The Weak Link Theory of Economic Development Charles I. Jones* Department of Economics, U.C. Berkeley and NBER E-mail:
[email protected] http://www.econ.berkeley.edu/~chad January 18, 2007– Version 1.10 Per capita income in the richest countries of the world exceeds that in the poorest countries by more than a factor of 50. What explains these enormous differences? This paper returns to two old ideas in development economics and proposes that complementarity and linkages are at the heart of the explanation. First, just as a chain is only as strong as its weakest link, problems at any point in a production chain can reduce output substantially if inputs enter production in a complementary fashion. Second, linkages between firms through intermediate goods deliver a multiplier similar to the one associated with capital accumulation in a neoclassical growth model. Because the intermediate goods' share of revenue is about 1/2, this multiplier is substantial. The paper builds a model with com- plementary inputs and links across sectors and shows that it can easily generate 50-fold aggregate income differences. * I would like to thank Daron Acemoglu, Andy Atkeson, Pol Antras, Sustanto Basu, Olivier Blanchard, Bill Easterly, Xavier Gabaix, Luis Garicano, Pierre-Olivier Gourinchas, Chang Hsieh, Pete Klenow, Kiminori Matsuyama, Ed Prescott, Dani Rodrik, David Romer, Alwyn Young and seminar participants at Berkeley, the Chicago GSB, Princeton, the San Francisco Fed, Toulouse, UCLA, USC, and the World Bank for helpful comments. I am grateful to On Jeasakul and Urmila Chatterjee for excellent research assistance, to the Hong Kong Institute for Monetary Research and the Federal Reserve Bank of San Francisco for hosting me during the early stages of this research, and to the Toulouse Network for Information Technology for financial support.