South-South trade and South-North trade: Which contributes more to development in Asia and South America? Insights from estimating income elasticities of import demand

Abstract

The experience of the global economic crisis led developing countries to intensify the diversification of sources of growth, seeking alternative models of economic development. The expansion of South-South trade assumed greater significance in the context of this search. Yet how promising a strategy is this? In attempting to answer this question, this paper documents the evolution of South-South trade and puts forward some theoretical considerations. It then undertakes an econometric analysis to estimate the income elasticities of import demand in bilateral trade relationships among developing Asian and South American countries and two key Northern markets. On applying an ARDL model, the analysis yields mixed results in terms of whether South-South trade presents higher income elasticities than South-North trade. Still, the findings show that South-South trade can be an alternative source of growth, especially if South-North income and import growth differentials persist.