1211965129221.html. Habibi, N. (2008) ‘Managing the oil wealth: foreign assets of GCC countries’, Crown Paper no. 1, Crown Centre for Middle East Studies. Hanware, K. and K. S. Ramkumar (2007) ‘Saudi Arabia–India investment gets immense boost’, Arab News, www.arabnews.com/? page=15§ion=0&article=104658&d=30& m=9&y=2008. Hassan, J. (2007) ‘Investment by Saudis in China grows’, Arab News, www.arabnews. com/?page=15§ion=0&article=104644 &d =4&m=10&y=2008. IIF (International Institute of Finance) (2007) ‘Tracking GCC petrodollars: how and where they are being invested around the world’, Paper presented at a financial conference in Kuwait City, Kuwait, 2007. ILO (International Labor Office) (2009) ‘International labor migration and employment in the Arab region: origins, consequences and the way forward’, International Labor Organization Publications, www.ilo.org/ public/english/region/arpro/beirut/downloads/aef/migration_eng.pdf. Jazan Economic City (2007) ‘Ground-breaking of Jazan Economic City: MMC in US$3 billion aluminium smelter and US$2 billion power deal’, Press release, Jazan Economic City, 2 November, www.jazanecity.com/en/ media-press-071124-Ground-breaking.html. Lane, P. R. and G. M. Milesi-Ferretti (2006) ‘The external wealth of nations mark II: revised and extended estimates of foreign assets and liabilities, 1970–2004’, IMF Working Paper WP/06/69, International Monetary Fund. Law Library of Congress (2008) ‘China: foreign exchange regulations revised’, Global Legal Monitor, www.loc.gov/lawweb/servlet/ lloc_news?disp3_659_text. McKinsey Global Institute (2009) ‘The new power brokers: how oil, Asia, hedge funds, and private equity are faring in the financial crisis’, www.mckinsey.com/mgi/reports/ pdfs/the_new_power_brokers_financial_crisis/MGI_power_brokers_financial_crisis_full_report.pdf. Ministry of Commerce (2007) 2007 Statistical Bulletin of China’s Outward

habibi | 221 Foreign Direct Investment, Beijing: Ministry of Commerce, People’s Republic of China, tradeinservices.mofcom.gov.cn/upload/2009/04/10/1239346168141_20005314. pdf. Mishra, R. (2008) ‘ONGC Videsh to surrender its Qatar block’, Hindu Business Line, www. thehindubusinessline.com/2008/06/30/ stories/2008063051360100.htm. Percept Profile Gulf (2007) ‘Kuwait Investment Company predicts surge in GCC investment into Indian real-estate development sector’, Press release, www.zawya.com/story.cfm/ sidZAWYA20070605134440/Kuwait%20 Investment%20Company%20predicts% 20surge%20in%20GCC%20investment%20 into%20Indian%20real-estate%20 development%20sector. Ramkumar, K. (2009) ‘Slowdown may take its toll on Gulf remittances’, Hindu Business Line, 11 February, www. thehindubusinessline.com/2009/02/11/ stories/2009021151480600.htm. Ratha, D. et al. (2008) ‘Outlook for remittance flows 2008–2010’, Migration and Development Brief no. 8, World Bank, siteresources. worldbank.org/INTPROSPECTS/Resources/334934-1110315015165/MD_Brief8.pdf. Reuters (2008) ‘Abu Dhabi investment house

eyes China fund’, uk.reuters.com/article/ fundsNews/idUKARO92996820080929. Shihab-Eldin, A. (2006) ‘GCC–Asia strategic relations: developments, opportunities and challenges’, Background paper for IMF/WB POS, International Monetary Fund/World Bank. Toloui, R. (2007) ‘Petrodollars, asset prices, and the global financial system’, Capital Perspectives, www.pimco.com/Pages/Petro dollars,AssetPrices,andtheGlobalFinancial System.aspx. Vasan, V. (2003) ‘Dubai Bank in pact with ICICI Bank’, Hindu Business Line, www. thehindubusinessline.com/2003/07/04/ stories/2003070401311000.htm. World Bank (2008) ‘Strengthening MENA’s trade and investment links with China and India’, Social and Economic Development Group, Middle East and Africa Region, World Bank, siteresources.worldbank.org/ INTMENA/Resources/MENA_China_India_ Sept08.pdf. ZAWYA (2008) ‘Abu Dhabi investment house signs deal for $6b China property ventures’, Gulf News, www.zawya.com/Story.cfm/ sidZAWYA20080929052531/ADIH%20 Signs%20Deal%20For%20$6B%20China %20Property%20Ventures%20.

