The Weighting Problem in Testing the Linkage Hypothesis

Author(s): Prem S. Laumas

Source: The Quarterly Journal of Economics, Vol. 90, No. 2 (May, 1976), pp. 308-312
Published by: Oxford University Press
Stable URL: http://www.jstor.org/stable/1884632
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 THE WEIGHTING PROBLEM IN TESTING THE
LINKAGE HYPOTHESIS *

PREM S. LAUMAS

Recently Yotopoulos and Nugent have taken on the interesting

task of testing the Unbalanced Growth Strategy of Albert Hirsch-
man.' Before the Yotopoulos-Nugent paper becomes an important
source of reference on the subject, it is important to note a major
limitation of their study relating to their technique of analysis. Let
me elaborate on this.
Yotopoulos and Nugent adopt a method of calculating linkages
by using the inverse of the Leontief 1-0 tables, which they claim to
be superior to the simple technique used by Chenery and Watanabe.2
This is indeed true because the inverse of an 1-0 matrix takes into
account both the direct and the indirect effects of an increase in the
output of an industry. However, there is a weakness in their pro-
cedure that may bring about misleading results. It arises from the
fact that LTj is an unweighted index.3 It assumes that all industries
have equal weights.4 It is obvious, though, that different industries
occupy different degrees of importance in a system of industries
listed in an 1-0 table. Several weighting schemes can be devised to
bring out the relative importance of various industries in the econ-
omy. The selection of a particular scheme, of course, depends on the
problem under consideration. Hirschman's theory requires first that
we identify the key sectors in the economy. In interacting with the
rest of the economy, these sectors would initiate the process of eco-
nomic development. It is imperative, therefore, that the relative
importance of each sector be clearly spelled out. An unweighted
index of linkage may fail to depict the pressure-creation ability of
the various industries, for its calculation procedure assumes that all
*The author is thankful to a referee of this Journal, Gordon C. Rausser,
and John C. Soper for helpful comments on an earlier draft of this note. He
is also thankful to Y. L. Mahajan for help in the computations reported in
this paper.
1. Pan A. Yotopoulos and Jeffrey B. Nugent, "A Balanced Growth Ver-
sion of the Linkage Hypothesis," this Journal, LXXXVII (May 1973), 157-71.
2. H. B. Chenery and T. Watanabe, "International Comparisons of the
Structure of Production," Econometrica, XXVI (Oct. 1958), 487-521.
3. Yotopoulos and Nugent define LTj=2a*f,. where a*,=U(I-af,)-1 and
laff is the ratio of the purchased intermediate inputs to the total value of

production, See Yotopoulos and Nugent, op. cit., p. 161.

4. Or that they have implicit weights analogous to the weighting scheme
implicit in an unweighted index number. It is obvious, though, that such
weights are arbitrary, illogical, and far from realistic in all but a few cases.

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 THE LINKAGE HYPOTHESIS: COMMENT 309

industries are of equal importance in a system of industries. There-

fore, a proper weighting structure is needed to capture the relative
abilities of various industries to set up tensions, pressures, and pac-
ing devices in inducing unbalanced growth through deliberately
engineered pressures of excess demand and bottlenecks. Hence, for
a more accurate test of Hirschman's theory, Yotopoulos and Nugent
should have weighted LTj, say, according to a given sector's share
in the final demand to demonstrate the demand approach to economic
development proposed by Hirschman.
In order to demonstrate the difference made to the size of the
backward and forward linkage indices by a weighting scheme, the
readily available 1-0 tables for India (1964-1965), Italy (1950),
Japan (1951), Norway (1950), and the United States (1947) have
been used. The I-0 tables for Italy, Japan, Norway, and the United
States were aggregated to make them comparable with the table for
India.5 Indices of linkages similar to the one used by Yotopoulos
and Nugent were published by Rasmussen some time ago.6 In what
follows, we use Rasmussen's technique. There are three main reasons
for using Rasmussen's indices: (a) By using the inverse of an I-0
matrix, these indices take into account the direct as well as the in-
direct effects of an increase in autonomous expenditure. (b) They
are properly weighted and, therefore, more correctly depict the im-
portance of strategic sectors of the economy. (c) It is possible to
make interindustry comparisons between different countries. Thus,
the Rasmussen indices are superior to those used by Yotopoulos and
Nugent for reasons (b) and (c). A brief description of Rasmussen's
method is given below.
Consider an inverse Leontief open static 1-0 matrix Z with Zj,
as its typical elements. Zij can be interpreted as the increase in the
output in industry i for per-unit increase in the final demand for the
product of industry j.
An index of backward linkage that Rasmussen calls the power
of dispersion is defined as follows:
1

Z-j
m. .

