June 2024

Primary Sector Paradox of the Global South: Economic Drivers and Challenges

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The economies of many countries in the Global South are heavily dependent on the primary sector, which includes agriculture, mining, and resource extraction. These sectors often form the backbone of their export earnings and GDP. The Global South, comprising developing countries in Africa, Asia, and Latin America, has traditionally relied heavily on the primary sector for economic growth and development.

According to World Bank data, agriculture alone accounts for over 25% of GDP in many low-income countries, particularly sub-Saharan Africa (World Bank, 2022). The United Nations Conference on Trade and Development (UNCTAD) reports that in 2020, agricultural raw materials and food comprised around 10% of total merchandise exports from developing countries. Mining and fuel exports are also significant, making up over 20% of the same year’s merchandise exports from developing countries (UNCTAD, 2021).

Several factors have contributed to the primary sector focus in the Global South. Many developing countries have a comparative advantage in primary commodities due to abundant natural resources and low labour costs. The Heckscher-Ohlin model of international trade suggests that countries will export goods that intensively use their relatively abundant factors of production (Krugman et al., 2018). Additionally, colonial legacies and unequal terms of trade have often locked developing countries into primary commodity dependence (Frank, 1966).

However, reliance on the primary sector has also posed significant challenges for the Global South. Primary commodity prices are notoriously volatile, leading to boom-bust cycles and macroeconomic instability. The Prebisch-Singer hypothesis argues that the terms of trade for primary commodities tend to deteriorate over time relative to manufactured goods, leading to a transfer of wealth from the periphery to the core (Prebisch, 1950; Singer, 1950). Moreover, the primary sector often has weak forward and backward linkages to the rest of the economy, limiting its potential for job creation and technological spillovers (Hirschman, 1958).

The environmental and social costs of primary sector dependence can also be high. Extractive industries like mining and oil drilling are associated with pollution, deforestation, and the displacement of local communities (Bebbington et al., 2008). Agricultural expansion, particularly for cash crops, has also led to deforestation and biodiversity loss in many regions.

Despite these challenges, the primary sector remains vital to many Global South economies. However, there is growing recognition of the need for economic diversification and value addition. The United Nations’ 2030 Agenda for Sustainable Development emphasises sustainable agriculture, responsible resource management, and inclusive growth (United Nations, 2015).

Successful primary sector-led development will require strategic policies and investments. Strengthening linkages between the primary sector and the rest of the economy through local content requirements and processing industries can help create jobs and foster industrialisation. Investing in agricultural research and extension, rural infrastructure, and smallholder support can boost productivity and food security. Implementing environmental and social safeguards can help mitigate the negative impacts of extractive industries.

In conclusion, while the primary sector has been a key driver of growth for many countries in the Global South, it has also posed significant challenges and limitations. Moving forward, a more diversified and sustainable approach is needed to harness the potential of the primary sector while promoting industrialisation, value addition, and inclusive development. With the right policies and investments, countries in the Global South can build more resilient and prosperous economies for the future.

References

  • Bebbington, A., et al. (2008). Development and Change, 39(6), 887–914.
  • Frank, A. G. (1966). Monthly Review, 18(4), 17–31.
  • Hirschman, A. O. (1958). The Strategy of Economic Development. Yale University Press.
  • Krugman, P. R., et al. (2018). International Economics: Theory and Policy (11th ed.). Pearson.
  • Prebisch, R. (1950). The Economic Development of Latin America and Its Principal Problems. United Nations.
  • Singer, H. W. (1950). American Economic Review, 40(2), 473-485.
  • United Nations. (2015). Transforming our World: The 2030 Agenda for Sustainable Development.
  • UNCTAD. (2021). Merchandise trade matrix in thousands United States dollars, annual.
  • World Bank. (2022). Agriculture, forestry, and fishing, value added (% of GDP).

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Supply-Side Economics in the Global South: Promises, Challenges, and the Quest for Inclusive Growth

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Supply-side economics has played a significant role in the global South, contributing to economic growth and uneven benefits. To build on this foundation, a more comprehensive strategy is necessary, one that leverages market dynamics and incentives while prioritising broad-based development, poverty reduction, and long-term productivity growth. By implementing the right balance of policies, countries in the global South can work towards achieving a more inclusive and sustainable development path.

Many countries in the Global South have embraced supply-side economics, often as part of structural adjustment programs. Supply-side economics has been a significant driver of economic policy in the Global South in recent decades. It emphasises increasing economic growth and productivity through policies encouraging production, investment, and innovation. These policies usually involve lowering tax rates, reducing regulations, privatising state-owned enterprises, liberalising trade, and attracting foreign investment (Bauer, 2000). The rationale is that by improving the business environment and incentives on the supply side, economies can expand their productive capacity and efficiency, leading to sustained growth and development.

