World Bank

:J)J(Dt7

Development Research Center

Discussion Papers

No. 17

ACCOUNTING FOR ECONOMIC GROWTH:

THE CASE OF NORWAY

by

Bela Balassa

with the assistance of Jonathan Levy

NOTE: Discussion Papers are preliminary materials circulated to stimulate discussion and critical connnent. References in publication to Discussion Papers should be cleared with the author(s) to protect the tentative character of these papers. The papers express the views of the author and should not be interpreted to reflect those of the 'olorld Bank.

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• Accounting for Economic Growth: The Case of Norway

* Bela Balassa with the assistance of Jonathan Levy

Revised

Following the pathbreaking contributions of Chenery (1960) and

Chenery, Shishido, and Watanabe (1962), several writers attempted to

explain economic growth in terms of the contributions of demand factors

(domestic demand and exports) and import substitution. In cases when total

(as compared to direct) measures were used in order to separate the indirect

effects of these primary determinants on intermediate inputs, technological

change or, more accurately, changes in input coefficients was shown separately

1/ as a source of economic growth.-

Apart from Desai (1969) who considered the conceptual relationship

of actual import substitution with an optimal situation, recent contributions

to the subject endeavored to refine earlier work on the measurement of

sources of growth. Morley and Smith (1970 and 1971) suggested to redefine imPort

substitution by including indirect imports in the form of intermediate

inputs used in the import substituting industries. In turn, Fane (1971)

proposed replacing estimation in discrete time by estimation in continuous

time, so as to provide a complete decomposition of economic growth and avoid

interaction terms among its primary determinants. In another paper,

Fane (1973) suggested a way to establish consistency between disaggregated

and aggregate measures of import substitution. Finally, Frank, Kim and

Westphal (1975) used a chained measure of import substitution in combining

results for individual subperiods.

* The author is indebted to Jonathan Levy for carrying out all the calculations and for writing the appendix to the paper, He also wishes to thank Hollis Chenery, GLaham Pyatt, Moises Syrquin, and tarry Westphal for comments on an earlier draft.

1/ The reader will note that this analysis contrasts with the production function approach, which seeks to explain economic growth in terms of changes in the amount and the productivity of primary factors.

- 2 -

This paper will take Harry Johnson's (1959) theoretical model of

economic development and international trade as its point of departure and

will apply sources of growth analysis to examine the effects of policy

changes in Norway during the period follo·wing the Second World War. Section I

provides a brief background on the Norwegian economy and on the policies followed

in the postwar period. In turn, Section II describes the models employed in the

paper while Section III presents aggregate estimates derived by the use of these

models. The disaggregated results for the major sectors of the Norwegia,n economy

and for individual industries are discussed in Section IV. Finally, Section V

provides the general conclusions of the analysis, and makes a comparison with

results obtained for Japan.

I

Iu an earlier paper (1970), the author drew attention to the contrast

between inward-looking strategies followed by semi-industrial countries in

Latin America (Argentina and Chile) and Eastern Europe (Czechoslovakia and

Hungary) on the one hand, and the outward looking strategies applied in two

Western European countries, Denmark and Norway, on the other. In a separate

paper (1969), the case of Norway was examined in some detail.

In the early postwar pe.riod, Norway showed the characteristic features

of a semi-industrial country. Its exports were laTgely dominated by primary

products in raw and simply processed form. Manufactured goods, defined in a

na.rrower sense to exclude intermediate products at lower levels of transformation,

accounted for less than one-tenth of exports and only 3 percent of the output

of the manufacturing sector was destined for export markets (Balassa, 1969, pp.

346-48).

The share of manufacturing thus defined n the gross national product

was much lower in Norway (15 percent) than in the major European industrial

nations (27 to 28 percent). The principal manufacturing activities included

consumer goods industries established behind moderate protection to cater to

•

- 3 -

domestic needs, the manufacture of wood and cork products benefiting from the

availability of cheap raw material, and engineering industries specialized in

shipbuilding and in machinery used for the processing of domestic materials.

