Morning Must-Read: Dominick Bartelme and Yuriy Gorodnichenko: Linkages and Economic Development

Dominick Bartelme and Yuriy Gorodnichenko: Linkages and Economic Development: “A single Honda… is made of 20,000 to 30,000 parts…

…produced by hundreds of different plants and firms…. Complex production chains are a salient characteristic of modern economies and the immense productivity gains of the past several centuries have relied on an extensive division of labor across plants which trade specialized inputs with one another in convoluted networks…. An early literature (e.g. Hirschman (1958)) reasoned these industry linkages were essential for economic development and focused on how to promote the formation of robust input markets in poor countries and target investment to the industries with the strongest linkages. However, before the data and methods to test these ideas became available, one-sector models that abstracted from intermediate goods altogether became the standard framework for studying growth…. Most of the analysis at this middle level is theoretical and qualitative but the predictions are clear: these linkages should play an important role in economic de- velopment…. Having built a database of input-output tables for a broad spectrum of countries and times, we provide evidence consistent with these predictions… [that] is quantitatively strong and robust… in line with the results from a calibrated multisector neoclassical model….

Various works in economics grapple with the importance of these linkages and specialization… domestic foreign-owned companies as well as imports of foreign inputs appear to be associated with increased productivity… corporate spin-offs aimed to increase the focus of their operations appear to earn higher abnormal returns…. However, these efforts seem disparate and lack a unifying framework with a macroeconomic perspective. We hope that future research will take up these challenges.