CONTRIBUTORS

Kevin P. Gallagher is associate professor of international relations at Boston University and a research fellow at the Frederick S. Pardee Center for the Study of the Longer-Range Future. He is the author of The Enclave Economy: Foreign Investment and Sustainable Development in Mexico’s Silicon Valley (with Lyuba Zarsky) and Free Trade and the Environment: Mexico, NAFTA, and Beyond in addition to numerous reports, articles and opinion pieces on trade policy, development, and the environment. Professor Gallagher is also a research associate at the Global Development and Environment Institute of the Fletcher School of Law and Diplomacy at Tufts University, an adjunct fellow at Research and Information System for Developing Countries and a member of the US–Mexico Futures Forum.

Laura Gómez-Mera is an assistant professor of international studies at Miami University. She holds a DPhil in international relations from Oxford University and an MSc in politics of the world economy from the London School of Economics. In 2004–05 she was visiting scholar at the Institute of Latin American Studies, Columbia University. She has also taught at Metropolitan College of New York and at New York University and has worked as a consultant for the World Bank and the United Nations Development Programme in South Asia. Her research interests include regional trade agreements, the politics of trade disputes, and the international relations of the developing world, with special reference to foreign economic policy-making in Latin America.

Nader Habibi is the Henry J. Leir Professor of the Economics of the Middle East at Brandeis University. Before joining the Crown Center in 2007, Habibi was managing director of the Middle East and North African Division in Global Insight. He is a regional economist with a concentration on the Middle East and North Africa. His recent research projects have focused on operations of sovereign wealth funds in Arab countries and US–Arab economic relations. He holds a PhD in economics and a graduate degree in systems engineering from Michigan State University, and has worked as a research fellow at the Middle East Council at Yale University.

Kathryn Hochstetler is CIGI chair of governance in the Americas at the Balsillie School of International Affairs and professor of political science at the University of Waterloo, in Canada. Dr Hochstetler has published widely on topics such as civil society and social movements, environmental politics, and presidentialism, with an empirical focus on South America or United Nations conferences. Her current research includes a study (with SSHRC funding 2011–14) of the positions

contributors | 223 Brazil and South Africa are taking in global climate change negotiations, as well as their implementation of their commitments through energy projects at home. This research is part of her broader interest in the emerging powers and the ways their national development strategies shape their participation in the global political economy and regional politics.

Shaheen Rafi Khan is a research fellow at the Sustainable Development Policy Institute (SDPI) and earned his PhD in economics from Columbia University. Prior to joining SDPI, Dr Khan worked at USAID and the Swiss Development Corporation (SDC), both as a programme and project manager. He has carried out various consulting assignments in Pakistan and abroad for the World Bank, the UNDP, USAID, the Asian Development Bank, ICIMOD and the National Environment Trust. He is also a member of the Regional and International Networking Group (RING) and an invited co-author of the Third Assessment Report for the IPCC. Dr Khan has authored and co-authored numerous research articles and reports on economic and environmental topics, including wheat pricing, structural adjustment, export market structure and import substitution, protected areas management, large dams, climate change, poverty and environment, environmental security and environmental policy. Nagesh Kumar is chief economist of the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) and director of the ESCAP South and South-West Asia office, based in New Delhi. From 2002 to 2009, Dr Kumar headed Research and Information System for Developing Countries, a development policy think tank also based in Delhi. In the 1990s he served on the faculty of the United Nations University-Institute for New Technologies (now UNU-MERIT) based in Maastricht, the Netherlands. A PhD in economics from the University of Delhi, Dr Kumar is a recipient of the Exim Bank of India’s first International Trade Research Award in 1989 and a GDN Research Medal in 2000. His recent books include: Asia’s New Regionalism and Global Role (2008); International Competitiveness and Knowledge-based Industries in India (2007); Towards an Asian Economic Community (2005).

Eric K. Ogunleye is an open economy macroeconomist with a speciality in international trade and finance, monetary, public sector and development economics. He currently serves as a leading economic policy researcher and adviser in the office of the Chief Economic Adviser to the President of the Federal Republic of Nigeria. His outstanding contributions to national economic policy-making earned him a Presidential Commendation ‘for uncommon sense of duty and commitment to national service’ in 2011. Prior to this engagement, Dr Ogunleye worked with the African Center for Economic Transformation – a premier African institution focusing on varying and cross-cutting African economic transformation issues. While there, he played a prominent role in working with a team that was involved in developing a transformation index for African countries with a view to tracking

224 | contributors their transformation progress. He also played a leading role in a study involving the assessment of the activities of China in Africa. Dr Ogunleye holds a PhD and MSc in economics from the University of Ibadan in Nigeria and a BSc in economics from the University of Calabar. He was a recipient of the prestigious African Economic Research Consortium’s collaborative PhD scholarship.

