South-South Economic Cooperation Exploring the IBSA Initiative Paranjoy

South-South Economic Cooperation: Exploring the IBSA Initiative Paranjoy Guha Thakurta, Director, School of Convergence, on behalf of Consumer Unity & Trust Society (CUTS) - International, India Pretoria, South Africa, June 28, 2006

Importance of South-South Cooperation: IBSA Initiative n n n Despite growing share of world trade, countries of the South depend on the North Tariffs coming down Cooperation at the WTO IBSA perceived as political not economic initiative Intra-IBSA trade negligible

IBSA Initiative: Challenges n n n BRICS: the future of the world economy Not three countries, but three regions South Africa as hub to Africa Brazil as springboard to Latin America India as gateway to SAARC/South Asia

IBSA Initiative: Challenges n n n Customs duties Issuance of visas Harmonization of standards, trade and investment procedures Lack of awareness Information gaps

Logistical Hurdles n n n Air travel expensive Freight costs prohibitively high Imbalances in flow of trade Imbalances in composition of trade Need for bilateral customs cooperation agreements before PTAs or FTAs

Similarities and Differences n n n n Low levels of investment Investment relations ad hoc – Use of tax havens Pharmaceuticals Automobiles and ancillaries Alcohol Ethanol Mining

Similarities and Differences n n n Bureaucratic procedures Small and medium enterprises disadvantaged Cultural differences, language barriers Competing economies: leather and agricultural products Non-tariff barriers

The Way Forward n n n Alleviation of poverty and hunger Biotechnology Environmental management Information technology Technological cooperation – the case of aerospace

Global Aerospace Scenario… The world over, the aerospace industry is: n A strategic asset n A generator of wealth n A driver of technological and economic development n Important source of employment n Poised to expand by 25 % over the next two decades

Global Aerospace Scenario. . . n n 20, 000 airlines expected to be operational by 2020 Matched only by the space industry in terms of technological complexity A dynamic propeller of industrial innovation The US has the highest market share

Global Aerospace Scenario. . . n n n Has seen a process of rationalisation and consolidation This has triggered stiff global competition among ‘first-tier’ players Growing competition among ‘second tier’ contractors has exerted pressures on the supply chain

Global Aerospace Scenario. . . n Globalization of the supply chain has allowed system integrators to develop an extensive pool of sub-contractors across the world

The Aerospace Industry. . . n n Is divided between first tier and second tier suppliers First-tier contractors: – Are a few big companies that provide wholly packaged systems to both commercial and military markets – Are using cutting edge technology – Maintaining, upgrading and repairing equipment throughout its lifespan

First tier contractors. . . – Are fully-fledged business integrators, marketing, selling and delivering aircraft on a large scale – Are also system integrators, presiding over manufacturing contracts and management of supply chains

Second tier contractors. . . – Are firms in states that possess limited but significant aerospace capabilities – Examples include: • Sweden • Canada • Australia • Brazil • India • South Africa

Second tier contractors. . . – Operations range from advanced system integration to medium and low levels of system integration – Companies operating in this segment are required to meet strict certification conditions

Prospects for IBSA Strategic Cooperation n n Currently very little aerospace collaboration between IBSA countries General agreement among governments on the need for cooperation

Potential for Cooperation n Three areas of cooperation can be identified: – Expansion of aerospace supply chains, premised on commercial opportunities offered by the diverse aerospace capabilities of the IBSA countries – Second, collaboration around aerospace systems in support of strategic defence needs

Potential for Cooperation – Third, collaboration around small and micro satellites. Brazil and India have strong competencies in in this sector while South Africa has a small but reputed small and micro satellite industry with full-fledged ground support infrastructure

Developing Technological Capabilities n n Sufficient scope for technical cooperation among the IBSA countries in aircraft and aircraft components production South African aerospace industry could exploit its competitive niche areas to integrate its manufacturers into Brazilian and Indian aircraft production sectors

Developing Technological Capabilities n n IBSA nations have the necessary infrastructure to develop a vibrant aerospace sector Sufficient scope for cultivating complementary niches

Role of Governments n Governments must play a central role in developing the aerospace sector by addressing concerns relating to: n • Import tariffs • Manufacturing and investment incentives • Transaction costs

Role of Governments – By providing subsidies for collaborative investment and manufacturing programmes, governments of IBSA countries could enable local firms to add value to aircraft production and compete effective with high-cost manufacturers based in Europe and the US

Role of Governments n Governments can further: – Support the development of defence and space projects by nationalization of segments of the productive chain – Act as intermediaries between respective national firms and foreign governments

Value Addition and Cooperation – The value-addition and cooperation instruments that are likely to yield optimal benefits inlcude: • • Boosting research & development Encouraging shared research Joint marketing arrangements Facilitating technological exchanges

Challenges and Threats n Important challenges to cooperation in the aerospace sector: – Corruption allegations against Denel made by the Indian government; this has significant implications for Indo-South African bilateral relations – Extent of willingness and capability of the IBSA countries to develop common collaborative areas of interest in an already congested global aviation market

Challenges and Threats – Both South African and Brazilian defence industries have been facing problems of overcapacity against a backdrop of declining defence expenditure – Reductions in: • Transaction costs • Shipping costs • Delivery times

Challenges and Threats – Removing the perception in Brazil that it would stand to gain little by cooperating with South Africa and India in aeronautics as its own industry is quite advanced and globally integrated – India has to change Brazil’s perception that its aerospace markets are difficult to penetrate due to bureaucratic hurdles – Removing doubts about the potential benefits of transnationalization of productive chains (as opposed to bringing world-class suppliers to operate in the national markets) in creating employment

n Aerospace can provide the starting point for a substantive economic dialogue among the IBSA nations

Thank You