Global Trade & Financial Governance for Inclusive Development

Show all

Delhi Process V – South South and Triangular Cooperation: Exploring New Opportunities and New Partnerships Post-BAPA+40

By Hany Besada, Senior Research/Programme Advisor, UNOSSC*

There is widespread consensus in international development discourse that South-South Cooperation is quickly taking centre stage of the global economic and financial architecture with a renewed interest in its historical promise to transform and help introduce a new global order with the rise of Southern state and non-state actors. The role of emerging economies as important contributors to changing the global landscape must be acknowledged and the extent to which South-South Cooperation is shaping their engagement in the global financial architecture. At a time when both globalization and multilateralism are under strain in the North, countries such as China, Turkey, South Africa, Indonesia, Mexico, Chile and India from the Global South – which is itself a diversified entity – are standing up for these principles.

The implications of this “new order” for international cooperation in general, and for South-South cooperation in particular, are considerable. In the last two decades, a shift in wealth has taken place. A rise in the number of emerging economies has radically transformed hierarchies and relations among countries in the Global South, as well as their individual roles in global systems. Newly emerging powers such as India have benefited from globalization – and thus are keen to partake more, not less, of global trade and investment flows. This viewpoint has triggered a very different dynamic, as far as SSC is concerned, one that permeates both the international behaviour of these countries in the South and the various economic and financial entities they have setup (such as development funds, development agencies and banks) to promote increased and deeper cooperation amongst each other.

Indeed, there is a gradual significant global shift in manufacturing and industrial production and from the North to the Global South with increased economic and financial cooperation among Southern states in the context of SSC, altering the global economic landscape. With much controversy currently surrounds the question of whether the these so-called `rising powers’ and non-state elites in the Global South have the intension and willingness to challenge the dominant structures of global capitalist development or seek to support, reinforce and reproduce these structures themselves, there is lots of evidence to show that a third trajectory is emerging defined by an increasing industrialization, economic growth, and financial capacity of Southern countries which will be a stepping stage to an eventual restructuring of the global economic power relations and the reform of the global financial governance architecture and institutions as well as norms and rules of the global economy. The direction here is shaped by increased reliance on intra-trade and investment and regional economic integration between Southern states, providing a kind of support for an idea of a globalized and open world economy. SSC provides a pathway for attaining a fairer global trading system in an era in which engagement with the global value chains is the only route to sustainable development.  

South-South Contribution to the Emergence of a Financial Governance Mechanisms

With the expansion of the G20 to include several emerging economies for the first time and starting with the Seoul Summit in 2010, economic and financial issues pertaining to the Global South made it on the agenda at the level of heads of states of the most industrialized countries unlike anytime in global financial history. This reflects a changing global economic reality but it has also allowed the Global South to sensitize Northern countries to Southern concerns and economic priorities. In 2015, under the Turkish Presidency, the “G20 and Low-Income Developing Countries Framework” underscored not only the support of the group to the 2030 Agenda for Sustainable Development, but also the need to include all countries in global economic and financial architecture and development discourse.

As countries in the Global South came into their own, they have set up their own entities, much like the IBSA Forum, BRICS, MINTS and other groupings. Quite apart for these new global forums and institutions and the increased participation of economies of the Global South in global financial governance mechanisms and IFIs, there are other way in which these countries are reshaping the global financial order. Countering charges of being mere “talk shops” they have assigned significant budgetary resources to back up their programs for increased SSC. China set up the Asian Investment and Infrastructure Bank (AIIB) in Beijing while BRICS set up the New Development Bank in Shanghai. The first has a capital of $100 billion and the second of $50 billion.

This reflects the perceived need of rising states, and also of African and Gulf States to establish their own financial institutions as a way to counter the alleged pro-Western bias and control of traditional institutions. It also indicates different lending and cooperation priorities and strategies. Many Southern states have acute infrastructure needs that remain unaddressed. To fill those needs in Asia, is the main purpose of the AIIB and constitutes a significant part of the NDP portfolio. The same applies to the African Development Bank which contributes, among other efforts to the Africa Infrastructure Investment Fund. China’s Belt and Road Initiative falls into this category, i.e that of putting infrastructure construction and connectivity at the very center of economic inclusion and development.

