How promising is South-South trade as a contributor to economic development in Asia and South America? Insights from estimating income elasticities of import demand

The recent global economic crisis which originated in the global North but quickly spread to the global South has raised questions about the desirability and viability of export regimes primarily orientated towards the markets of high-income countries. The experience of crisis and contagion made developing countries intensify their efforts to diversify sources of economic growth and their search for alternative models of economic development. Expanding South-South trade relationships increasingly became viewed as one such alternative. Yet how promising a strategy is this? In an attempt to provide an answer to this question, this paper first documents the dynamic evolution of South-South trade in past decades and puts forward some theoretical considerations. It then undertakes an econometric analysis to estimate income elasticities of import demand for bilateral trade relationships among a sample of developing Asian and South American countries and two key Northern markets, the Eurozone and the US. Applying an ARDL approach to estimation, our econometric analysis yields mixed results with regard to the question whether South-South trade is generally characterized by higher income elasticities of import demand than South-North trade. While this is largely true for trade involving developing Asian economies, the same does not hold for South American countries. Moreover, income elasticities for imports from the global South are comparatively high in the US (and actually higher than for South-South trade flows in many cases) but this does not equally apply for the Eurozone. Still, our findings show that South-South trade can be a promising alternative source of economic growth, especially if South-North income growth and import growth differentials in favor of the former continue to persist. These findings, thus, provide a rationale for policies aimed at facilitating trade among developing countries.