Given the limitations of its fishing, forestry, and mining

resources, the continuation of this pattern of specialization would not

have provided sufficient impetus for rapid economic gL"owth in Norway duTing

the postwar period, so that there was need to expand the manufacturing sector.

Possible policy choices included adopting an inward-looking strategy oriented

towards import substitution behind increased protection as was done in

a number of Latin American and Asian countries or following an outward-looking

strategy aimed at export expansion. The decision was made for the latter,

with policy measures taken to stimulate exports and to increase foreign

competition in domestic markets.

The maintenance of realistic exchange rates and duty rebates on

imported inputs used in export production, together with the elimination of

quantitative import restrictions and reductions in tariffs, served these

objectives. In particular, tariffs in Norway were reduced to levels much

below those in semi-industrial countries of Latin America and Asia.

In 1954, tariffs on manufactured goods averaged 8 percent in Norway and

the average effective rate of protection was also 8 percent as against

96 and 113 percent in Brazil, 111 and 182 percent in Chile, 24 and 26 percent

in Mexico, 85 and 271 percent in Pakistan, and 25 and 61 percent in the

Philippines. (Balassa, 1971, p. 54).

Protection levels in Norway were even lower than in the major

industrial countries. Thus, averages of nominal and effective protection

on manufactured goods were 12 and 20 percent in the United States, 16 and

18 percent in the United Kingdom, and 12 and 18 percent in the European

Common Market. Only Sweden had comparable protection levels, with tariffs

averaging 7 percent and the effective rate of protection 12 percent

(Balassa, 1965, p. 588).

- 4 -

Subsequently, Norway became one of the founding m~bers of the

European Free Trade Association, established in 1960. Other member countries

were Austria, Denmark, Portugal, Sweden, Switzerland and the United Kingdom,

with Finland joining at a later date. Tariffs on intra EFTA trade in

non-ag~icultural products were eliminated by the end of 1966. In turn,

following British entry into the Common Market, Norway signed an association

agreement with the EEC that entails free trade in practically all manufactured

products.

The process of industrial transformation in Norway thus took

place in the framework of an open economy during the postwar period and

Norwegian firms had to meet the test of the world market at home as well as

abroad. And, the maintenance of realistic exchange rates and the lack of

foreign exchange restrictions also benefited service exports, consisting

primarily of shipping.

This paper will investigate the effects of the policies applied

on imports substitution and exports, and hence on economic growth, during

the periods before and after the establishment of the European Free Trade

Association (1953-61 and 1961-69). This will involve comparing observed

magnitudes with hypothetical results that would have been obtained in the absence

of policy changes. The comparisons will be made by the use of sources of

growth analysis under alternative assumptions.

The data will be expressed in terms of constant prices, reflecting

the assumption that autonomous changes in relative prices did not affect the

composition of output. While this assumption is open to criticism, it could

not have been relaxed without building a complete model. At the same time,

the comparisons made between actual results and the hypothetical "anti-monde"

a:.re designed to indicate the effects of induced priCE! changes that resulted

from the application of outward-looking policies.

•

- 5 -

II

Harry Johnson explains changes in imports in a growing economy

in terms of pro-and ant:I.-trade biases in production and in consumption.

Production will be pro (anti)-trade biased if the supply of importables

is growing less (more) rapidly than national income. In turn, consumption

will be pro (anti)-trade biased if the demand for importables is rising

more (less) rapidly than national income. In combining these biases,

we obtain pro-trade bias (negative import substitution) or anti-trade

bias (positive import substitution) in production and consumption, taken together.

While Johnson's model has been formulated in a two-product

framework, it can be readily applied in a multi-pr'oduct context. In the

following, the relevant formulas will be derived for import-substituting

industry i, with national income denoted by Y, production for domestic use

by S, consumption by D, imports by M, and growth rates by small letters.

