The Global South Embarks on Sectoral Alliances

Amid fears of de-globalization and the fragmentation of value-added and production chains, a new trend may be in the making as developing nations are starting to foster their own partnerships—not merely regional alliances but comprehensive platforms that aim for a greater coordination in the resource sectors of the world economy. Such sectoral alliances may portend the coming of a more fragmented economic space globally, but these trends could also lead to a greater consolidation of economic/market power in the hands of the developing nations. The key focus for the international community will need to be the greater incorporation of such sectoral accords into the framework of broader multilateral cooperation, possibly including G20.

The rise of sectoral cartels may well pick up steam in the coming years as countries seek to compensate high inflation via greater proceeds from increased market power and prices in various commodity segments. This cartelization of the world economy could become a reaction of developing economies to the undermining of universal rules and norms in the economic sphere, most notably the principles of fair and open competition. Against the backdrop of rising protectionism from the advanced economies and the re-configuration of supply chains on the basis of friend-shoring, developing countries will be increasingly bent on creating their own platforms, regional groupings, development institutions, sectoral cartels and extracting their own fair share of market power.      

The world economy that emerges on the back of the creation of such sectoral platforms is more regionalized, more geared towards the developing world and more vulnerable to excesses in market power. Accordingly, it will be important to find pathways to integrate these platforms and clubs into the broader framework of G20 and the main international organizations. With respect to the G20 this may call for the creation of a new engagement group that brings together such sectoral platforms (whether formed already or groups of main producers in key sectors of the global economy). This would facilitate the resolution of some of the key sectoral global problems such as energy security and food security.

Amid fears of de-globalization and the fragmentation of value-added and production chains, a new trend may be in the making as developing nations are starting to foster their own partnerships—not merely regional alliances but comprehensive platforms that aim for a greater coordination in the resource sectors of the world economy. Such sectoral alliances may portend the coming of a more fragmented economic space globally, but these trends could also lead to a greater consolidation of economic/market power in the hands of the developing nations. The key focus for the international community will need to be the greater incorporation of such sectoral accords into the framework of broader multilateral cooperation, possibly including G20.

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The formation of platforms across countries, regions, sectors and companies has been highlighted on a number of occasions by the Valdai club, including in a separate report published in June 2021. The most emphatic of these “platform trends” has been associated with the regional platforms of the Global South that included such projects as the African Continental FTA, the creation of the Regional Comprehensive Economic Partnership (RCEP), expansion in the Shanghai Cooperation Organization (SCO).

Apart from creating new regional blocks, greater activism on the part of the developing countries in building alliances was also reflected in the emergence of platforms/clubs bringing together the largest producers of mineral resources. This, in turn, reflects the increasing role of the “resource ownership” in the world economy and the preponderant role played by developing countries in supplying the world economy with natural resources.

One of such sectoral alliances recently promulgated by developing economies is a platform to protect the world’s rainforests uniting Brazil, the Democratic Republic of the Congo as well as Indonesia—the countries that account for 52% of the world’s tropical rain forests. Similar green alliances were formed by other developing nations: Suriname, Panama and Bhutan formed an alliance in 2021 envisaging trade liberalization, carbon pricing and other policies to support the progression of their economies along the “carbon negative path”.

Another sectoral alliance discussed this year was the alliance of Lithium producers, which is to bring together members of the so-called “Lithium triangle”, namely Argentina, Chile and Bolivia. These countries account for the bulk of the reserves in Latin America, which itself accounts for nearly 60% of global reserves.

For its part, Indonesia is looking into the establishment of an Opec-like cartel for nickel and other key battery metals. In particular, Bahlil Lahadalia, Indonesia’s investment minister, declared: “I do see the merit of creating Opec to manage the governance of oil trade to ensure predictability for potential investors and consumers. Indonesia is studying the possibility to form a similar governance structure with regard to the minerals we have, including nickel, cobalt and manganese.”.

These new sectoral platforms are to come on top of the existing arrangements that have already proven their efficiency in regulating supply and commodity price dynamics. This is the case with the OPEC+ arrangement that coordinated oil supply policies of key suppliers from the developing world and Russia. In essence, such platforms will involve greater market power and higher prices that are likely to be passed on to the consumers. This pro-inflationary factor will come on top of some of the potent drivers of higher prices, including the effects of monetary policy loosening in the U.S., electricity/food price surges, labor shortages, disruption in global supply chains, etc. This may be the price that the world economy pays for the “overshooting of globalization” in the preceding decades and the political expediency of developing nations translating their increasing economic clout into greater market and geopolitical capital.