Haroldo Ramanzini is assistant professor at Federal University of Uberlândia (UFU). He is a researcher at the Center for Studies on Contemporary Culture (CEDEC) and at the National Institute of Science and Technology for Studies on the United States (INCT/INEU). He holds a PhD in political science from the University of São Paulo (USP). He is a coordinator of the regional integration programme from the Coordinadora Regional de Investigaciones Económicas y Sociales (CRIES). His work has been published in books and scholarly journals such as Latin American Politics and Society, Global Society, International Spectator, The Latin Americanist, Nueva Sociedad and Pensamiento Proprio. His research interests include South–South cooperation, emerging powers foreign policy and regional integration.

Mariana Rangel is assistant professor at the International Relations and Political Science department, Tecnológico de Monterrey, Mexico. Since 2007, she has served as programme director of the BA course in international relations. She currently teaches international politics and North American Scenario courses at the undergraduate level. In the summers of 2008 and 2009, she was visiting professor at University of California, Berkeley, where she taught courses studying contemporary Mexico. Her research interests include trade and investment flows and development in Latin America and the socio-economic consequences of regional integration processes. She holds an MA in international affairs with a specialization in global finance and multinational enterprises from Carleton University and a BA in international relations from the Tecnológico de Monterrey.

Alcides Costa Vaz is the former director of and a professor at the Institute of International Relations of the University of Brasilia. In Brazil, he is a well-known commentator on the country’s foreign policy. At the moment he is writing a book about the role of emerging powers on the world stage.

Manuela Trindade Viana is a PhD candidate in international politics at the Catholic Univerity of Rio de Janeiro (PUC-Rio) and holds a master’s degree in political science and a bachelor’s degree in international relations, both from the University of São Paulo (USP), Brazil. She is a researcher at the International Relations Research Centre (NUPRI) and an editor for Pontes, a periodical that provides trade-related news and analysis, published by the International Centre for Trade and Sustainable Development (ICTSD), Switzerland. She also worked for the Centre for International Negotiations Studies (CAENI).

INDEX

11 September attacks, 202 Abdullah, King, visits by, 201; to China, 213 Abu Dhabi Commercial Bank (ADCB), 211 Abu Dhabi Investment House (ADIH), 210 Abuja Treaty, 37 Adedeji, Adebayo, 35 Afghanistan, 84 Africa: economic integration in, policy recommendations for, 53–5; integration prospects in, 49–53; inter-regional trade in, 43–6; investment flows in, 46; structure of regional economic integration in, 38–42; trade and economic integration in, 34–57 (history of, 35–8); trade with Southern countries, 46–9 Africa-Caribbean-Pacific-European Commission (ACP-EU), 94 Africa Finance Corporation, 53 African-Asian Business Forum, 53 African, Caribbean and Pacific (ACP) countries, 36, 96 African Central Bank, 53 African Development Bank (AfDB), 38 African Development Fund (ADF), 51 African Economic Community (AEC), planned creation of, 37 African Growth and Opportunities Act (AGOA), 39–42 African Investment Bank, 53 African Monetary Fund, 53 African Union (AU), 5, 35, 42, 49; Commission, 39 Agenda of Consensual Implementation, 170–1 Agreement on Bilateral Relations between India and Pakistan, 76 agricultural production, 144; monitored by satellite, 189 Algeria, 48 aluminium, processing plants, 214 Amazon Cooperation Treaty (ACT), 173, 177 American Beverages (AmBev) company, 122 Amorim, Celso, 91, 174 Andean Community of Nations (CAN), 12, 21, 26, 27, 170, 171–2 Andean Pact, 12 Angola, 49 Arab Maghreb Union (AMU), 37 Aramco company, 209 Argentina, 17, 21, 25, 26, 42, 97, 100, 121, 183, 193; environmental issues in, 173; soybean exports of, 169, 186 Asia-Pacific, regional econonomic cooperation in, 5, 58–72

Asia-Pacific Trade Agreement (APTA), 59–60 Asian Clearing Union (ACU), 59–60 Asian Development Bank (ADB), study of economic integration, 63–4 Asian migrant workers, in GCC, 215–16 Asian Relations Conference, 76 Association of Southeast Asian Nations (ASEAN), 24, 61, 68; ASEAN+3, 58–9, 64–6; Asean+6, 64, 66; Free Trade Agreement, 58–9 A. T. Kearney company, 64 Australia, 60, 64, 68, 70–1 Australia-New Zealand Closer Economic Relations (CER), 61 Automated Inter-bank Clearing System (SICAUEMOA), 51 Automated Transfer Settlement System (STARUEMOA), 51 Baguio Conference, 76 Banco del Buen Ayre, 125 Banco del Sur, 18, 21, 25 Banco Itaú, 125 Bandung Conference, 34 Bangladesh, 78, 83 Bank of China (BoC), 211 Bank of the South, 20 Banque Centrale des États de l’Afrique de l’Ouest (BCEAO), 51 Banque des États de l’Afrique Centrale (BEAC), 51 Baroncelli, E., gravity model, 83 BASIC grouping, 175–6, 177 Bay of Bengal Initiative for Multisectoral Techno Economic Cooperation (BIMSTEC), 60 Bhagwati, Jagdish, 73 Bharat Petroleum Corporation Limited (BPCL), 209 Bharti Airtel company, 119 Bhutan, 81 Bilateral Investment Treaties (BITs), 42, 53, 117, 122 bilateral trade agreements, 11, 15, 21 biofuels, 142, 174 Birla Group company, 119 Bolivarian Alliance for the Americas (ALBA), 17–18, 21, 23, 25, 27 Bolivarianism, 12 Bolivia, 17 Botswana, 46 Brazil, 6, 17, 21, 25, 26, 28, 87, 91, 93, 95, 97, 98, 99, 100, 103, 112, 118, 127, 128, 144, 183; approach to South-South relations, 132–60; case study of, 119–26; commitment to emissions reduction, 176;

