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Challenges Posed by North-South Relations on Small and Vulnerable Economies
Author: Mothae Anthony Maruping
Date of Publication: 2008-10-10
The challenges facing the developing world, especially small and vulnerable developing countries are deep-rooted in the history of North-South relations. During the colonial period, colonies’ borders were artificially drawn and largely ignorant of ethnic or tribal belongings. When the independence movement gained momentum in the late 1950s, trade flows from the South to the former masters consisted primarily of raw material but the terms of trade were comparatively fair. Gradually, exploitation rather than trade started to characterize the North-South relationship and developing economies became more vocal in their calls for a new global economic order. When the situation continued to deteriorate, import substitution was adopted by South states as a development strategy to counteract dependency on foreign manufactured and industrial goods. While it worked for some, small countries soon found that such a strategy was unsuited to their small markets and resorted to regional partnerships and agreements instead. However, closer integration was never pursued rigorously and regional commitments remained largely symbolic. In a later period, governments would learn about the benefits of closer South-South partnership that the integration process should have followed in order to make markets more viable and competitive.
The second half of the Cold War was a race among the two superpowers for winning over satellite states. Incentives for joining one or the other camp were mainly in the form of large financial transfers and tolerance for dictators in the South. Later in the 1980s and 1990s, most small developing countries experienced heavy indebtedness which further fuelled their economic deterioration. The Bretton Woods institutions then stepped in with their policies to cut down public spending and inflation in these countries. The Structural Adjustment Programme put forward by the IMF prescribed development through rapid trade liberalization, heavy lending and fiscal discipline. Due to the perceived lack of other options, smaller countries submitted to IMF prescriptions and liberalized their economies prematurely.
Calls for unconditional liberalization reflected the resurgence of the old ideas of comparative advantage and “marketsknow- best”. It was argued that abiding strictly by the policy prescriptions of the IMF will lead to a surge in foreign direct investment and ultimately economic and human development. However, expected investment flows did not materialize and FDI continues to contribute negligibly to the developing countries’ economies. The only capital that is flowing into the African economies, for example, is heavy investment in oil, minerals and mining. Foreign companies come in, extract fast and get out of the country as soon as possible. Such investment activities are still driven by a competition for access to raw materials in the rawest form rather than long-term commitments on the part of the investors. Exhaustion, rather than sustainable extraction and reinvestment of the profits in the host country, remains the mantra.
Along with the process of economic opening up, the 1996 HIPC Initiative (Heavily Indebted Poor Countries) tried to provide a comprehensive approach to debt reduction for countries pursuing IMF- and World Bank- supported adjustment and reforms programmes. In spite of its ambition, the programme did not manage to restore the external debt sustainability in the world’s 42 HIPCs, 32 of which are African.
The Doha Round of trade negotiations was supposed to level the playing field and accommodate the interests of all parties but the players themselves are far from equal. There will always be economic giants and small and vulnerable economies; and we all know that giants always win. The negotiations focused on quota-free, duty-free access and removal of the preferential treatment from which many developing countries benefited. But even if the Least Developed Countries (LDCs) manage to benefit from such liberalization, free access will have limited impact on the economic growth of the South economies because of more subtle restrictions in terms of Rules of Origin and non-tariff barriers.
Another threat to small states’ economic progress is the short period negotiated for adjustment to the new trade regime. In order to benefit from the opening up, significant efforts to provide assistance and build local capacity are needed. However, activities towards the attainment of this development objective have been widely imported from the experience of the North and are not need-based or demand-driven. “Aid for Trade” and other initiatives to help build capacities and remove supply-side constraints in order to enable developing countries to benefit from trade have largely been a waste of monies and failed to live up to their stated goals. The result is a failure of the international economic order to accommodate those economies and help them design context-sensitive policies which will contribute to their development. The major financial institutions need to address these new challenges and opportunities in order to stay relevant and reinvent their role as advocates for the poor. The currently practised dogma of technical assistance tends to perpetuate dependence.
Technical assistance addiction among small developing countries should be substituted for building institutional and human capacity. While being largely sidelined in multilateral negotiations, small and vulnerable economies have recently recognized the vbenefits of regional cooperation and coalition building. Economic fragmentation of traditional alliances in the South is not a new phenomenon – entities like the African Customs Union and other regional trade arrangements emerged as a response to the attempted cooptation of big South players in the multilateral negotiations. Since small countries’ support from the capital during those negotiations is small, coalition building activities must be enhanced to try and pull human and administrative resources together so that sidelined countries can have a louder and more unified voice. Governments have to learn to exploit the benefits of symbiosis and synergies to re-invigorate integration efforts.
Much has been done already to raise awareness on the indispensability and viability of African sub-regional and regional cooperation in the face of marginalization and the loss of opportunities offered by globalisation. The benefits of regional economic integration are (i) benefits for all through synergy and symbiosis; (ii) a stronger bargaining bloc in the international arena; (iii) a viable size for foreign direct investment; and (iv) improved scope for diversification and its benefits of lowering risk. The benefits of regional integration, and indeed globalisation, remain a critical part of Africa’s workable development strategy. The era of isolated tiny national economies has to give way to strategic alliances that harness knowledgeand- resource-based comparative advantages through integration. This however does not come effortlessly and at no cost: a lot of dedicated planning and hard work must be put in first.
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