By Mr. Anurag Sinha

Recently accelerating Asian trade and investment in Africa hold great promise for Africa’s economic growth and development, provided certain policy reforms on both continents are implemented. Systematic empirical evidence, collected by the World Bank, throw light for the first time on how the two emerging economic giants of Asia—China and India—now stand at the crossroads of the explosion of African-Asian trade and investment. Exports from Africa to Asia tripled in the last five years, making Asia Africa's third largest trading partner (27%) after the European Union (32%) and the United States (29%). Indian and Chinese foreign direct investment in Africa also grew, with China's amounting to US$1.18 billion by mid-2006. China and India each have rapidly modernizing industries and burgeoning middle classes with rising incomes and purchasing power.

These societies are demanding not only natural resource-extractive commodities, agricultural goods such as cotton, and other traditional African exports, but also diversified, non-traditional exports such as processed commodities, light manufactured products, household consumer goods, food, and tourism. Now, because of its labour-intensive capacity, Africa has the potential to export these non-traditional goods and services competitively to the average Chinese and Indian consumer and firm. The overwhelming bulk of Africa's exports to Asia are natural resources, but the novelty emanates from the fact that there is far more than oil that is being invested in. This is an important opportunity for Africa's growth and reduction of poverty because Africa's trade for many years has been concentrated in primary commodities and natural resources. The presence of China and India, though, is a reassurance, and rejuvenates the thought of a viable South-South model with optimism, despite prospective problems.

A new dimension of South-South cooperation is also evident in the realm of bilateral investments. In fact, though only 25% of the bilateral investment treaties (BITs) are between developing economies (and about 50% of those stand unratified), the number of South-South BITs has been gradually swelling. In part, this trend of an increasing number of South-South BITs corresponds to a general trend of growing South-South FDI flows. A broad look at geographical patterns suggests that those regions accounting for most FDI outflows are also those with the highest number of South-South BITs. Asia, home to the largest and fastest growing outward investors, accounts for the majority of economies that are most active in South-South BIT cooperation. In fact, more than one-third of the FDI in developing countries, at the end of the previous decade, may have originated from other developing countries.

According to these estimates, South-South FDI flows appear to have grown faster than FDI from high-income countries to developing countries (North-South FDI) in the late 1990s, and to have remained relatively more resilient in the post-Asian-crisis period as well. The growing importance of South-South FDI indicates that developing countries are more financially integrated with one another than was previously believed. Thus, a typical developing country has access to more sources of investment than before. This is particularly important for small economies, as firms from the South, because of their comparative advantages, tend to invest in countries with similar or lower levels of development than their home countries.

A similar, but less pronounced, trend of increasing South-South investment cooperation can be observed with respect to Double Taxation Treaties (DTTs). DTTs are frequently entered to promote and facilitate investment, although their focus is on taxation issues. Compared to BITs, the share of outward FDI in developing countries originating from other developing countries that is covered by signed DTTs is much higher: an estimated 59% in 2003. This, again, shows the potential for further South-South cooperation with respect to DTTs against the backdrop of a fast growth of outward FDI flows among developing countries. The trend towards increasing South-South cooperation in investment is also prominent in the case of preferential trade and investment agreements (PTIAs). These encompass a variety of international agreements aiming at facilitating trade and investment – other than BITs and DTTs – that contain a commitment to liberalize, protect and/or promote investment.

To paraphrase the UNCTAD South-South report (2005), the past decade saw a substantial effort in South-South cooperation in the investment area, with the respective initiatives covering different geographical regions and comprising different partners. So far, most South-South investment agreements have been concluded within geographical regions. There is a notable movement to conclude regional agreements, but these initiatives do not necessarily concentrate entirely on investment. Rather, a number of the most recent International Investment Agreements (IIAs) form part of broader agreements covering in particular trade in goods, services and, in differing degrees of detail, competition. The increase in South-South IIAs is happening in parallel to an upsurge in South-South FDI flows. Moreover, in spite of the rapid growth of South-South IIAs, there is still a large proportion of FDI stock in developing countries that is not covered by IIAs, indicating a potential for further South-South cooperation.