226 | index development assistance to Africa, 142; driver of African trade, 47; environmental issues of trade, 161–79, 191; exports of soybeans, 186 (to China, 191); exports to MERCOSUR, 138; growth of foreign trade of, 133; imports from Africa, 48; investment patterns in, 140–1; OFDI patterns of, 122–5; role in WTO, 106–7; Southern markets of, 136–40; soybean production in, 191; trade of, 7–8 (with Chile, 174; with China, 8, 161, 166–9; with India, 173–6; with South Africa, 173–6); wood and pulp industry, 167 Brazilian Development Bank (BNDES), 22, 121, 141, 172 Bretton Woods institutions, decision-making in, 69 BRIC countries (Brazil, Russia, India, China), 91, 134, 138, 140, 145 bureaucratic obstacles to business, 164 butterfly strategy, 174 Cacique company, 121 Cairns Group, 144 Cameroon, 45 Cancún Ministerial of WTO, 97, 99, 144 Caribbean Common Market (CARICOM), 12, 96 Caribbean Free Trade Association, 12 Central American Common Market (CACM), 12 Centrale des Incidents des Paiements (CIP), 51 CFA franc, 39; convertibility of, 43 Chávez, Hugo, 17, 21, 25 Chery company, 187 Chiang Mai Initiative (CMI), 58–9, 60, 67 Chile, 14, 17, 25, 26, 42, 112, 183, 121; trade agreements of, 14–15 (with China, 188–9) China, 6, 7, 9, 15, 48, 51, 53, 55, 59, 60–1, 68, 70, 87, 91, 93, 98, 118, 127, 132, 134–5, 136, 137, 139, 140, 174, 188; as trading partner of Brazil, 161; automotive sector in, 187; Brazilian exports of soybean to, 191; commitment to emissions reduction, 176; demand for commodities, 197; dependence on GCC oil, 217; driver of African trade, 47; economic growth of, 181; FDI of, 186–7 (in Latin America, 184–5); ‘go out’ policy of, 186; imports of (of metals, 183; of Saudi oil, 207); investments of (in Africa, 49; in GCC, 211–12); need for natural resources, 218; trade relations of (with Brazil, 8, 134, 166–9; with Chile, 188; with Costa Rica, 188; with Latin America and the Caribbean, 180–99; with Peru, 188–9) China-Brazil Earth Resources Satellite, 189–90 China Development Bank (CDB), 188 China National Offshore Oil Corporation (CNOOC), 213 China National Petroleum Corporation (CNPC), 213 China Petroleum and Chemical Corporation (SINOPEC), 209, 210, 213 Chindia, economic relations with GCC, 200–21 chocolate, production of, 54 coalitions, 92–4; costs of participating in, 93; in the Doha Round, 94–100; typology of, 93

