Reverse Linkages: The Growing Importance of Developing Countries - Finance & Development - March 1996 - Swati R. Ghosh

HE DEVELOPING countries’ economic prospects have long been heavily dependent on the industrial economies. But the share of world output, trade, and capital flows that can be attributed to developing countries has been increasing over the past two decades. As a result, “reverse linkages”—the impacts of developing countries on industrial countries—are becoming more significant. Growth of the developing countries’ output and trade—and of their share of world output and trade—has accelerated over the past five years (Charts 1 and 2). If this trend continues, over the next 10–15 years, developing countries can be expected to play a much greater role in the world economy—and have a much larger impact on industrial countries. Although the rising importance of developing countries in the international economy has so far been due to a relatively small number of countries, the recent acceleration of growth in the developing world has been broadly based, and this trend is expected to continue. To date, the debate on reverse linkages has focused almost exclusively on one aspect—the potentially adverse consequences of growing trade between developing and industrial countries on employment and wages in the latter. However, comprehensive analysis of the three factors responsible for the growing impact of developing countries—expanding trade between industrial and developing countries, increasing financial integration, and relatively rapid growth in developing countries—suggests that if the process of integration is properly managed, benefits will outweigh costs to industrial countries.