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 Labour Organisation, continued labour-market deterioration last year 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 last year, 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 per cent in 2007 to 1.4 per cent 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, globalisation has come under heavy criticism, including from leaders of developing countries that could strongly benefit from it. 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 liberalisation 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 globalised world, developing countries this year 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 labour, 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 globalised 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 labour 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 eight per cent growth target last year - became an economic powerhouse only after instituting market-oriented reforms in the 1980s.

Indeed, all 13 economies with an average annual growth rate of seven per cent or more for 25 years or longer, identified in the Growth Commission Report led by Nobel laureate Michael Spence, are market economies.

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.

The world is now so far down the path of integration, that turning back is no longer a viable option. We must internalise 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.

The author is World Bank Chief Economist and Senior Vice President for Development Economics.

© Project Syndicate, 2009, www.project-syndicate.org.