The Explanatory power of linkages

Tatjana Krupenenkova Instructor Eric Hinderliter Development Economics ECO442 2007 03 10 The Explanatory power of linkages Albert Otto Hirschman was born in Berlin in 1915. He was educated in Paris, London and Trieste. In Trieste he got his Ph. D. Then in 1940 he fought in French army and in 1941 he immigrated to the United States, where during two years he stayed in Berkley. After that he joined the USA army. In 1946 he joined the Federal Reserve in Washington. He lived in Bogota, Colombia from 1952 to 1956, and moved to Yale, Colombia and Harvard before settling in Princeton in 1974. Albert Hirschman was working on political economy of development. He discussed the economic resons for emergence of authoritarian regimes in Latin America in the sixties and seventies, and about the return to democratic forms of governance in the eighties. Hirschman’s work has been the subject of numerous symposia and has won him many prizes and honors, including the 1983 Talcott Parsons Prize for Social Science from the American Academy of Sciences, the 1997-98 Toynbee Prize, and the 1998 Thomas Jefferson Medal, awarded by the American Philosophical Society. “Clearly impatient with the walls that divide disciplines and thinkers from each other, he has been described as a playful genius, someone who loves being.” (http://www.amherst.edu/commencement/2004/honorands/hirschman.html) He differed greatly from other economists in his worldview and ideas. When he went to Columbia in 1952, he didn’t have any prior knowledge of economic development. And as he says it was a real advantage for him because he looked at reality without any theoretical ideas. Then when he moved to America and started to read different literature about development economics he recognized that his own ideas and views were almost the same with the ideas and views of other economists famous at those times. After two years of staying in Colombia in 1954 he writes a book called “Strategy”. Here the basic concern lies with the discovery of hidden rationality. He was working hard and made many different kinds of observations, but must of these observations were isolated from one another, so in his book he made one general principal ties all of his observations together. Albert Hirschman suggests that underdeveloped countries need special “pressure mechanisms” to bring forth their potential, and that “ development depends not so much on finding optimal combinations for given resources and factors of production as on calling forth and enlisting for development purposes resources and abilities that are hidden, scattered, or badly utilized. He presented his main point as a special characteristic of the underdeveloped countries, and granted that the advanced countries were ruled by the traditional principles of maximization and optimization, on the basis of given and known resources and factors of production. As a result while thinking about the ideas with which he could build up the economy of underdeveloped countries and the economy as a whole, these ideas became as a general approach to the understanding of change and growth. So by trying to set out to learn about others, Hirschman in the end learned about himself. Using an unusual for economists approach he played an important role in development economics by developing the concept of linkages that described the political-economic stream, and have changed the landscape of the social sciences. According to Hirschman linkage can be defined as a sequence of investment decisions happening in industrialization process, and in economic development. Development depends not on finding best combinations of resources and factors of production, but taking more into consideration abilities which influence development, and that are hidden. There are two kinds of linkages backward and forward linkages. Backward – industrial operation that relies on imports and on many material inputs, which will try to push their domestic manufacture of these inputs and go toward domestic capital good industry. In other words if for example one industry like steel increases production in industry of coal, then an expansion in industry of coal will generally create an increase demand for the product in industry of steel. A forward linkage appears when one product used in the production stimulates the establishment of another new product. For example a steel industry while expanding can create a railway industry. The concept of linkages is important because linkages have a great influence on economy. Hirschman suggested that it is reasonable to invest in the certain key sectors in the economy, the linkages would influence other sectors, and the market would respond to the unbalanced situation by making the other investments spontaneously. So it is very important to choose the particular sector that the government would invest to. Though it is very difficult to measure the effectiveness of linkages there are several things that people and government shod take into consideration. Government should start from the number of linkages that a particular sector of economy possesses. It is better to look for the largest number of other sectors that can be affected as a result of the development of the sector that government has chosen. And it is necessary, because it would be unprofitable if for example government would invest all of the given money into the art or music, because music or art would not have a lot of linkages with other more important and profitable industries. Second important thing that government must consider is the strength of each linkage. Though backward and forward linkages seem to be equivalent, they have different effects on economy. Backward linkage increases the demand for the product of another sector, simply rises the price of the output, by stimulating higher production supply. A forward linkage reduces the price of the input used in the production. And the overall effect is diffused. These linkages have the opposite effects. If forward linkage has growth effects on the existing firms, and helps to develop new industries, backward linkages start to carry the sharper flow of information. Finally government also should consider the intrinsic profitability of each sector. And it should try to make it best choice. Because sometimes governments make mistakes and over invest money into the particular sector, as a result there is no change, and some other industries may suffer. Government sometimes needs to invest into the less profitable sectors of the economy and in the long run it can win. The good example of the linkage concept would be Tanzanian tourism. In the recent decade tourism became one of the most influential sectors of the economy. It became like a pillar of the Tanzanian’s economy. The government of Tanzania was considered if to invest more money into that particular sector. Tourism has a significant impact on the output, because it shows the very strong inter-sector linkage effects. So as we see this particular sector has many linkages with other important industries. Tanzania is full with various natural resources, and it attracts the attention of tourists. Tanzanian’s overdependence on agricultural exports means that tourism may diversify the sources of foreign exchange earnings, so it influences economy. Tourism many other sectors of the economy and brings to them many benefits, like income, employment and tax revenues, besides tourism brings a lot of structural changes into economy. Other important sectors of the economy in Tanzania re coffee, cotton, and textiles and leather. The effectiveness of the tourism sector depends on the output responses of the other sectors, particularly those linked significantly with tourism. These sectors are food and beverages, fishing and hunting, staple food and wholesale retail trade. However greater linkages do not imply greater incomes, indicating that sectors linked with tourism have low value output. Thought tourism sector have many strong linkages that really affects other industries, the different estimates showed that tourism is not particularly significant in terms of income generation. This may be due to the level of wages in the sector. Second is that tourism also have a very week linkage with employment, and though it influences economy and many different industries, it doesn’t affected employment. The recent growth of tourism and its significant contribution to the economy has attracted investment and government policy initiatives to support its development. After reading all of three articles, and necessary materials, I can conclude that Hirschman’s concept of linkages played very important role in economy, politics and society. But the is a lot of confusion in my mind, because it is really very difficult to find the best sector of the economy and invest into it. As I have already told sometimes government make mistake, and over invest money, and different sectors that are influenced by that particular sector may suffer. The example of Tanzania’s tourism shows how really the concept of linkages can work, but it is only one example and it is the example only about particular sector of Tanzanian’s economy, and what about other different countries that are much bigger and wider, and that have a lot of different powerful sectors. How should the government choose the good sector? Tanzania is not very big and there a small number of larger industries, and only several sectors that influence economy, so as I think it was not so difficult to recognize the particular sector for investment. Yes tourism helps, and government is investing money to develop it. But on the other hand, though this sector influences economy, still it doesn’t influence some of the other important factors of the economy, in this situation it was income generation and employment. The concept of linkages is a powerful tool, it can influence economy, but s I think it is not the only way to improve the economy, and that this tool sometimes can mislead governments. It is not possible to rely only on that concept, government should think and about other factors of the economy. Work Cited Hirschman, Albert O. “Issue: What is the explanatory power of ‘linkages’? Amherst College Commencement. Commencement 2004: Honorands

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