Many countries in the global South have embraced supply-side economics, often as part of structural adjustment programs mandated by international financial institutions like the International Monetary Fund (IMF) and World Bank. In Latin America, countries like Chile, Mexico, and Brazil undertook extensive market reforms and liberalisation starting in the 1980s (Williamson, 1990). Chile, in particular, became known for its aggressive, free-market policies under the guidance of the “Chicago Boys” economists. As a result, Chile’s economy grew by an average of 7% per year between 1985 and 1997 (Kurtz, 2001).

In Asia, India launched major economic reforms in 1991 to open up to global trade and investment, deregulate industries, and reduce the state’s economic role. These reforms have been credited with unleashing India’s entrepreneurial potential and enabling the country to achieve an average GDP growth rate of around 7% since the mid-1990s (Ahluwalia, 2002). China’s economic miracle has also been underpinned by supply-side policies like creating special economic zones, liberalisation of agriculture, and massive infrastructure investments. Between 1978 and 2010, China achieved an average annual GDP growth rate of 10% (Morrison, 2014).

However, the impact of supply-side economics in the global South has been mixed. While some countries have seen significant economic growth and poverty reduction, the gains have often been uneven. In many cases, the benefits of growth have accrued disproportionately to urban elites and the owners of capital, while large segments of the population remain stuck in poverty. Income inequality has risen in many countries pursuing supply-side policies. For example, despite China’s impressive growth, income inequality, as measured by the Gini coefficient, has increased from 0.30 in 1980 to 0.55 in 2012 (World Bank, 2014). In 2022, China reached a score of 46.7 (0.467) points. (Textor, 2024)

Moreover, the focus on export-led growth and foreign investment has left many countries vulnerable to global economic shocks. The 2008 financial crisis, for instance, had a severe impact on export-dependent economies in the global South. In Mexico, GDP contracted 6.5% in 2009 as demand for its manufacturing exports plummeted (Villarreal, 2010). Supply-side policies have also often failed to create enough jobs to keep pace with the rapid growth of the labour force in developing countries. For example, the economy has struggled to generate sufficient employment in India, with the labour force participation rate declining from 58% in 2004 to 53% in 2012 (Mehrotra et al., 2014). In 2023, the labour force participation rate (LFPR) in urban areas increased to 50.4 per cent (Rathore, M. 2024).

Critics argue that supply-side economics neglect the importance of domestic demand and human capital development. Policies that suppress wages and fail to invest adequately in education and health may boost short-term competitiveness but undermine long-term productivity and innovation (Stiglitz, 2002). A study by Barro (2001) found that human capital, as measured by years of schooling and health indicators, was a significant determinant of long-term economic growth.

To achieve more inclusive and sustainable development, countries in the global South may need to adopt a more balanced approach that combines supply-side reforms with demand-side policies and investments in human capital. Progressive taxation and social safety nets can help reduce inequality and expand domestic markets. Industrial policy and government support for research and development can foster innovation and technological upgrading. Investing in quality education and healthcare can build the skilled and healthy workforce to move up the value chain.

References

  • Ahluwalia, M. S. (2002). Economic Reforms in India Since 1991: Has Gradualism Worked? Journal of Economic Perspectives, 16(3), 67-88.
  • Barro, R. J. (2001). Human Capital and Growth. American Economic Review, 91(2), 12–17.
  • Bauer, P. T. (2000). From Subsistence to Exchange and Other Essays. Princeton University Press.
  • Kurtz, M. J. (2001). State Developmentalism Without a Developmental State: The Public Foundations of the “Free Market Miracle” in Chile. Latin American Politics and Society, 43(2), 1–25.
  • Mehrotra, S., Gandhi, A., & Sahoo, B. K. (2014). Is India’s Long-Term Trend of Low-Quality Employment Growth Reversing? Economic & Political Weekly, 49(7), 83-91.
  • Morrison, W. M. (2014). China’s Economic Rise: History, Trends, Challenges, and Implications for the United States. Congressional Research Service.
  • Rathore, M. (2024). Rate of labour participation across India 2023
  • Stiglitz, J. E. (2002). Globalisation and Its Discontents. W. W. Norton & Company.
  • Textor, C. (2024). Gini index: inequality of income distribution in China 2012-2022
  • Villarreal, M. A. (2010). The Mexican Economy After the Global Financial Crisis. Congressional Research Service.
  • Williamson, J. (1990). What Washington Means by Policy Reform. In J. Williamson (Ed.), Latin American Adjustment: How Much Has Happened? (pp. 7–20). Institute for International Economics.
  • World Bank. (2014). World Development Indicators. Retrieved from http://data.worldbank.org/indicator

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China Leads BRICS in Challenging Financial Inequality in the Global South

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Mohammed Saqib​

Center of Geoeconomics for the Global South (COGGS), UAE

As the world grapples with the lingering effects of the COVID-19 pandemic and ongoing economic instability, the need for a more equitable global financial system has become increasingly urgent. The Global South, in particular, has long been trapped in a cycle of financial dependency and exploitation, with Western-dominated institutions perpetuating a form of financial slavery that hampers the development and sovereignty of nations.