In turn, for purposes of estimating import substitution, expected

* importsare defined as Mt in the case of neutral growth in production with ** consumption at observed levels, Mt in the case of neutral growth in

consumption with production at obse1rved levels, and Mt in the case of

neutral growth in both production and consumption. In a two-period model,

equations (1) and (2) show actual imports while equations (3) to (5)

indicate expected imports under the alternative definitions .

(1)

(2)

I"

M. 10

D - S io io

S1.t = (1+d.) D. - (1+s.) S. = (1+m.) Mi, where

1 10 1 10 1 0

(1+d.) Dio - (1+s.) S. 1 1 10 - 1 m. ==

1 Dio - 8io

I·

(3)

(4)

(5)

(6)

(7)

(8)

- 6 -

* Mit = (l+d1 ) D10 - (l+y) 8io ** Mit = (l+y) D - (l+s1 ) 8io io

Mit= (l+y) D. - (l+y) s. = (l+y) M. 10 10 10 Next equations (6) to (8) show the extent of anti-trade bias in

(l+si) S. - (l+y) S. = (s.-y) s. 10 10 1 10

* Mit -Mit = (l+y) Di - (l+d) D. ~ (y-di) D.

0 10 10 ** Mit - Mit =

Mit- Mit= /(l+y)(Dio) - (l+y) Sio/- /(l+di)

= (l+y) Mi - (l+mi) Mi = (y-m.) M. 0 0 1 10

D. 10

- ( 1 +s . ) S . 7 = 1 10

production, in consumption, and in production and consumption combined.

Rearranging terms, the relationship of the three formulas is indicated in

equation (9), with total anti-trade bias (import substitution) being the sum

(9) * ** - -Mit -Mit = (Mit -Mit) + (Mit -Mit) = /i_l+si) 8io - (l+y) 8io/

+ /(l+y) D. - (l+di) Di / = (s.-y) S. + (y-d.) D. - 10 0 1 10 1 10

of anti-trade bias in production and in consumption.

This formulation of the i~o~t substitution term contrasts with

that widely used in the literature (Lewis and Soligo 1965; 'Desai, 1969;

Morley and Smith, 1970 and 1971; Fane, 1971 and 1973; and Frank, Kim, and

Westphal, 1975) where, following the first paper by Chenery (1960), import

substitution was defined in terms of changes in the share of imports in the

dotnestic consumption of the products of a particular industry. A decrease

(increase) in this share, corresponding to a rate of increase of domestic

production exceeding (falling short of) that, of domestic consumption, wouln

accordingly represent positive (negative) import substitution. Thus, under

the share method import substitution is defined at (di - m1) M10 and the

difference between the two formulations equals (y-d.) Mi • 1 0

•

- 7 -

A shortcoming of the share method is that it arbitrarily takes a

constant share of imports in individual industries as the norm and neglects

the underlying changes in production and consumption. Thus, if in an industry

production rose less rapidly than consumption, the existence of import sub-

stitution would be shown under the share method, even though the industry's

production grew more :rapidly than national income.

By contrast, in defining import substitution by reference to devia-

tions of the growth rates of the industry's production and consumption from

the growth rate of national income, the model based on Johnson's approach takes

changes in domestic production and consumption as its point of departure.

Non-neutrality in production~accompanied by neutrai changes in consumption,

will give rise to production effects while non-neutral changes in consumption,

accompanied by neutral changes in production, will give rise to consumption effects.

Thus, under the Johnson approach, changes in p'roduction and consump-

tion in a particular industry are taken to be independent and th~ full effects

of non-neutral changes in production and consumption bear on imports. This

is analogous to the treatment of "fully traded" goods in project evaluation,

in the case of which increases in production resulting from the implementation

of a new investment project lead to lower imports without affecting domestic

consumption while increases in consumption result in higher imports without

affecting domestic production (Joshi, 1972)!/.

