The capital flow performance has been pronounced with South-South FDI flows rising from $14 billion in 1995 to $47 billion in 2003.

Ranabir Ray Choudhury

The pace of intra-South economic activity is expanding rapidly which, given the potential for development, could significantly alter the profile of the international economy in course of time.

The 21st century is said to be the Asian Century, meaning that the economies of the continent are going to occupy the international economic centrestage. For Asia this is all very good just as it is not such a welcome development for the developed countries. But is the emergence of Asia the only important phenomenon that will mark the planet's economic evolution in the coming decades? Or can one widen the canvas a bit and include most developing countries? In other words, can one say that this century will be one dominated by the South as opposed to the North, which will include the economies of not only Asia but also of South America, parts of Africa, etc?

Domination is perhaps too strong a word and may invoke images of an economic situation where the tables are decisively turned against the developed, industrialised countries of the past century. However, if the theory of the flux of civilisations over time holds any water, it may not be too preposterous to think of a time when the developing economies of today will call the shots in the international economy.

But such a revolutionary change in economic status is still some way into the future. What is important for us is to discern any trends (if there are any) that may be emerging pointing to such an eventuality, which would be important not only in trying to understand the evolution of world history over time but also to enable national governments to put new economic trends in proper perspective and prepare appropriate policies which would have a better chance of long-term success.

Strengthening the South

One of the latest reports to throw important light on the subject is that on Global Development Finance just released by the World Bank which, among other things, singles out the strengthening of the South's position in the international economy and suggests steps on how this development can be harnessed to quicken the pace of growth in these economies.

At the fag end of the 220-page report, there is a section which points to a fundamental change in the monetary structure of the international economy, a transformation which, if allowed to ripen further, could lay the foundation of a new system of trade and commerce and capital flows which will be governed not by a handful of developed Western economies (and Japan) but by a more varied mix of economies, which would include some of today's developing countries. Among other things, the report states: "The world is moving toward a multipolar international monetary system in which the monetary and financial policies of the major industrial countries... and of key emerging market economies that are important players in global trade and finance... are of predominant importance." As regards the international reserve currency, the euro has already muscled into the domain of the US dollar, a process which is already leaving a firm footprint in trade and commerce.

Ongoing transformation

But this is not enough to explain what may happen tomorrow


the expected transformation of the basic character of the international economy.

Those who really matter come into the picture when there is a crisis, and the World Bank report makes it clear that crises-solving exercises of today (and certainly tomorrow) will have to involve economies that are not members of the Group of Seven (or Eight) countries, which have been arbiters of the world's financial system till now.

To quote the report: another aspect of the multipolar world "is that a wider set of countries now matter in the resolution of policy imbalances.

Developing countries, which would suffer disproportionately from the instability induced by a hard landing, have a shared interest in seeing multilateral cooperation in international monetary relations.

"The scope of cooperation should cover global liquidity, the optimal mode of adjustment, and the role of key currencies. The large size of the US current deficit has as its counterpart large surpluses in Asia and among oil exporters.

"The anticipated need to help correct that deficit will have to occur against a wider set of currencies than those of the industrial countries... which may well make policy coordination more difficult.

"However, it is clear that countries with large reserve holdings have a shared interest in a smooth adjustment of (the) dollar's exchange rate."

Global focus shift

If the World Bank report is any indication, it is apparent that the emerging economies (more broadly, the developing world as a whole) will have to be treated as important players in the resolution of monetary and financial crises affecting the globe.

The important question to ask is, whether this new clout of the developing world is backed up by a firm increase in economic activity.

Not only is the answer `yes' but, according to the report, South-South economic interaction is on the increase compared to the North, from which one can conclude that, as matters stand now, the global economic focus is gradually shifting to what is known even today as the developing and under-developed world.

Among other things, the report points out that while the South's share of global GDP has increased from 18 per cent in 1990 to just 20 per cent in 2004, its share of international trade has jumped from 15 per cent in 1991 to 26 per cent in 2004.

Importantly, the South-South performance in capital flows has been even more pronounced with South-South FDI flow increasing from $14 billion in 1995 to $47 billion in 2003 "a higher share than that of South-South exports in developing countries' total trade and of South-South remittances in their total remittance receipts."

Clearly, as the report says, what this suggests is that better capital-flow management techniques will have to be employed to keep the growing phenomenon under check.

But the crucial indication for the future is that the pace of intra-South economic activity is expanding rapidly which, given the potential for development, could significantly alter the profile on the international economy in course of time.

(This article was published in the Business Line print edition dated June 5, 2006)
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