Country Comparative Advantage

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.

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May 15, 2017 – Online MCAT CARS Practice

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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.

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% 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% 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 successful economies all 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.

Adapted from Project Syndicate.

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This was an article on Economics.

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26 Comments


  1. as globalization becomes common in developing countries not only it brings advantages but also disadvantages as well.
    author gives an example on global financial crisis and how it affected those countries.
    alternatives isn’t the option; it’ll make countries more stagnant and creates its own problem.
    since turning back isn’t an option countries must utilize ‘comparable advantage’ to insulate financial shocks.
    author gives examples on countries where they utilize ‘comparable advantage’ as well.

    Reply

  2. MIP: world economy = financial turmoil; reject globalization = negative outcome; focus on comparative advantage; government play important role

    Reply

  3. Author discusses the ways that developing countries can cope or survive in times of economic crisis.

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  4. comparative advantage = helpful to developing countries’ economies + government must help them

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    1. What about the problems of globalization mentioned in the reading? I think they are important in laying the foundation for CA.

      Reply

  5. integration is the only option, must improve markets and enhance working together in order to avoid/escape crisis.

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  6. Integration + comparative advantages = helpful for improving a country’s economy

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  7. “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”

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  8. Although there has been recent criticisms about globalization, allowing globalization and an healthy government influence is critical in the growth of a countries economy.

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  9. WE=recession
    globalization alternative=unpopular (CW)
    tone=neutral

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  10. 1. MI= glob=best alt, not closure
    tone=neut
    2. MI= need CA and gov help for success in global mark
    tone=neut

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  11. Every country needs a helping hand to fully tap its comparative advantage.

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  12. The world becomes vulnerable to economic crisis through globalization and this affects the future. They need to switch to pursuing their changing capital in order to grow their wealth, become resistant to the shock of recessions, and become an overall better country.

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  13. comparative advantage = competitiveness

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  14. globalization has negative effects; must adapt markets in order to prosper

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  15. MI- comparative adv++, solves global market problems and strengthens both individual countries economy as well as global economy

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  16. In order to survive developing countries should use their comparative advantages.

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  17. Main idea: The current detrimental state of the global market and the need for countries to participate in working market economies, with private and government investments.

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  18. Economic globalization has in ways improved and stagnated the development of the involved economies. The current trend however is the decline in international economic prosperity, which is especially disheartening for countries that are still developing. Among this international crisis, there are models in countries like China and India that show ways to counter the negative impacts left. This involves focusing on capital that is working and giving significant outcomes to strengthen the comparative advantage. Risk/reward models are considered in these scenarios and scenarios with greatest reward ratio are favorable. Financial investment from the government is also recommended in these cases as it stimulates the overall economic growth, which ultimately subsides the impact of the international financial crisis.

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  19. During recession, comparative advantage= essential Govt can also help

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  20. economy = recession + unemployment
    Lessons of history = answer to crisis –> comparative advantage = foundation + strengthens;

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  21. Theme: Comparative advantage must be exploited by each country in order to stay competitive in the age of globalization and the government can play an important part in fostering a conducive environment to grow its economy. (central)
    Prospective study, report likely made in 2009. Reduced growth in real wages globally and increased poverty to be expected.
    Although globalization has been criticized by developing countries for (same old order with new means of control….oppression…marginalization) it has not stopped leaders of such countries from integrating their economies as they stand to benefit too. They understand the need to integrate or risk lagging behind.
    Alternative to global integration not lucrative (between the devil and the deep blue sea, take the lesser of the two evils), i.e. having a closed economy and not opening it to free trade will result in stagnation and homegrown crises like Myanmar and North Korea. Successful countries like China, Vietnam and India have liberated their economies by assimilating with the rest of the world.
    Testable: Know that which countries have benefited from opening up their economies and which countries are still behind for not integrating
    Draw right lessons from history (e.g. Ecuador and its horticulture)
    Emerging countries able to cope with current crisis due to strong balance sheets so they have the resources to apply counter-cyclical policies to cushion shocks. They also nurtured their industries to be aligned with their comparative advantage. Lesson is to not defy your CA (substantiated with evidence; adopting import-substitution strategy, resort to subsidies that weaken economy and not able to apply countercyclical measures)
    Testable: ways a country can doom itself in a recession
    Country needs to implement a price system, encourage firms to enter industries to prosper in globalised world (specific examples: China and India). Caveat for system to work – only feasible in market economy and implementation of market-oriented reforms.
    Testable: comparative advantage involves having a market economy and institutionalizing market-oriented reforms, developing countries can transform from labour/resource-abundant to capital abundant in span of 1 generation, rapid accumulation of human and physical capital
    Governments can provide financial incentives to encourage firms to invest (One pioneer succeeds the rest will take the plunge so a committed, credible and capable government needs to give the push to facilitate process; chicken-and –egg situation, the government plays an instrumental role in shaping its economy and making it resilient enough to weather recessions
    Tone: informative, neutral

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  22. MP: we need well functioning markets that is dependent on both parties to ensure success in comparative advantage

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  23. Globalization for economics=bad climate
    Comparative advantage=prepare for handling crisis.
    Comparative advantage is good under the market economy.
    The government can give a hand to facilitate the improvement of comparative advantage.

    Reply

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