The AIIB and the Arab Bank for International Development in Africa are part of a new parallel structure of IFIs that has emerged as a result of the wealth shift that prioritize financial inclusion and liquidity for development projects for Southern states based on their own development priorities. What is unique here is that the new and more complex finance for development landscape, some countries in the Global South may have or have more opportunities to gather the resources needed to back up their programmatic, policy and development cooperation priorities. For example, regional integration projects (such as the AfDB financing the East Africa Regional Integration Strategy Paper) are important to note.

Development funds, including trust funds, usually provide aid on generous terms for sustainable development project on climate change, poverty alleviation, rural development, youth nutrition, small and medium enterprise development and other socially oriented areas. In this context both regional and non-regional banks can establish special funding mechanisms that are managed by the regional bank or on a national level but with multilateral modalities. For the Programme for Infrastructure Development in Africa, for example, the AfDB is the executing agency, while the initiative is led by the NEPAD Secretariat. Many Southern banks also engage in non-lending practices, such as coordinating meetings and facilitating information gather and shared aimed at promoting knowledge transfer in the context of SSC.  The ADB, for example organizes a variety of forums on a variety of themes, from clean energy to procurement to transport, within a knowledge management strategy among its member states.

Several new financial efforts deserve some comment. The ALBA Bank and Bank of the South were specifically formed, in an ideological context, as counterweights to capitalist imperatives and consequently constitute alternatives to the traditional IFIs, which many Southern states viewed as perpetuating indebtedness.  These banks were established with the specific aim of promoting sustainable development via finding social projects targeting some of the most impoverished and vulnerable population groups in participating countries. As integration platforms in defense of independence, self-determination and identify of the peoples comprising it, coupled with regional cooperation in sectors such as education, literacy and healthcare, they champion the case and ideological points embedded around SSC.

South-South Cooperation and Financial Technology in a Globally Inclusive Financial Architecture

According to PwC, as of 2016, financial technology (FinTech) firms had raised US$4.2 billion to make loans to unbanked and underbanked consumers. Fintech start-ups have been attracting growing amounts of venture capital financing that now exceeds $13 billion annually. Digital financial services are also making breakthroughs in Southern economies. In Kenya, for example, 80% of adults use M-Pesa, a mobile phone-based system for transferring money that has since spread to other countries in Africa, the Middle East, and South Asia. In some countries such as China, banks are partnering with FinTechs to develop and offer innovative products and services to customers. The country is a leader in mobile payments, recording $12.8 trillion in mobile transactions from Jan to Oct 2017. About 68% of internet users in China make mobile digital payments, compared to 15% in the US. 

The technological transformation of financial services presents a very significant opportunity to developing countries to improve financial inclusion and, by extension, economic development. As many as 2 billion people worldwide are “unbanked”, that is, they do not have an account at a financial institution or through a mobile money provider. Moreover, as many as 200 million micro, small, and medium-sized enterprises across developing regions are either unserved or underserved financially and not able to access the credit they need to grow—a total credit gap we estimate at about USD 2.2 trillion. While microfinance institutions have stepped in to fill some gaps for microenterprises over the past four decades, they also face constraints, including high transaction costs. The lack of financial inclusion hurts not only the poor and middle classes who do not have access to financial services. 

The heavy use of cash, which accounts for more than 90 percent of all transactions across emerging economies, compared with about 50 percent in advanced economies, also raises costs and results in lost opportunities for providers, as well as creating a leaky pipeline for expenditure and tax collection that invites corruption. The lost opportunities for providers reflect the way that banks and other financial institutions in emerging economies are primarily designed to serve better-off individuals, large businesses, and government agencies. Their lack of modern digitalized systems can limit the ability of these institutions to broaden their pool of customers and assess the creditworthiness of potential new borrowers. On the other hand, for financial-service providers, the cost of offering customers digital accounts can be 80 to 90 percent lower than using physical branches. This makes their services more affordable and accessible for users, particularly low-income users in remote locations, and enables providers to serve many more customers profitably, with a broader set of products and lower prices.

Digital finance has the potential to fill this financial gap in many Southern economies, and as such it represents a significant growth and development opportunity. In Asia, fintech person-to-person (P2P) lending start-ups are proliferating, and many of them operate across borders. For instance, Kuala Lumpur-based Crowdo, which launched in 2013, now has more than 20,000 members, with offices also in Jakarta and Singapore. Funding Societies opened an office in Singapore in 2015 and a second location in Jakarta in January 2016.

