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Globalization and Income Inequality: A Pressing Challenge for South Economies

Posted in Corporate and Investment

The drivers of economic growth among South economies was a principal focus of a conference last month in Delhi sponsored by the GrowthNet (to which Covington is a Knowledge Partner).  As a result of the macro-economic shift that has occurred over the last decade, and which was accelerated in part by the 2008-2009 financial crisis, South economies now account for just over half of global purchasing power, a relatively rapid shift that translates to an increase of 10 percent in the past decade. In 2012, for the first time, South economies accounted for 51 percent of foreign direct investment compared with 42 percent in the industrialized economies.  These trends are likely to continue at least for the near-term given that growth in the industrialized economies is 1.3 percent compared to an average growth in Asia of 6.5 percent, an average growth in Africa of 5.5 percent, and an average growth across all emerging markets of about 5 percent.

Interconnectedness between the South economies also is growing rapidly.   According to Claude Smadja (founder of GrowthNet and President of Smadja & Smadja Strategic Advisory in Switzerland), South-South trade is “exploding,” having risen from 17 percent of global trade before 2008 to more than 30 percent today, representing a value of over $5 trillion.  India’s trade alone has grown from 14 percent of GDP in 1991 to 44 percent of GDP.  Of particular significance has been the rapid expansion of the India-Africa relationship.  According to the Confederation of Indian Industry and the World Trade Organization, bilateral India-Africa trade grew by nearly 32% annually between 2005 and 2011 and is expected to reach $90 billion by 2015.  Two of the more notable aspects of this relationship are that (i) the trade and investments have come from both the Government of India and the Indian private sector; and (ii) Indian private investment in Africa has been in sectors key to infrastructure development such as energy, telecommunications, and IT.

Unfortunately, India, Africa, and other South economies have another shared narrative: sizable but under-engaged youth populations.  As noted in a keynote talk by Mukhisa Kituyi, Secretary General of the United Nations Conference on Trade and Development (UNCTAD) and formerly Kenya’s Minister of Trade, job creation, particularly for the youth, has not kept pace with the broader economic growth in South economies.  This has created an inequality within and among nations, constrained growth, and potentially may contribute to instability.  As N.K. Singh, a Member of Parliament and former Secretary to the Prime Minister for economic issues, described it, the incoming government (likely to be announced on May 16) will face a “lost decade” in which growth has been under 5 percent, high fiscal deficits, and low social investments. One of the Indian government’s most immediate challenges will be to address the concerns of the 60 percent of the population that is between 15 and 24 years of age. Wendy Luhabe, director of the Women Private Equity Fund in South Africa echoed this sentiment, saying that the “challenge of our time” is to reverse the rising income inequality.  Indeed, a January 2014 report by the World Bank made clear that a major priority across Africa is raising the earning potential of its youth population.

For companies investing in South economies, especially in Africa, the returns can be significant but sustained success will be predicated on a willingness to invest in the youth population, especially as it relates to job creation, skills development and enhancing opportunities for young entrepreneurs.