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The world economy has just been through a severe recession marked by financial turmoil, large-scale destruction of wealth, and declines in industrial production and global trade. According to the International Labor Organization, continued labor-market deterioration in 2009 may lead to an estimated increase in global unemployment of 39-61 million workers relative to 2007. By the end of this year, the worldwide ranks of the unemployed may range from 219-241 million — the highest number on record.
Meanwhile, global growth in real wages, which slowed dramatically in 2008, is expected to have dropped even further in 2009, despite signs of a possible economic recovery. In a sample of 53 countries for which data are available, median growth in real average wages had declined from 4.3% in 2007 to 1.4% in 2008. The World Bank warns that 89 million more people may be trapped in poverty in the wake of the crisis, adding to the 1.4 billion people estimated in 2005 to be living below the international poverty line of $1.25 a day.
In this climate, globalization has come under heavy criticism, including from leaders of developing countries that could strongly benefit from it. President Yoweri Museveni, who is widely credited for integrating Uganda into world markets, has said that globalization is "the same old order with new means of control, new means of oppression, new means of marginalization" by rich countries seeking to secure access to developing country markets.
Yet the alternative to global integration holds little attraction. Indeed, while closing an economy may insulate it from shocks, it can also result in stagnation and even severe homegrown crises. Current examples include Myanmar and North Korea; before their economic liberalization China, Vietnam, and India were in the same boat.
To ensure a durable exit from the crisis, and to build foundations for sustained and broad-based growth in a globalized world, developing countries in 2010 and beyond must draw the right lessons from history.
In the current crisis, China, India, and certain other emerging-market countries are coping fairly well. These countries all had strong external balance sheets and ample room for fiscal maneuver before the crisis, which allowed them to apply countercyclical policies to combat external shocks.
They have also nurtured industries in line with their comparative advantage, which has helped them weather the storm. Indeed, comparative advantage — determined by the relative abundance of labor, natural resources, and capital endowments — is the foundation for competitiveness, which in turn underpins dynamic growth and strong fiscal and external positions.
By contrast, if a country attempts to defy its comparative advantage, such as by adopting an import-substitution strategy to pursue the development of capital-intensive or high-tech industries in a capital-scarce economy, the government may resort to distortional subsidies and protections that dampen economic performance. In turn, this risks weakening both the government's fiscal position and the economy's external account. Without the ability to take timely countercyclical measures, such countries fare poorly when crises hit.