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Towards a Free Trade Area for the Global South

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The expanded format of the BRICS+ dialogue conducted by China in June 2022 as well as the rising number of large developing economies expressing willingness to join the BRICS core grouping sets the scene for more ambitious steps directed at strengthening South-South economic cooperation.

At the same time, rising protectionism across the global economy, looming risks of stagflation and the division lines emerging along the Global North-South axis raise the expediency of greater economic openness and trade liberalization among the developing economies. An ambitious goal in advancing such South-South cooperation may be the creation of a free trade area (FTA) for the Global South economies with particular care accorded to the needs of the vulnerable developing nations, including the world’s least developed countries (LDCs).

The attainment of such an ambitious goal as the creation of a Global South FTA will not be possible in a single stroke – it will most likely necessitate an assembly process that involves time and sequencing. In terms of the mechanics and technology of assembly, the “integration of integrations” of the existing regional free trade agreements of the Global South may prove to be the most effective operational framework. Such an approach may allow for an integration among all of the main three pan-continental platforms of the developing world: Africa + Latin America + Asia/Eurasia. Accordingly, one possible abbreviation for the Global South FTA could be “Triple AAA FTA” that denotes the tripartite alliance between the developing economies of Africa, America and Asia. In terms of sequencing, it may be expedient to start the construction of a South – South FTA with the smaller continental platforms, increasing the scale of integration with every following step of the assembly process.

The first pan-continental free trade area in the developing world has been achieved in Africa with the launching of the African Continental Free Trade Area (AfCFTA). This step, in effect, allowed for the creation of a framework for co-integrating the numerous regional integration arrangements on the African continent. The next possible step towards a pan-continental free trade area could be observed in the coming years in Latin America, where regional conditions are improving for continental initiatives to be advanced.

The next stage in progressing towards a free-trade area for the Global South would be to link up the pan-continental free trade arrangements in Africa and Latin America. The two pan-continental blocs are broadly similar in terms of the size of GDP – in 2021 Africa’s GDP totaled around USD 2.7 trn, while for South America’s 12 economies the total in 2021 was around USD 3.25 trn. Furthermore, there is already a track-record of Africa-Latin America cooperation in the sphere of “integration of integrations” via the signing of a preferential trade agreement between MERCOSUR and the South African Customs Union (SACU) in 2008-2009 – the trade deal entered into force in April 2016.

In recent years links between Latin America’s regional organizations and Africa have further strengthened. On 7 September 2021, leaders from the African Union and the Caribbean Community (CARICOM) convened the 1st Africa CARICOM Summit.

Furthermore, in 2021 in the context of Argentina’s Presidency Pro Tempore, MERCOSUR and the African Union undertook steps to boost bilateral relations between the two regional blocs. In particular, “the Secretary for International Economic Relations, Jorge Neme, chaired the first Mercosur-African Union Meeting, aimed at strengthening relations between the blocs, renewing political ties, further reinforcing cooperation mechanisms and fostering economic relations”.

The more complicated steps will involve the incorporation of Asia, most notably China, into the common South-South FTA platform. The difficulty emanates from the fragmentation of the regional integration patterns in Asia as well as the asymmetries in terms of size: Asia accounts for over 80% of the Global South total GDP, while China alone accounts for well over a third of the total economic mass of the Global South. Another factor is competitiveness: China exerts a competitive edge in a wide range of industries compared to its Global South peers, making the prospect of free trade more difficult to digest politically and economically. One possible option in attenuating these competitive pressures may be to precede the FTA with a preferential trade agreement across the South-South platform that does not involve the creation of a full-scale trade liberalization in the very near term, but rather a sequential, step-wise lifting of barriers in key priority sectors. There will also be a need to include provisions that protect the interests and needs of the least developed economies of the Global South.

Estimates from the United Nations ESCAP suggest that the potential dividends from the creation of a South-South FTA may be substantial – “such a scenario would enhance South-South trade significantly. Most of the South countries would experience rise in export to other South countries”. One of the possible guides in this respect may be the progression of the AfCFTA project – according to the estimates of the World Bank, “by 2035 the AfCFTA is set to lift 30 million Africans out of extreme poverty and 68 million from moderate poverty”. A more recent study by the World Bank finds that “under deep integration, Africa’s exports to the rest of the world could rise by 32% by 2035, while intra-African exports could grow by 109%, led by manufactured goods”.