Cobden, Richard, trade as moral issue, 73 Cold War, 201; end of, 91 Colombia, 26, 183 Colombo Powers Conference, 76 commodities: boom of, 182, 191; China’s demand for, 197; rising prices of, 186 Common Market for Eastern and Southern Africa (COMESA), 37, 38, 43, 51 Common Monetary Area (CMA), 39, 51 Communauté Économique et Monetaire de l’Afrique Centrale (CEMAC), 39, 43, 44, 51 Companhia Vale do Rio Doce (CVRD), 120 COMPASS Initiative, 51 competition: in growth of trade agreements, 25–6; in world markets, 193–6; policy for, 55 competitiveness, promotion of, 54 composition effect of economic activity, 162–5, 177 Comprehensive Economic Partnership in East Asia (CEPEA), 66–7; Study Group, 62 conditionality of development funding, 36 conflict: bilateralizes trade relations, 83–4; constraint on trade, 81–4; effects of, on institutional integration, 82–3 connectivity, improvement of, 67 Copenhagen Accord, 175–6 copper, exports of, 182 Core Group on Singapore Issues, 95 Correa Camargo company, 172 Costa Rica, 22, 196; relations with China, 187, 188 Côte d’Ivoire, 45, 50, 54 Cotonou Agreement, 36 cotton, US-Brazil dispute, 103 Cotton-4 coalition, 95, 96 country coalitions see coalitions country studies, need for, 53 cross-institutional political strategies, 24–5 Cuba, trade agreements of, 17 currency, appreciation of, 190–1 customs clearance procedures, 79 customs unions, 24, 37, 38; theory of, 34 Daewoo Trucks, 65 debt, 112; cancellation of, 20 Declaration on Trade-Related Aspects of Intellectual Property Rights (TRIPS) and Public Health, 95 deforestation, 167, 176; in Brazil, 167, 169 democracy, deficit of, 84–6 dirty industries, move to Southern countries, 162 dispute settlement mechanisms of WTO (DSM), 24–5, 92, 106 Doha Development Agenda, 94, 143 Doha Round of WTO, 1, 3, 6, 92, 137, 143, 174, 175; country coalitions in, 94–100 domestic political processes, influence on trade, 22–3 dominant-country paradigm, 84–7 Dominican Republic, 22, 187 Dominican Republic-Central America free trade agreement (DR-CAFTA), 22

index | 227 domino theory, 20 Double Taxation Treaties, 42, 53 Dow Chemical, 210 dry ports, 67 Dubai Bank, 211 Dubai International Finance Centre (DIFC), 216 dumping, 167; measures against, 79 Dutch disease, 190, 197 East African Community (EAC), 35, 50; EAC Railway Development Master Plan, 52 East African Submarine Cable System, 52 East Asia: economic crisis, 59; trade integration in, 34 East Asia Summit (EAS), 5, 60, 62, 64, 70; economic cooperation in, 66–9 East, Central Southern and West African Power Pool, 52 Economic Commission for Africa (ECA), 35, 37–8; Revised Framework of Principles, 37 Economic Community of Central African States (ECCAS), 37, 45 Economic Community of West African States (ECOWAS), 37, 43, 50, 52; Ecowas Monitoring Group (ECOMOG), 50 economic complementation agreements (ECA), 12 economic integration, in Africa, 43–9 Ecuador, 17, 18–19 education and training, 68 Egypt, 42, 48, 53 El Salvador, 22 Emaar company, 210 Enersa company, 19 environment-trade links, as protectionism, 165, 168 Environmental and Social Evaluation with a Strategic Focus (EASE), 173 environmental complaints, in China, 165 environmental impact assessments (EIAs), 173 environmental issues of trade, 8, 161, 190, 191, 197; of South-South trade, 161–79; overview of, 162–6 Environmental Kuznets Curve (EKC), 87, 163–5 environmental licensing, 172 Environmental Performance Index, 164 European Commission, Trade Commissioner, 102 European Community (EC), 36; as user of WTO system, 105 European Union (EU), 58, 137, 144, 166; Brazilian imports from, 135; economic circumvention of, 206; reduced consumption of fossil fuels, 217 EU-African Infrastructure Trust Fund, 51 European Union (EU) and African, Caribbean and Pacific (EU-ACP) cooperation, 39 EXIM Bank Overseas Investment Finance Scheme, 117 Export-Import Bank (China), 188 ExxonMobil company, 209 financial crisis, 133, 168, 218; Asian, 3, 59; global, 201; in Asia-Pacific, 58–72 Five Interested Parties (FIPs), 98

foreign direct investment (FDI), 64; as resourceseeking, 186; greenfield investment, 116, 118, 119, 124, 125; inflows into Africa, 49; major acquisitions, 123 (by Indian companies, 129); of China, 186–7 (in Latin America, 184–5); of GCC in Asia, 208–9; outward (OFDI), 111–31; South-South flows of, 111–31 Forum for China-Africa Cooperation (FOCAC), 53, 55 Frederick S. Pardee Center (Boston), 1 Free Trade Area of the Americas agreement (FTAA), 136–7, 168; collapse of, 14 free trade zones, 38, 205 frontier land expansion, 191 G20 coalition, 6, 96, 97–100, 138, 143–4; durability of, 106; as destination of Brazilian goods, 134; membership of, 69; opposition to, 98 G33 group, 96 General Agreement on Tariffs and Trade (GATT), 2, 94 genetically modified (GM) produce, 169 Gerdau company, 121, 122, 125 Ghana, 46, 54 global order, changing of, 91–110 Global Trade Analysis Project, 63 globalization, 3, 121, 180; and economic dynamics, 19–20 Globo company, 121 Goldman Sachs, 59, 164 governance: economic, creating mechanisms of, 143, 143, global, 132–60 government, role in directing FDI, 128 greenfield investment see foreign direct investment, greenfield investment Grendene company, 121 Grossman, Gene, 162 Gulf Cooperation Council (GCC), 9, 87; allocated assets of, 208; Asian migrant workers in, 215–16; demand for foreign labour, 218; economic relations with Chindia, 200–21; exports to India, 203; financial investments of, 211; Indian diaspora in, 203, 214–15; investments of (in Asia, 208–9; in oil and natural gas, 211–14; in real estate, 210, 214) GCC-China Framework Agreement on Economic Cooperation, 201 Heavy Investment Fund (China-Venezuela), 188 Hinduism, militancy of, 86 Hindustan Petroleum Corporation Limited (HPCL), 209 HIV/AIDS, 142, 145 Hong Kong, 118, 193 Huawei company, 65, 186 human rights, violations of, 86 hydropower initiatives, in Africa, 51 Hyundai company, 65