5. A 23X23 1-0 table has been published recently by K. V. Santhanam

and R. H. Patil, "A Study of the Production Structure of the Indian Economy:
An International Comparison," Econometrica, XL (Jan. 1972). The 1-0 tables
for Norway, Italy, Japan, and the United States are published in Chenery and
Watanabe, op. cit.
6. For the details of this method see P. N. Rasmussen, Studies in Inter-
sectoral Relations (Amsterdam: North Holland Publishing Co., 1956), Ch. 8.

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310 QUARTERLY JOURNAL OF ECONOMICS
m
where Zj= E j is the sum of the column elements and is to be
interpreted as the total increase in the output from the whole system
of industries needed to cope with an increase in the final demand for
the product of industry j by one unit.
Similarly an index of forward linkage is defined as

1
-zi.
Ui. = m (i = 1,2,3, . . . , m),

m
where Z. = Zij is to be taken as the increase in output in industry
j=1
i needed to cope with a unit increase in the final demand of all the
industries.
The overall averages are represented by

1 mm 1 m 1 m
2 z Zij= 2 z j=- zi..
m j=1i==1 m j=1 m2 i=1

These appear necessary for making interindustry comparisons. Due

to differences in the strength and the pattern of linkages between
different countries, the ability of a given industry to stimulate other
industries is bound to vary from country to country. Therefore,
in making interindustry comparisons between the countries, it is
desirable that we consider the linkage index of a given industry with
reference to the total degree of interdependence of all industries. This
is especially desirable when one is comparing the linkage patterns
of a developed country with those of an underdeveloped country,
for the degree of interdependence in the latter may be severely lim-
ited. Yotopoulos and Nugent have probably made some serious
errors in their results by not using some such overall average.
These indices have been weighted according to the importance of
each sector in the final demand. It may be useful to elaborate this
further with reference to, say, the index of forward linkage.
The index of forward linkage based on an unweighted sum of
the row elements implies that different industries in the system of in-
dustries have equal weights. In summation, however, one should
consider that an increase in the final demand of m units equally
distributed in the system of industries according to their importance
for the sector of final demand would mean an increase of

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 THE LINKAGE HYPOTHESIS: COMMENT 311

mXiD
m

E XhD
h== 1

units for the product of industry i. Therefore, the sum of the row ele-
ments can be taken as a weighted sum as follows:
m

m X ZijX]D
j=1 Xi

: XjD XD
j==1

Accordingly, -Zi. means the increase in industry i needed if

m
the final demand is to increase by one unit. xi(i= 1,2, . . ., m)
is total output, and XD(jD= 1,2, . . . , m) is final demand, and XD
is total demand. The increase in the final demand is distributed over
the system of industries according to their share in the final demand.
Parenthetically, we may note that any weighting scheme is to
some extent arbitrary and subject to criticism. A possible criticism
of the weighting scheme used here is that, if the price levels of the
inputs and outputs of the various units aggregated in a given sector
happen to diverge greatly, one is making erroneous calculations if
one does not somehow weigh the price levels of different components
that constitute a given sector. But it may be fair to say that this
is not so much a consequence of the conceptual problem of weight-
ing. Rather it appears to be the result of the consolidation and the
aggregation problem implicit in an I-0 approach.
Calculations were made on the basis of a weighted index as well
as an unweighted one. The results differed greatly. In many cases
the unweighted values were several times different from the values
of the weighted indices, even though the average values for all sec-
tors for each one of the countries studied were approximately the
same. Thus, for example, the values of the weighted index of for-
ward linkage was 0.059 for the leather and products sectors, and the
unweighted value was 0.557 for Japan. Similar values for transport
equipment sector were 0.132 and 0.400, respectively; for rubber
products, 0.223 and 0.513; for iron and steel, 3.609 and 2.648, re-
spectively. For the index of backward linkage the weighted value for
the agriculture and forestry sector was 1.235, and the unweighted
value was 0.636; and for petroleum products, 0.160 and 0.593, re-
spectively.
Table I reports further the effect of the weighting scheme.

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312 QUARTERLY JOURNAL OF ECONOMICS

TABLE I

EFFECTS OF WEIGHTING INDICES OF LINKAGES

Percentage of inter- Number of Percentage of inter- Number of

mediate production with sectors mediate production with sectors
sharply different values affected sharply different values affected
Country of forward linkage a out of 23 of backward linkage out of 23

India 56.63 12 75.15 17

Italy 56.10 13 75.82 12
Norway 41.36 13 37.40 8
Japan 39.43 10 40.26 6
United States 50.92 9 43.99 6

a. Sharply different values of the linkage indices mean that the value of the weighted
index is at least twice that of the unweighted index or vice versa.

In view of the above evidence I conclude that the unweighted

indices used by Yotopoulos and Nugent give misleading results.
On the basis of their calculations it is difficult to reject the extreme
version of Hirschman's theory or to support their acceptance of the
weaker form of the Linkage hypothesis.

NORTHERN ILLINOIS UNIVERSITY

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