‘What does the global South have over Europe?’

Current issues related to economics, (responsible) investment, pensions and income: every week an APG expert gives a clear answer to the question of the week. This time: chief economist Thijs Knaap on the question of what the global South has over Europe. “They provide something we need.”

“Europe needs to grow out of the mindset that Europe’s problems are world problems, but world problems are not Europe’s problems.” It is a recent statement by Indian Foreign Minister Subrahmanyam Jaishankar. He is referring to the relations between the “rich” North and “poor” South. Yet his words do not seem to fall on deaf ears. Outgoing Foreign Minister Hanke Bruins Slot says in the podcast The World from New York, during the United Nations General Assembly, how she sees countries in the global North becoming more aware of countries in the global South, a collective term for the countries in Latin America, Southeast Asia and Africa, among others. “In his speech, President Biden told the Global South, ‘Your future is mine.’ By saying that, he is emphatically showing awareness of other countries. He realizes that if we want to move forward in this world, we need each other.” The question then arises: what does the Global South have over Europe?

Seeing things in perspective
“To see things in perspective, an interpretation of the world economy over the past decades is in order," Knaap says. According to him, that starts just after World War II, the moment when all major international institutions were established, such as the United Nations, the IMF, the World Bank and the World Trade Organization GATT (today's WTO). “A logical moment, because at that time almost all trade in industrial goods took place between Western Europe, America and Canada.” On the other hand, you had the southern countries, Knaap knows. “They supplied the raw materials, the coal, copper and uranium, for example, which we could use to make things and trade.”

And the northern countries did plenty of that trading, Knaap outlines. “Why do countries trade? Economics has two answers to that. Countries that can make a product better or cheaper have advantages. They may have these because of the climate, because of certain raw materials, because of location, or because of lower labor costs. But a country may also have the economies of scale of a large industrial sector, or because of accumulated knowledge. Take ASML; everyone trades with the Netherlands to get those machines. Not because we are so cheap here.”

Development model came to life

The advantages among the various Western countries created more and more trade, Knaap says, and numerous trade agreements emerged among them. “And for many countries that were outside that wealthy group, a development model came to life. You're poor and you want something. Japan and Korea, and later China, for example. China was a very poor country in the 1970s and 1980s. Really very poor, but they started to stir at some point. Important feat; cheap labor. They could initially make very cheap products, but slowly but surely they climbed up and achieved substantial economic growth through economies of scale and technological know-how. This is how they secured a permanent place in international value chains.”

Knaap: “Bangladesh is another example. Bangladesh makes clothing and 80 percent of it is exported to the rich Western countries.” Knaap’s point is that poor countries are developing and they are developing a value chain that ends in the West. “We put on that nice warm sweater. And we use those handy smartphones. And the new knowledge and capital earned helps exporting countries develop further. China was a supplier, but now plays a leading role in the global economy.”

Positions change

Positions are changing, and the southern countries are becoming more important. If you look at who is growing the fastest, it’s a done deal. Meanwhile, more than half of the world’s economic growth comes from, what Knaap calls, emerging countries. “People sometimes don’t realize it, but the growth of Indonesia and Turkey will add more to the world economy in the coming years than the growth of Germany and Japan. If you look at that old system, which was set up by the winners of World War II, basically the rich countries of the late 1940s, it now looks a little old-fashioned. You can ask yourself: does that still fit with all these emerging countries? Are those old bodies like the UN, the World Bank, WTO a good architecture for the new era? They were built on a democratic system with democratic countries. But now you have new entrants with countries that are not democratic. How do you engage with that? That is more difficult. You see that too, there is much less multilateral resolution and much more geopolitical threat.”

Of course, it is inconvenient for the “old” countries that familiar structures are being threatened. But it can also be a deterioration for emerging countries, which want to grow through the ladder of trade. It makes sense from that perspective and it is good that rapprochement is being sought by the North, says Knaap. “Moreover, emerging countries have something we need, which is stuff. They produce, for us that becomes more difficult due to the aging population and tight labor market. But they have to want to supply that stuff. Free trade used to be taken for granted, but that is no longer the case. We need the emerging countries, and that goes double for the Netherlands. We need them to provide our imports.”