The Global South is keen to reduce its dependence on traditional financial institutions dominated by developed countries and establish a more equitable and inclusive global financial system. China and the BRICS nations are working together to challenge this status quo and address developing countries’ financial disparities.

One of the most significant and tangible initiatives of BRICS to combat financial slavery is the establishment of the New Development Bank (NDB), formerly known as the BRICS Development Bank. Founded in 2014, the NDB has a subscribed capital of $50 billion and an initial authorised capital of $100 billion. The NDB aims to mobilise resources for infrastructure and sustainable development projects in BRICS and other emerging economies. It has approved over 96 projects worth $33 billion in sectors like renewable energy, transportation, and water management. The NDB provides alternative financing options to reduce dependency on institutions like the World Bank and IMF, which are criticised for imposing stringent conditions and perpetuating economic inequalities.

China has been leading the BRICS nations in actively promoting the use of local currencies in international trade and financial transactions. According to data from the Society for Worldwide Interbank Financial Telecommunication (SWIFT), the share of the US dollar in global payments has declined from 44.1% in 2015 to 38.4% in 2020, while the share of the Chinese yuan has increased from 2.0% to 4.5% during the same period (SWIFT, 2021). BRICS established the Contingent Reserve Arrangement (CRA) with $100 billion to provide emergency funds during balance of payments difficulties. The CRA has helped member countries cope with financial crises, including supporting them during the COVID-19 pandemic (BRICS, 2021).

Apart from leading the initiatives of BRICS, China’s Belt and Road Initiative (BRI), launched in 2013, is another significant effort to address financial slavery in the Global South. The BRI aims to create a vast network of infrastructure projects connecting Asia, Africa, and Europe, promoting economic integration and development. According to estimates based on transactional data, the value of China’s investment and construction projects in 147 BRI countries totalled around 67.8 billion U.S. dollars in 2022. By 2027, total global BRI spending is estimated to reach $1.3 trillion. Other economic forecasts predict more than 2,600 projects worldwide valued at $3.7 trillion. With investments in transportation, energy, and telecommunications infrastructure. The BRI has also facilitated trade and investment between China and the Global South, with China becoming the largest trading partner for many developing countries.

China has been a key player in establishing and running the Asian Infrastructure Investment Bank (AIIB) alongside the Belt and Road Initiative (BRI). Founded in 2016, the AIIB is a multilateral development bank aimed at supporting infrastructure development in Asia and beyond. As of December 2022, the AIIB had approved over 233 projects worth more than $45 billion. The AIIB provides alternative financing options, reducing developing countries’ reliance on institutions like the World Bank and the International Monetary Fund (IMF).

China has been a pivotal lender in Africa, extending loans exceeding US$170 billion to 49 African countries and regional institutions between 2000 and 2022. It is also one of the major financiers of infrastructure projects in sub-Saharan Africa, with a total investment of $155 billion over the past two decades (Nikki Asia, March 2023).

China, along with BRICS countries, has been involved in debt relief and restructuring initiatives to help alleviate the financial burdens of the Global South. China has participated in the G20 Debt Service Suspension Initiative (DSSI), which provides temporary debt relief to eligible low-income countries during the COVID-19 pandemic.

China has restructured or cancelled debts for several African countries. According to Johns Hopkins University’s China Africa Research Initiative (CARI), China wrote off at least $3.4 billion of debt between 2000 and 2019, almost all interest-free loans to African countries. As of 2022, China has forgiven 23 interest-free loans in 23 countries.

Furthermore, China has been a strong advocate for reforms in global financial governance. The country has called for greater representation and voting rights for developing countries in international financial institutions.  The voting shares of BRICS nations in the IMF and the World Bank are significantly lower than their share of global GDP. For example, as of 2021, the combined voting share of BRICS nations in the IMF is approximately 14.7%, while their share of global GDP in nominal terms is around 26%. China’s own voting share in the IMF and the World Bank is significantly lower than its share in global GDP. Its share voting share in IMF is approximately 6.4%, while its share of global GDP is around 19%. By challenging the existing power structures and pushing for a more democratic and inclusive decision-making process, China aims to create a more balanced and equitable global financial system.

China’s efforts to empower the Global South and challenge financial inequality The BRI and AIIB have provided much-needed financing for critical infrastructure projects in developing countries, helping to stimulate economic growth and reduce poverty. Promoting the RMB and trade in local currencies have helped diversify the global financial system and reduce dependency on major currencies.

Despite the criticism of China’s initiatives, like the BRI, China and the BRICS countries are working together to challenge the Western bias and address financial challenges in the Global South through initiatives such as the New Development Bank, AIIB, and debt relief and restructuring, which have shown positive results. This collaboration offers a promising alternative to traditional approaches, providing the Global South with greater autonomy and opportunities for growth. China’s role in shaping a fairer financial future for the Global South will remain significant.

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