The platform for a comprehensive FTA across the Global South may be based on the BRICS+ framework whose evolution since 2017 is increasingly geared towards bringing together the main regional integration blocs from the Global South. The BRICS+ summit and the foreign ministers’ BRICS+ meeting in 2022 brought together developing economies that represented regional blocs such as the African Union, CELAC, SCO, GCC and ASEAN – this in effect was the widest outreach exercise covering the vast majority of the Global South and representing a platform that could prove instrumental in advancing greater economic openness across the developing world. In particular, going forward the BRICS+ summits could be complemented by official discussions of the progress achieved in South-South economic integration as well as the signing of key trade/investment accords related to the building of a comprehensive South-South economic cooperation platform.

The key factor that renders the creation of a South-South FTA feasible and in fact expedient is the high degree of undertrading along the “South-South” axis compared to the potential based on distance and respective country GDP levels (indications of the gravity model). Another factor is the “integration gap” – namely the significantly lower scale and quality of integration in the developing world compared to the advanced economies. The South-South FTA accordingly could serve to bridge this gap and foster “catch-up integration” or “integration convergence” vis-à-vis the developed world.

In the process of such “integration convergence” the evolution of the assembly process of a Global South FTA will need to be flexible in allowing for plurilateral trade accords to be incorporated into the common South-South platform . The common South-South platform should also be innovative and in sync with global trends – there will be a need to devise provisions governing South-South cooperation and integration in the digital sphere (most notably in e-commerce) as well as in areas pertaining to environment and economic sustainability.

In the end, an FTA across the wide expanse of the Global South is an undertaking that is well worth pursuing in light of the greater momentum towards trade cooperation in the developing world and the protectionist measures introduced by advanced economies. A South-South FTA will significantly boost economic growth and consumption across the developing world without excessive competitive pressures emanating from the developed economies. It will also contribute to global economic expansion in view of the significant scope for trade liberalization in the Global South as well as the sizeable economic growth potential in the developing world. A common platform for dialogue and trade will also facilitate other Global South initiatives, including the creation of new international reserve currencies and payment systems. Finally, greater economic integration across the Global South should also be conducive to a more constructive pattern of North-South economic cooperation.

From our partner RIAC

Head of the analytical Department of Sberbank's corporate and investment business (Sberbank CIB) — Sberbank Investment Research, RIAC Member

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Economy

Baltic reality: High inflation and declining of living standards

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The Baltic States’ economy is in bad condition. The latest estimate from the EU’s statistics body shows that Eurozone inflation is continuing to soar to record highs.

The Baltic countries continue to be the hardest hit. These states in particular are experiencing the highest levels of inflation in the Eurozone. Thus, inflation in Latvia and Lithuania hit 22.4 per cent and 22.5 per cent respectively. Estonia also has seen inflation rise year on year from 6.4 per cent in September 2021 to 24.2 per cent in September 2022. The more so, the Baltic States continue to see soaring energy and food prices which lead to declining standard of living.

The Bank of Lithuania has published its latest economic forecast and revised gross domestic product (GDP) growth projections for 2023 from 3.4% to 0.9%.

Statistics Lithuania also reports that in September 2022, the consumer confidence indicator stood at minus 16 and, compared to August, decreased by 5 percentage points. The decrease in the consumer confidence indicator in September was determined by negative changes in all of its components.

According to SEB bank economist Tadas Povilauskas, the number of poor people in Lithuania will increase. Living standards will be affected by rising food and energy prices. The current price of natural gas is too high and the economy cannot “go” with it. It is evidently that energy prices shocks have far-reaching effects on Lithuanian economy and population.

The main cause of such state of affairs is deteriorated relations with Russia. Russia has lately been the EU’s top supplier of oil, natural gas, and coal, accounting for around a quarter of its energy.