228 | index IBSA group (India, Brazil, South Africa), 112, 114, 128, 138, 144–5, 162, 173–6; Dialogue Forum, 7 ICBC bank, 214 ICICI Bank, 211 implementation problems of regional cooperation initiatives, 23–6 import substitution industrialization (ISI), 115, 127 Inbrac company, 121 India, 6, 7, 9, 48, 60–1, 64–5, 68, 70, 76, 78, 80, 81, 83, 84, 87, 91, 93, 95, 98, 99, 112, 127, 128, 132, 134–5, 136, 139, 140, 144, 174, 175; British-ruled, 74; case study of, 115–19; commitment to emissions reduction, 176; conflict with Pakistan, 5; dependent on GCC oil, 217; dominance in information technology, 78; driver of African trade, 47; exports to Africa, 49; FDI laws in, 209; free trade agreement with Sri Lanka, 83; investments of, in GCC, 211–12; OFDI of, 116; relations with Pakistan, 85; religious identity of, 86; role in WTO, 106–7; trade deficits of, 65; trade with Brazil, 173–6 Indian diaspora, in GCC, 203, 214–15 Indian Oil Corporation, 213 Indo-Sri Lanka FTA, 78 informal trade, 78, 79–80 Information Technology (IT) sector, 128 Infosys company, 119 infrastructure, development of, 172; in Africa, 54 Integrated Programme of Action (IPA) (South Asia), 76 Integration of Regional Infrastructure in South America (IIRSA), 18, 170–3; Articulation Group, 172 intellectual property rights, 7, 105, 137 Inter-American Development Bank (IADB), report on regionalism, 12–14 International Institute of Finance, study of GCC acquisitions, 208 International Monetary Fund (IMF), 2, 18, 20, 91; study of Indian economy, 64–5 Internet, banking services, 50 interstate power asymmetries, 20–2 investments: financial, 211; in natural gas, 212–14; in oil and petrochemicals, 209–10, 212–14; in real estate, 210; internationalization of, 119–26; intra-African flows, 46 Iraq, US invasion of, 202 iron ore: exports of, 182 (destined for China, 186); mining of, in Brazil, 167 Islam: and banking, 211; in India, 86 JACIK countries, 62 Japan, 59, 68, 70–1, 135, 200 judicial independence, loss of, 86 Kashmir, tensions around, 84 Kenya, 43–4, 45, 54 Kenya Commercial Bank (KCB), 50

Kenya-Uganda Oil Pipeline, 52 Krueger, Alan, 162 Kuwait, investment in Asia, 210 Kuwait Petroleum Corporation (KPC), 210 Lagos Plan of Action, 37 land use and ownership, reform of, 54 Lasmo Oil company, 125 Latin America: economic cooperation in, 11–33; patterns of trade and economic cooperation in, 12–19 Latin America and the Caribbean (LAC), 8, 11; relations with China, 180 Latin American Free Trade Association (LAFTA), 12 Latin American Integration Association (ALADI), 12 Lesotho, 46 less developed countries (LDCs), 96, 101; classification of, 101 liberalization: of agricultural sector, 175; of financial markets, 54; of trade, 11, 14, 22, 34, 116, 136, 162, 180 Liberia, 50 Lomé Convention, 36 ‘Look East’ policies, 200; of Gulf Cooperation Council, 9, 217; of India, 65 Lusaka Declaration, 37 Malawi, 46 Malaysia, 68 Maldives, 81 market, driving force behind Chinese growth, 181, 187 Mbeki, Thabo, 174 mergers and acquisitions, within OFDI patterns, 118 Mexico, 14, 15, 112, 121, 183, 193, 196; maquiladora sector, 162 MGF Development company, 210 Minimum Integration Programmes (MIPs), 38 Monrovia Declaration of Commitments, 37 Morocco, 42, 48 most-favoured-nation (MFN) trading, 58, 79, 83 multilateral trade negotiations, environmental clauses, 161 multilateralism, 143; evolution of, 19 Mumbai massacre, 84 Muslims, investment by, 211 NAMA-11 group, 96–7 Nansen company, 121 natural gas: GCC resources of, 218; investments in, 212–14; trade with India and China, 201–2 neoliberalism, in Latin America, backlash against, 17 New Partnership for Africa’s Development (NEPAD), 42 New Zealand, 60, 64, 68, 70–1 NFC company, 214 Nigeria, 45, 46, 48, 49, 50, 54, 118 Nkrumah, Kwame, 35 noodle-bowl syndrome, 62, 70

