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Rise of the South: the New Masters of the Global Economy

Thinking back on my undergraduate years in Rio de Janeiro in the late 1990s, my professors used to point out that historically Brazil had been thought as having an enormous potential to become "o maior do mundo" -- the greatest in the world.
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Thinking back on my undergraduate years in Rio de Janeiro in the late 1990s, my professors used to point out that historically Brazil had been thought as having an enormous potential to become "o maior do mundo" -- the greatest in the world.

Fast forward 15 years or so: I have a PhD in economics and assiduously study development issues at the World Bank's Latin America unit; in the meantime, Brazil has yet to "graduate" into the big leagues of the world's richest economies (for various reasons that are beyond the scope of this blog).

In spite of this, Brazil and many other emerging economies (including several in Latin America) have experienced a momentous change. This so-called rise of the South has in fact been deep and widespread.

Here are five astounding takeaways from this phenomenon:

  1. The rise of the South. The gross domestic product (GDP) of the South, which represented about 20 percent of world GDP between the early 1970s and the late 1990s, doubled to about 40 percent by 2012, with China alone accounting for 12 percent of global GDP. The share of the South in global GDP is projected to reach 55 percent by 2025, according to the World Bank's 2013 Global Development Horizons.
  2. Trade: the South's strong suit. The South's participation in global trade rose from 24 percent in 1970 to 35 percent in 2000 and 51 percent in 2012. This advance was associated with major transformations in the structure of world trade, as the weight of the South varied across sectors. Between 2000 and 2012, the South's share of global exports of manufactures increased from 32 percent to 48 percent, and its share of global imports of primary (agricultural and mineral) goods expanded from 32 percent to 47 percent.
  3. The North's no longer the world's "center." In the sphere of international trade, the traditional overlap between the developed North (think of the G-7 and the Western European countries) and the "center" (and the South and the "periphery") no longer holds. Several South countries -- including not only China but also Brazil, India, Russia, South Africa, and Turkey--have moved toward the center of the global trade network.
  4. Know thy neighbor. As the South gained weight in the global economy, the number of its bilateral economic connections proliferated. These ties increased in every direction, and new South-South connections rose more rapidly than North-South linkages in both trade and finance. In 1980, the number of active South-South trade connections was 40 percent of all possible connections (the number of connections that would exist if every South country were connected to every other South country). This figure rose to 46 percent in 1990 and 70 percent in 2012.
  5. Latin America's good fortune. The restructuring of the global economy provided a strong push for growth in Latin America and the Caribbean -the region experienced its best growth performance of the last 40 years (with growth rates reaching nearly 5 percent during the first decade of the 2000s) and navigated rather successfully the largest global crisis since the Great Depression. Regional economic activity, however, has slowed down significantly since then: from close to 4 percent in 2011 to less than 1 percent in 2015.
How transitory will the economic gains associated with the rise of the South for Latin America be? To what extent does the region's economic future depend on the quality of its external connections? Are the newly forged linkages with the South countries more likely to deliver learning and technology gains, thereby boosting long-run growth in the region?

These are some of the questions addressed in the World Bank's regional flagship report, Latin America and the Rising South: Changing World, Changing Priorities. It argues that the rise of the South is probably here to stay -- it is neither short-lived nor reversible -- and hence it digs deeper into how the rise of the South has conditioned economic development and modified the policy priorities in Latin America.

From the region's perspective, at least two global events characterize the rise of the South: 1) a supply shock related to the expansion of South-originated manufactures and 2) a demand shock associated with a huge increase in global demand for primary goods and the resulting commodity price surge.

These shocks boosted Latin America's share in world commodity exports while undercutting its share in manufacturing exports.

It is important to recognize that economic development in today's world is inherently linked to participating in manufacturing Global Value Chains (GVCs), especially in their middle segments for the maximization of learning spillovers (with producers learning as much from their suppliers of imported goods as from the buyers of their exports).

Yet, Latin America has lagged behind other South regions. For example, less than 30 percent of its international trade in 2011 could be linked to GVCs, in contrast with almost 50 percent in East Asia. Moreover, Latin American countries have typically integrated either at the very beginning (e.g. South America as a supplier of raw materials) or at the end of these chains (e.g. Mexico as a manufacturer of the final goods, using imported parts). Behind these patterns is the fact that value chains are mostly regional, not global, and, for the most part, Latin America has not developed extensively its own production chains.

Overall, the study presents evidence suggesting that there is no unique answer as to whether the region's cross-border connections are evolving in a direction of greater quality that could boost medium-term growth significantly.

In fact, the observed changes to date have exacerbated some of the region's long-standing development challenges, such as those associated with its dependence on commodities (both agricultural and mineral).

Economic policy priorities in the region will thus likely have the growth agenda at their core, with some rethinking being called for in light of this new "multipolar" global economy.