"...countries with a strong comparative advantage in natural resources are particularly prone to fall into the trap of growth-reducing structural change. For these countries, globalization is a mixed blessing. The natural-resource industries that globalization promotes have limited capacity to absorb employment out of traditional sectors. Globalization therefore entrenches dualism, rather than helping to overcome it.
Appropriate policies can help. One lesson is to avoid premature collapse of import-competing industries that employ substantial numbers of people before sufficient employment opportunities have emerged in more productive industries. Asian countries, for instance, have typically liberalized at the margin (through export subsidies or special economic zones), spurring new export industries without pulling the rug from under the rest.
Second, the exchange rate is vitally important. Competitive currencies promote and protect modern tradable industries that employ a substantial share of the labor force. We found in our research that countries with competitive currencies were much more likely to experience growth-enhancing structural change.
Finally, flexible labor-market policies seem to be important, too. Legal requirements that significantly increase the costs of hiring and firing labor discourage employment creation in new industries.
Structural change does not automatically accelerate economic development. It needs a nudge in the appropriate direction, especially when a country has a strong comparative advantage in natural resources. Globalization does not alter this underlying reality. But it does increase the costs of getting the policies wrong, just as it increases the benefits of getting them right."