In the financial space, greater market power of developing countries in the resource space is likely to lead to a further expansion in the reserves held by the sovereign funds of the Global South economies. The rise of these sovereign funds, to a significant degree, reflected the growing role of such developing economies as China and the resource-rich economies of the Middle East.

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As a result, sovereign wealth funds—such as GIC, CIC, ADIA—have risen to leading positions in the institutional investor space across global markets. While the sovereign funds have become more sizeable players in the world’s financial markets, there is no comprehensive platform uniting the main funds from the Global South. In this respect, one of the initiatives discussed in the past several years was the possibility of creating such a platform for the BRICS economies. An expanded BRICS+ framework could comprise some of the leading sovereign wealth funds from the Middle East as well.

Going forward, there may be a number of areas where sectoral platforms with dominant participation of developing economies may emerge in the coming years:

• Rare-earth elements (REE)
• Producers of key food staples and fertilizers
• Potable water and water preservation
• A “gas OPEC”
• Green platforms uniting countries around the goal of lowering net emissions

Some of these tracks have already been explored. In the case of the “Gas OPEC”, there is already a grouping of countries that brings together some of the main gas producers, namely the Gas Exporting Countries Forum (GECF). There have been suggestions the GECF could perform a role on the gas market similar to the one that is played by OPEC in the oil sector. Russia’s Deputy Prime Minister Alexander Novak declared, however, that the GEFC does not currently have the authority to regulate the gas market and primarily deals with information exchange and joint research. Novak further noted that there were also inherent difficulties with gas market regulation given that it is not as well-developed as the oil market in terms of production, supply and spot trade. Accordingly, with time conditions may improve for gas market coordination mechanisms to be created among the main gas producers from the developing world.

Importantly, developed economies have embarked on creating their own alliances in the sphere of natural resources. In particular, the EU put together a European Raw Material Alliance to involve all relevant stakeholders, including industrial actors along the value chain, Member States and regions, trade unions, civil society, research and technology organizations, investors and NGOs. One of the rationales for the creation of the alliance was to diversify sources of supply of rare earth materials away from China and with time that trend does appear to be slowly setting in: while China supplied the EU with 98 per cent of its rare earth needs in 2017, it accounted for 90 per cent of rare earths supplies in the following 5 years.

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In effect, the formation of such platforms is in line with the friend-shoring strategy promulgated by advanced economies in 2022 – a strategy of redirecting the supply chain toward countries that share the same political values. These partnerships in the developed world are starting to take on a trans-regional scale as the EU is teaming up with such important economies in the mineral resource space as Canada—the partnership between the Canadian and EU governments concluded in 2021 aims to secure supply chains for natural resources critical to manufacturing.

Another alliance launched by the advanced economies deals with sustainable development in mining natural resources – in 2022 Canada, Australia, France, Germany, Japan, the United Kingdom and the United States launched the Sustainable Critical Minerals Alliance to improve the sustainability of mining minerals essential to decarbonisation. The announcement was made at the COP15 biodiversity summit in Montreal.

The rise of sectoral cartels may well pick up steam in the coming years as countries seek to compensate high inflation via greater proceeds from increased market power and prices in various commodity segments. This cartelization of the world economy could become a reaction of developing economies to the undermining of universal rules and norms in the economic sphere, most notably the principles of fair and open competition. Against the backdrop of rising protectionism from the advanced economies and the re-configuration of supply chains on the basis of friend-shoring, developing countries will be increasingly bent on creating their own platforms, regional groupings, development institutions, sectoral cartels and extracting their own fair share of market power.

The world economy that emerges on the back of the creation of such sectoral platforms is more regionalized, more geared towards the developing world and more vulnerable to excesses in market power. Accordingly, it will be important to find pathways to integrate these platforms and clubs into the broader framework of G20 and the main international organizations. With respect to the G20 this may call for the creation of a new engagement group that brings together such sectoral platforms (whether formed already or groups of main producers in key sectors of the global economy). This would facilitate the resolution of some of the key sectoral global problems such as energy security and food security.