index | 229 North, consumption and disposal patterns of, 163 North American Free Trade Agreement (NAFTA), 21, 58, 136, 162, 168 North-South economic relations, 5 nuclear weapons, testing of, 84 Odebrecht company, 126, 172 oil: demand for, 202; dependence on, 217; falling prices of, 201; GCC reserves of, 218; investments in, 209–10, 212–14; trade with China and India, 201–2 Oil India Ltd, 213 Oman, 213 Oman-India Fertilizer Company, 213 open regionalism initiative, 11 Organization for African Unity (OAU), 35–6, 37 Organization of American States (OAS), 12 Organization of Islamic Cooperation (OIC), 3 Pakistan, 76, 78, 79, 80, 81, 83, 84–6, 210; relations with India, 5, 85; religious identity of, 86; US role in, 85 peace dividend, 83 Peru, 15, 26, 183; trade treaty with China, 188–9 Petroamerica company, 19 Petroandina company, 19 Petrobras company, 19, 119–20, 121, 122, 125, 126 petrochemicals, investments in, 209–10 Petróleos de Venezuela (PDVSA), 19 petroleum, 188; exports of, 182, 186 pharmaceutical sector, 118, 128 Piñera, Sebastián, 27 politics model of trade, 83 poverty, reduction of, 142, 144 preferential trade agreements, 14–17; proliferation of, 25 primary commodities: exported 161 (from Latin American countries, 186); used as form of payment, 188 privatization, 121 product complementarity, enhancement of, 54 product fragmentation, 53–4 Programme for Infrastructure Development in Africa, 38, 52 public health coalitions, 95 public-private partnerships, 54 Qatar, 212 R&D: in India, 65; indigenous, 128 Railway Restructuring (RR), sub-Saharan Africa, 52 railways, 52, 67, 74, 80 Rashtriya Swayamsevak Sangh (RSS), 86 real estate, investments in, 210, 214 real time gross settlement (RTGS) system, 51 Recently Acceded Members (WTO), 95 regime complexity, cause and consequences of, 11–33 regional agreements: complexity and density of, 19–23; implementation problems of, 23–4

regional trade agreements (RTAs): in South Asia, 76–7; proliferation of, consequences of, 23–6; role in promoting peace, 77–81; trend towards, 73 regional trade integration: in Asia-Pacific, 58–72; institutional paradigm of, 73–90; South-South, 4–6 regionalism: new, in Americas, 13; open, 12; postliberal, 17–19 remittances of migrants, 215–16, 218 resource curse, 190–3 Road Management Initiative (RMI), sub-Saharan Africa, 52 roads, 67, 68, 74, 170 Rodrik, D., 76 Roussef, Dilma, 139, 146 Rural Travel and Transport Programme (RTTP), SubSaharan Africa, 52 Russia, 6, 117, 132, 134–5, 136, 139, 140 Rwanda, 46 Samsung company, 65 Sany company, 187 satellite technology, 189–90 Saudi Arabia, 118, 204, 213; heavy crude, market for, 217; oil exports to China, 207; oil market problems of, 210 scale effect of economic activity, 162–5, 168 Shanghai Construction (Asia) Co. Ltd, 210 Sierra Leone, 50 da Silva, Luiz Inácio ‘Lula’, 7, 21, 100, 121, 135, 136, 174 Singapore, 68, 87, 118, 127 Singh, Manmoham, 62 Sino-Saudi Gas Limited (SSGL), 213 Sinomach company, 214 Small and Vulnerable Economies Group, 94 smuggling see informal trade software sector, 118, 119 Somalia, water crisis in, 3 South: concept of, 1, 91; emerging countries of, 6–9; ‘second’, 141–4 South Africa, 6, 42, 45, 48, 91, 93, 95, 112, 136, 138, 139, 142, 144, 174, 175; commitment to emissions reduction, 176; trade with Brazil, 173–6 South American Community of Nations (SACN), 21 South American Council of Infrastructure and Planning, 170 South American Free Trade Area, 21, 75, 77 South Asia, political risk in, 81 South Asia Preferential Trade Agreement (SAPTA), 60, 74, 75, 77 South Asian Association for Regional Cooperation (SAARC), 60, 61, 74–5, 83; establishment of, 76–8; SAARC Free Trade Area, 60 South Korea, 42, 59, 60–1, 68, 70–1, 80 South-South, FDI flows, 111–31 South-South cooperation, 1, 4–9, 22, 68, 97; Brazilian approach to, 132–6; factors of, 216; history of,

