Cambridge – It may take a few months or a couple of years, but one way or another the United States and other advanced economies will eventually recover from today’s crisis. The world economy, however, is unlikely to look the same.
Even with the worst of the crisis over, we are likely to find ourselves in a somewhat de-globalized world, one in which international trade grows at a slower pace, there is less external finance, and rich countries’ appetite for running large current-account deficits is significantly diminished. Will this spell doom for developing countries?
Not necesarily. Growth in the developing world tends to come in three distinct variants. First comes growth driven by foreign borrowing. Second is growth as a by-product of commodity booms. Third is growth led by economic restructuring and diversification into new products.
The first two models are at greater risk than the third. But we should not lose sleep over them, because they are flawed and ultimately unsustainable. What should be of greater concern is the potential plight of countries in the last group. These countries will need to undertake major changes in their policies to adjust to today’s new realities.