South-South Cooperation yields great potential in strengthening knowledge sharing in underlying digital financial infrastructure construction, and help developing countries enhance their capacity for constructing digital infrastructure such as clouds, networks and terminals, with government officials responsible for planning and policy formulation as the key targets. Second, digital financial institutions in the Global South are encouraged to strengthen knowledge sharing in business models for the platform economy and APP development.  UNOSSC is working with partners such as the FCSSC and Fudan University’s Six Industrial Research Institute to promote the transfer and diffusion of technology in developing countries and help them to learn from the digital experiences of others. The goal is to create digital economies across the Global South by promoting the development of inclusive finance, building digital financial infrastructure, investing in human capital, and securing necessary knowledge and tools.

Inclusive Global Trade in the Context of South-South Cooperation

The limitations of traditional trade mainly lie in the monopolization by transnational companies and high costs. Traditional commerce models are more likely to be controlled by transnational companies. From the global perspective, transnational firms control 60 percent of international trade. By cutting transaction costs, cross-border e-commerce promote increased inclusion of Southern actors in the global trading system, which help create more opportunities for small and medium-sized enterprises, thus increasing the opportunity for countries in the Global South to deepen technological and investment cooperation. 

Cross-border e-commerce directly connects sellers and buyers, thus significantly cutting transaction and communication costs and lowering the threshold for small and medium-sized enterprises to integrate into the global value chain. In this way, cross-border trade, which was formerly dominated by large companies, has begun to open up to small and medium-sized enterprises and start-ups. By integrating service providers from the entire industrial chain, cross-border e-commerce platforms optimize all major links in cross-border trade and facilitate the engagement of more Southern countries in international trade.Southern countries can strengthen infrastructure construction and international cooperation by introducing foreign capital. 

The emergence of cross-border e-commerce platforms in the Global South not only provide comprehensive services such as product information uploading, translation, marketing, customer service, customs clearance, inspection, taxation, currency exchange and warehousing, but also specialized services such as cross-border logistics. Due to their convenience and inclusiveness, this lowers the threshold for small and medium-sized enterprises in Southern countries to participate in cross-border trade in a more convenient way. Many cross-border e-commerce platforms provide an opportunity for small and medium-sized enterprises to open stores online free of charge, thus enabling them to fully engage in the global value chain without enduring the lengthy, complicated procedures of traditional commerce models. By way of example, MercadoLibre, the largest C2C platform in Latin America, amassed a total of 52,000 vendors and 50.2 million registered users by 2017, ranking among the global top 50 in terms of page views, with its business reaching 13 Southern countries.

Based on the unique features of Southern countries, cross-border e-commerce platforms in those countries have forged some cooperation models worthy of further dissemination. In the process of promoting cross-border e-commerce cooperation, Southern countries have expanded technological cooperation through investments and acquisitions, in keeping with their respective development models.In the context of SSC, and since 2015, for example, Chinese e-commerce giant Alibaba has continuously invested in Indian e-commerce and mobile payment platform Paytm. In the process, Alibaba has also brought the technologies and operational models that it has developed in China to Paytm35. In the payment service niche, Ant Financial Services respects the user’s localization options. By acquiring shares and then exporting the technological capabilities amassed in the Chinese market, the market can be captured as quickly as possible. Due to technological support from Alibaba, Paytm’s user base has increased rapidly. 

However, many countries in the Global South still suffer rudimentary digital infrastructure, embryonic online consumption habits, underdeveloped logistics facilities, unitary platforms and insufficient human capital for cross-border e-commerce, and thus fail to fully integrate into the global cross-border e-commerce network. Thus, the countries of the South should attempt to learn from the new technologies of developed countries and seek to engage in technical cooperation. Furthermore, Southern countries should strengthen and encourage innovation in operating e-commerce platforms that are suitable for local characteristics, thereby actively creating a better business environment. 

* This article is a product of original research and open knowledge exchange. The views expressed are those of the author and do not necessarily represent those of the United Nations, UNDP, UNOSSC or United Nations Member States.