By Justin Yifu Lin
BEIJING, Jan. 6 -- 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.
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 percent
in 2007 to 1.4 percent 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 U.S. dollars 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.
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 through 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
hit by crises.
To pursue its comparative advantage and prosper in a
globalized world, a country needs a price system that reflects the relative
abundance of its factor endowments. Firms in such a context will have incentives
to enter industries that can use their relatively abundant labor to replace
relatively scarce capital, or vice versa, thereby reducing costs and enhancing
competitiveness. Examples include the development of garments in Bangladesh,
software outsourcing in India, and light manufacturing in China.
But such a relative price system is feasible only in
a market economy. This is why China - which appears to be faring well in the
crisis, meeting its 8 percent growth target in 2009 - became an economic
powerhouse only after instituting market-oriented reforms in the 1980s. Indeed,
all 13 economies with an average annual growth rate of 7 percent or more for 25
years or longer, identified in the Growth Commission Report led by Nobel
laureate Michael Spence, are market economies.
Pursuing its comparative advantage strengthens a
country's resilience to crisis and allows for the rapid accumulation of human
and physical capital. Developing countries with such characteristics are able to
turn factor endowments from relatively labor- or resource-abundant to relatively
capital-abundant in the span of a generation.
In today's competitive global marketplace, countries
need to upgrade and diversify their industries continuously according to their
changing endowments. A pioneering firm's success or failure in upgrading and/or
diversifying will influence whether other firms follow or not. Government
compensation for such pioneering firms can speed the process.
Industrial progress also requires coordination of
related investments among firms. In Ecuador, a country that is now a successful
exporter of cut flowers, farmers would not grow flowers decades ago because
there was no modern cooling facility near the airport, and private firms would
not invest in such facilities without a supply of flowers for export.
In such chicken-and-egg situations, in which the
market alone fails to overcome externalities and essential investments go
lacking, the government can play a vital facilitating role. This may be one of
the reasons why the Growth Commission Report also found that all successful
economies have committed, credible, and capable governments.
The world is now so far down the path of integration
that turning back is no longer a viable option. We must internalize lessons from
the past and focus on establishing well-functioning markets that enable
developing countries fully to tap their economies' comparative advantage. As
part of this process, a facilitating role for the state is desirable in
developing and developed economies alike, although the appropriate role may be
different depending on a country's stage of development.
Ultimately, in today's complex and interlinked world,
even the most competitive economies need a helping hand as they climb the global
ladder.
The author is World Bank Chief Economist and
Senior Vice President for Development Economics Project Syndicate
(Source: China Daily)