230 | index 2–3 increase of, 106; recent trends in, 3; within WTO, 92 South-South investments, development effects of, 126–7 South-South regional integration, 4–6 South-South relations, keystone of Brazilian policy, 174 South-South trade, environmental issues of, 161–79, shift to, 165 South-South trade priority, politics of, 135–40 Southern Africa Customs Union (SACU), 15, 35, 38, 39 Southern African Development Community (SADC), 37, 52, 74 Southern Common Market (MERCOSUR), 14, 15, 21, 25, 26, 27, 136–8, 170, 171; destination for Brazilian exports, 138; Environmental Protocol, 165 Southern Cone Common Market (MERCOSUR), 12 soybeans: cultivation of, in Brazil, 167, 191; exports of, 182 (Brazilian, 169, 186; Argentinian, 186) spaghetti-bowl situations, 73 see also noodle-bowl syndrome Special and Differential Treatment (S&DT), 98, 101 Special Safeguard Mechanism (SSM) of G20, 98 Sri Lanka, 78, 80, 81, 118; FTA with India, 83 State Bank of India (SBI), 214 structural adjustment, 112, 116 Sub-Saharan Africa Transport Policy Programme (SSATP), 52 Sucre, regional currency, 18–19, 25 Sudan, 118 sugar cane, production of, 126 Supplementary Agreement on Trade in Services (China), 189 supply-side constraints, in Africa, 54 Taiwan, issue of, 181, 187 Talal, Prince Alwaleed ibn, 211 Tanzania, 54 tariffs, 12, 83, 94, 111, 115; avoidance of, 127; elimination of, 34, 171; in Bangladesh, 79; in India, 79 Tata Group company, 119 Tata Motors, 65 Taylor Nelson Sofres company, 66 technique effect of economic activity, 162–5, 168, 174 technology transfers, 126 telecommunications, 186–7, 188 Thailand, 68, 118 Thapar Group company, 119 Togo-Benin-Ghana Power Interconnection Project, 52 Toyota company, 65 Trade and Development Act (USA), 42 Trade and Transport (T&T), sub-Saharan Africa, 52 transition economies, 117 transport, and trade, facilitation of, 67 Treaty of Rome, 36, 39 Uganda, 54

Unified System for Regional Compensation, 18 Union of South American Nations (UNASUR), 17, 19, 21, 23, 27, 170 Union of Soviet Socialist Republics (USSR), 91 United Arab Emirates (UAE), 118, 204, 212, 214–15; financial investments of, 211 United Nations (UN), 91; presence of Taiwan in, 187 UN Committee on Trade and Development (UNCTAD), World Investment Prospect Survey, 140 UN Economic and Social Commission for Asia and the Pacific (UNESCAP), 59, 68 UN Global Compact, 126 United States of America (USA), 103, 105, 121, 136, 137, 138, 140, 143, 144, 168; as importer of oil, 200; as user of WTO system, 105; destination for Brazilian exports, 135; economic circumvention of, 181, 206; economic dominance of, 7, 22, 166; preferential trade agreements of, 14–15; reduced consumption of fossil fuels, 217; relations with Pakistan, 85; soybean exports of, 169; trade agreements of, 22, 26 US-Mexico free trade area, 20 US Trade Representative, 102 Urban Mobility (UM), sub-Saharan Africa, 52 Uruguay, 21 Uruguay Round of GATT, 3, 94, 97, 103, 105; Blair House agreement, 99 Vale company, 122, 126 value added tax (VAT), 43; introduction of, 50 Venezuela, 17, 18–19, 21, 26, 28, 121, 188 vertical specialization, 53–4 Vietnam, 68 Vishwa Hindu Parishad (VHP), 86 Washington Consensus, 17, 180, 181 West African Economic and Monetary Union (WAEMU), 39, 43, 51 West African Gas Pipeline project, 52 West African Monetary Zone (WAMZ), 38, 51 Wipro company, 119 Wolf, Martin, 68 World Bank, 2, 18, 173; LINKAGE model, 63; report on migrant remittances, 215–16; study of FDI outflows, 208; study of free trade agreements, 78 World Economic Forum, 66 World Trade Organization (WTO), 3, 5, 6, 25, 28, 39, 136, 138, 167; anti-dumping cases, 167; China’s entry into, 181; developing countries in, 91–110; disputes settlement system of, 100–6; incorporation of coalitions, 96; intellectual property regime of, 137 see also Doha Round of WTO Zain Group company, 119 zones of comparative advantage, 78 ZTE company, 186