The conflict in Ukraine and political confrontation between Russia and the West has exacerbated the energy crisis by fuelling global worries it may lead to an interruption of oil or natural gas supplies from Russia. Moscow said in September it would not fully resume its gas supplies to Europe until the West lifts its sanctions.

It is obviously that the conflict in Ukraine dramatically worsened the situation on the markets, as Russia and Ukraine account for nearly a third of global wheat and barley, and two-thirds of the world’s exports of sunflower oil used for cooking. Ukraine is also the world’s fourth-biggest exporter of corn.

According to Euronews, the prices of many commodities – crucially including food – strained global supply chains, leaving crops to rot, caused panic in many European countries, including the Baltic States.

High inflation has become the direct consequence of sanctions imposed on Russia. As for the Baltic States, the lack of wisdom to find compromises and blindly following the European Union’s decisions have lead to declining standards of living. The desire to punish such huge state as Russia played a cruel joke on the Baltic States. It will be difficult to explain the population why they should turn down the heating in homes, schools and hospitals over the winter.

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Policy mistakes could trigger worse recession than 2007 crisis

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The world is headed towards a global recession and prolonged stagnation unless fiscal and monetary policies holding sway in some advanced economies are quickly changed, according to a new report released on Monday by the UN Conference on Trade and Development (UNCTAD).“There is still time to step back from the edge of recession,” said UNCTAD chief Rebeca Grynspan.

‘Political will’

“This is a matter of policy choices and political will,” she added, noting that the current course of action is hurting the most vulnerable.

UNCTAD is warning that the policy-induced global recession could be worse than the global financial crisis of 2007 to 2009.

Excessive monetary tightening and inadequate financial support could expose developing world economies further to cascading crises, the agency said.

The Development prospects in a fractured world report points out that supply-side shocks, waning consumer and investor confidence, and the war in Ukraine have provoked a global slowdown and triggered inflationary pressures.

And while all regions will be affected, alarm bells are ringing most for developing countries, many of which are edging closer to debt default.

As climate stress intensifies, so do losses and damage inside vulnerable economies that lack the fiscal space to deal with disasters.

Grim outlook

The report projects that world economic growth will slow to 2.5 per cent in 2022 and drop to 2.2 per cent in 2023 – a global slowdown that would leave GDP below its pre-COVID pandemic trend and cost the world more than $17 trillion in lost productivity.

Despite this, leading central banks are sharply raising interest rates, threatening to cut off growth and making life much harder for the heavily indebted.

The global slowdown will further expose developing countries to a cascade of debt, health, and climate crises.

Middle-income countries in Latin America and low-income countries in Africa could suffer some of the sharpest slowdowns this year, according to the report.

Debt crisis

With 60 per cent of low-income countries and 30 per cent of emerging market economies in or near debt distress, UNCTAD warns of a possible global debt crisis.

Countries that were showing signs of debt distress before the pandemic are being hit especially hard by the global slowdown.

And climate shocks are heightening the risk of economic instability in indebted developing countries, seemingly under-appreciated by the G20 major economies and other international financial bodies.

“Developing countries have already spent an estimated $379 billion of reserves to defend their currencies this year,” almost double the amount of the International Monetary Fund’s (IMF) recently allocated Special Drawing Rights to supplement their official reserves. 

The UN body is requesting that international financial institutions urgently provide increased liquidity and extend debt relief for developing countries. It’s calling on the IMF to allow fairer use of Special Drawing Rights; and for countries to prioritize a multilateral legal framework on debt restructuring.

Hiking interest rates

Meanwhile, interest rate hikes in advanced economies are hitting the most vulnerable hardest

Some 90 developing countries have seen their currencies weaken against the dollar this year – over a third of them by more than 10 per cent.

And as the prices of necessities like food and energy have soared in the wake of the Ukraine war, a stronger dollar worsens the situation by raising import prices in developing countries.

Moving forward, UNCTAD is calling for advanced economies to avoid austerity measures and international organizations to reform the multilateral architecture to give developing countries a fairer say.

