Have North-South Growth Linkages Changed?


WP/96/54-EA

Have North-South Growth Linkages Changed?
by Alexander W. Hoffmaister, Mahmood Pradhan, and Hossein Samiei


The relationship between industrial countries (the North) and
developing countries (the South) has often been described as one of one-way
dependence, with growth in the South being driven by that in the North.
Despite the sluggish growth in the industrial countries in the early 1990s,
however, the developing countries as a group have sustained rapid growth.
This suggests that the conventional wisdom of the North pulling the South
needs to be re-examined. Moreover, the linkages between the North and the
South are also being affected by changes in their relative economic weight:
if the developing countries continue to grow at current rates--about
6 percent a year--they are likely to account for a greater proportion of
global output than the industrial countries by the middle of the next
decade. This paper examines whether the recent divergence between growth
rates in the North and the South represents a structural break in the
traditional North-South relationship. It also discusses some of the reasons
for the greater resilience of the South to output fluctuations in the North,
and whether this development has benefited the North.

The empirical results suggest that, at least until recently, business
cycles in the North and in the South have been relatively synchronized, with
recessions in the North typically lowering growth in the South. Since the
late 1980s, however, the short-run relationship between growth in the two
regions appears to have changed, with the South becoming more resilient to
cyclical movements in the North. A decomposition of developing country
growth by region suggests that this greater resilience of the South mostly
reflects stronger economic performance in Asia.

A number of factors have contributed to improved performance and
sustained growth in the South. Structural reform policies, especially in
the areas of trade liberalization and the removal of distortions in domestic
product and financial markets, have raised productivity and attracted large
inflows of foreign capital. For many developing countries, greater
diversification of exports and export markets has resulted in a substantial
increase in intraregional trade. The increasing integration of world
financial markets and the greater openness of many developing country
financial markets have strengthened financial linkages between industrial
and developing countries. With more open capital markets, weak activity and
low interest rates in the industrial countries in the early 1990s resulted
in higher capital inflows and investment in many developing countries,
offsetting the adverse effects on trade during the cyclical downturn in the
industrial countries.