Blog: Two Developments for South-South Trade and Investments Post-COVID-19

Oct 13, 2021 | Blog

by Mateusz Bratek Amrita Saha, and Peter Holmes for the Institute of Development Studies

Between 2000 to 2016, countries of the global South, in Africa, Asia, Latin America and the Middle East, have seen their collective share of world GDP rise from 28% to 40.6 per cent According to UNCTAD’s 2018 World Investment Report, alongside South-South trade volumes have seen sharp increase from 2.6 trillion USD in 2007 to 4.5 trillion USD in 2017 (from 19 per cent to 28 per cent of total world trade). In fact, South-South trade is no longer a peripheral part of the global goods and services market but contributes to the economic growth of even larger emerging economies. South-South FDI has also been rising steadily, and by 2025 firms from the Global South are projected to generate ⅓ of global FDI outflows.

Trade and technology exchange are crucial factors contributing to knowledge sharing between countries while fostering and deepening mutual cooperation. The knowledge exchange between the countries of the Global South is sometimes easier than between North and South where Global South countries bear more similarities in terms of economic development, making their practices more easily applicable to each other. This can contribute both to incentivising, but also extending cooperation.

The above prospects have also been highlighted in recent years by the increasing number and scope of regional trade agreements (RTAs). RTAs between countries from the Global South maybe a stepping-stone to further gradual market opening as they decrease the perceived risk of opening up to economies whose industries are more developed. The former is sometimes a reason for emerging economies’ reluctance to sign RTAs.

It is also clear that sustainable development priorities can no longer be overlooked within investment strategies, with implications for South-South investments. This has been reinforced by the movement to ‘Responsible Investment’, the strategy and practice to incorporate environmental, social and governance (ESG) factors in investment decisions and active ownership.

The ongoing economic uncertainty caused by the COVID-19 pandemic, especially in the countries of the Global South, presents continued challenge but is also an opportunity to reshape policymaking. Fundamental to this will be the prospects of increasing RTAs and rise of responsible investment. Combined, these trends could facilitate opportunities for South-South trade and promote investment cooperation that fosters inclusiveness, sustainability, and a fairer recovery post-COVID-19.

Increasing Importance of Regional Trade Agreements

The importance of regionalism has been growing over the three last decades which in turn has increased regional trade liberalisation. In fact, of 350 RTAs in force as of September 2021, 266 were signed after the year 2000 (Figure 1).

Figure 1. RTAs currently in force (by year of entry into force), 1948-2021. Source: WTO Regional Trade Agreements Database

The rising popularity of RTAs is reflected not only in their increasing number, but also in the scope of policy areas that they cover. Initially aimed specifically at trade liberalisation, RTAs now tend to include clauses on areas ranging from investments or intellectual property rights through environmental rights to cultural or educational cooperation.

These RTAs have been recently referred to as Deep Trade Agreements and could lead to a more integrated approach (for trade, investments, standards, etc.) to international development cooperation among the countries of the Global South (while not being more trade diverting than any other RTAs). RTAs could also serve as important institutional infrastructure for regional integration . For example, plurilateral agreements such as the African Continental Free Trade Agreement (AfCFTA) present a major opportunity to help African countries diversify their exports, accelerate growth, rethink their regulations, address many ‘behind-the-border’ issues and attract FDI.

Responsible Investment

Responsible Investment has gained significant attention from policymakers and investors around the world. The EU Sustainable Finance Taxonomy, for example, significantly strengthens sustainability disclosure requirements, diminishing possibilities for greenwashing, and offering a chance to scale up investment truly wary of ESG factors.

The evolution of Responsible Investment initiatives for the world’s 50 largest economies is shown in Figure 2 below. It presents another important pillar for South-South cooperation as policies to attract investment that address ESG factors could signal real opportunities for more sustainable development.

Figure 2. Number of Responsible Investment-Related Policy Instruments Over Time Across World’s 50 Largest Economies. Source: Taking Stock: Sustainable Finance Policy Engagement and Policy Influence, 2019, 4.

Incentivising responsible investment has become even more attractive since the COVID-19 pandemic, and the climate emergency has reinforced how vital it is to achieve sustainable and inclusive development. Responsible investment is no longer a goal for a small group of altruistic investors and policymakers, or as a goodwill charitable initiative for those possessing excessive funds. It is now seen as a means of transforming the way people invest, without any negative impact on the stakeholders.

Multiple research studies suggest that applying ESG consideration in business has no negative impact on returns and it may even have a positive link for financial returns. This explains why some major investment funds including BlackRock are already following this path. Evidence suggests that this correlation may be even firmer for businesses located in emerging markets. It strengthens the case for ESG considerations in the Global South but requires further in-depth assessment and monitoring as there has also been scepticism about the long-term financial performance from ESG strategies generally. It is important to recognise the importance of recognising the possibility of lower financial returns in return for positive social outcomes, especially in South-South contexts where capturing impact is especially challenging.

The overall evidence on responsible investments supports the ambition of the statement “Build Back Better”, originally mentioned by the UN in relation to disaster recovery before the pandemic and understood as the use of the recovery, rehabilitation and reconstruction phases after a disaster to increase the resilience of nations and communities through integrating disaster risk reduction measures into the restoration of physical infrastructure and societal systems, and into the revitalisation of livelihoods, economies and the environment. This idea has framed the post-pandemic recovery plans of the British government, and international institutions such as the OECDUNESCO, or UNEP. There are also other examples – a recent World Bank report on post-COVID-19 reconstruction in Latin America for example argued that electricity grids could be rebuilt so as to reduce pollution, spread costs more fairly, increase competition, and  facilitate cross border co-operation.

South-South Opportunity

South-South cooperation is set to rise in the coming years as the economies involved grow and there is an increase in regional cooperation initiatives. The lasting impact of the COVID-19 pandemic underscores the need for adaptation of international development cooperation practices. In the case of South-South cooperation agreements for trade and investments, this could be facilitated through the combined opportunity of the trend to increased RTAs and  focus to Responsible Investment. The latter presents a practical way of balancing financial, environmental and social returns that could enable economies, particularly those in the South, to genuinely build back better from the COVID-19 pandemic and beyond.