Calm markets, dampen speculation

For much of the last two years, rising commodity prices – particularly food and energy – have posed significant challenges for households everywhere.

And while upward pressure on fertilizer prices threatens lasting damage to many small farmers around the world, commodity markets have been in a turbulent state for a decade.

Although the UN-brokered Black Sea Grain Initiative has significantly helped to lower global food prices, insufficient attention has been paid to the role of speculators and betting frenzies in futures contracts, commodity swaps and exchange traded funds (ETFs) the report said.

Also, large multinational corporations with considerable market power appear to have taken undue advantage of the current context to boost profits on the backs of some of the world’s poorest.

UNCTAD has asked governments to increase public spending and use price controls on energy, food and other vital areas; investors to channel more money into renewables; and called on the international community to extend more support to the UN-brokered Grain Initiative.

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Economy

‘Sanctions Storm’: Recovery After the Disaster

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After the start of the special operation in Ukraine, a “sanctions storm” hit Russia; more sanctions were imposed against Russia in a few months than against Iran in decades. But a catastrophe did not take place, and the stage of stabilization came.

Indeed, almost all the weapons in the sanctions arsenal were used one after another: commodities exchange was suspended in some sectors, export and import controls were put in place, restrictions on air and sea transportation were introduced. The sanctions have spread to the investment and financial sectors, paralyzing many transactions with the West and complicating them with the East. An image impact came from the mass withdrawal of foreign business from the Russian market—not directly caused by the sanctions, but demonstrating “over-compliance,” excessive submission to them.

In the public mind, the destabilizing wave created the impression of the end of the story of the market economy in Russia, an impending catastrophe. But the catastrophe did not happen. The stage of stabilization has come, and it is important to use it correctly.

What to do?

In the near future, the Russian authorities and business will have to solve three groups of interrelated tasks. First, they must provide the domestic market with necessary goods, and restore value chains by the use of alternative partners. Second, they need to establish reliable financial mechanisms for working with these partners. Third, it is necessary to look for new growth points for the future, industries in which dependence on the West was critical. It is important to work out the possibilities: for new partners entering the markets and for attracting investors from friendly countries, as well as trying to integrate into new value chains.

Partners, first of all, include China and India. The southern direction is also not unpromising—to begin with, this includes Iran and Turkey, as well as a search for investors in the Arab world and the development of logistics routes through the Middle East. Nevertheless, in all areas, the key obstacle is the threat of secondary sanctions by the United States and the EU—which means that the second task becomes the main one: building a safe infrastructure for financial cooperation.

China remains Russia’s first trading partner—but despite the strategic partnership on the political level, large Chinese companies and banks that are active in the international market are suspending cooperation with Russia, fearing secondary US sanctions. In these conditions, it is important to work on explaining the nuances of the sanctions policy for Chinese business, creating secure payment channels that do not depend on foreign banks or on the dollar and the euro, and developing profitable package offers. Beijing seeks to use the opportunities opening up in the Russian market to occupy the vacant niches and strengthen the yuan in international payments, which means that its interest in finding a common solution is high.

A similar situation is developing in the Indian market, with the difference that Indian business is more connected than Chinese business with America, and its awareness of doing business in Russia is lower. As a consequence, Indian companies and banks integrated into the global economy will comply even more closely with sanctions restrictions, despite their interest in developing ties with Russia. Accordingly, even more active informational work is needed to establish Russian-Indian business ties, as well as the creation of a secure settlement mechanism. India already has similar experience, from doing business with Iran. In particular, UCOBank was formed to trade with it in rupees. Similar structures can be created in the Russian direction.

If the necessary channels are laid, both China and India can not only replace some Western goods in Russian markets, and ensure purchases from the Russian energy, agricultural, and military-industrial sectors—preserving their prospects for business—but also become zones of qualitative economic growth. Chinese partners can become a support in the development of bilateral cooperation in the fields of electronics and digital technologies (including 5G), and Indian, in pharmacology and high-tech agriculture. It also makes sense for business to look at these countries from the point of view of the development of green technologies in energy and agriculture, and the introduction of ESG practices, since these countries are also interested in this.

From our partner RIAC

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