Two further advantages of the Johnson approach over the share method

should be noted. For one thing, the sum of disaggregated estimates equals the

aggregate estimate of import substitution that is not the case under the share

method; for another, there is no interaction term as between the contribution

1/ The result assumes that domestic prices equal marginal cost in domestic industries; protection takes the form of tariffs; and imports are available at a constant wor.'ld market price.

- 8 -

of domestic demand and import substitution to the increment of output, the

existence of which has been shown for the share method.!_/

The next question concerns the choice of an appropriate norm for

exports. In this connection, the views of Nurkse, Prebisch, and Raj and Sen

on the export prospects of developing countries offers interest. According to

Ragnas Nurkse, in contradistinction with the nineteenth century, under present-

day conditions the exports of primary products to developed nations offer

limited possibilities for economic growth in the .developing countries; in

turn, industrialization for exports encounters obstacles on both the demand

and the supply side. Raul Prebisch (1969) further developed this line of

argument, calling for a tr~nsfer of resources from (primary)_export to (manu-

facturing) import-substitution industries. Finally, in calling "for the

industrialization of primary producing countries oriented primarily to their

home markets", Raj and Sen (1961) "assume that a number of such countries today

are not in a position to increase their ex:port earningsn (pp.43-44), and use

the assumption of stagnant export earnings in their theoretical model for

developing countries.

The assumption of stagnant export earnings would entail taking the

exports of the base period as the norm in calculating the contribution of

exports to the growth of output. This assumption, used without any explicit

justification in studies on Pakistan (Lewis and Seliga, 1965, Fane, 1971),

Brazil (Morley and Smith, 1971), and Korea (Frank, Kim, and Westphal, 1975),

may find application to Norway in part because of the limitations of natural

resources referred to earlier and in part because of the unimportance of

manufactured exports at the beginning of the period.

1../ See Appendix

•

•

- 9 -

An alternative hypothesis would involve assumption that, in the

absence of policy changes, exports would have gro'vn at the same rate as

national income. This is the assumption made by Johnson (1959) in his two

commodity model that consist of an exportable and a importable. In Johnson's

model, neutrality obtains if the production and the consumption of both the

exportable and the importable, and hence exports and imports, grow at

identical rates.

In setting out to explain differences between the actual and the

hypothetical output of an industry, the latter being derived by assuming that

1/ -the industry's output grew at the same rate as aggregate final demand,

Chenery, Shishido, and Watanabe (1962) also define the export norm in pro-

portionate terms. In applying the sante norms to domesti.c demand an.d imports,

Chenery, Shishido, and Watanabe decompose deviations in output levels for

particular industries from proportionate growth in terms of the deviatiorrs

in output levels for particular industries from propo·.rtionate growth in terms

of the deviations in consumption, exports, and imports~ Thus, they calculate

import substitution in the same way as under the Johnson approach, which is

shown in equation (8).

In the following, three models will be used to indicate the contribu-

tion of exports aDd import substitution to changes (deviations) in output.

Models I and II decompose absolt1te increments in output in terms of the

contributions of domestic demand, exports, and import substitution. In both

cases, export contribution is defined by taking hypothetical exports to equal

the exports of the base p2riod . In turn, import substitution is measured

by the use of the share method in Model I, which has historical precedence,

and by employing the Johnson approach in Model II. Finally, in both model~,

Using aggregate final demand rather than national income as a norm will not give rise to discrepancies if balanced trade is obtained throughout the period under consideration. In this paper, we have followed Chenery, Shishido, and Watanabe in using aggregate demand norms.

- 10 -

domestic demand norms are derived after adjustment made for the import

subatitution norm. ' These two models are shown below, together with the Chenery,

Shishido, Watanabe approach that has been designated Model III. In all

c~:.1.~es~ the domestic demand, export, and import substitution effects are

e~pressed as a difference between actual and norm (hypothetical) values.

In the equations, domestic output (X) is taken to equal the sum of production

fox· domestic use (S) and exports (E).

Changes (deviations) Import

Domestic Substitution in output demand effect Export effect effect

Actual Norm Actual Norm Actual Norm Nonn Actual (10) Model I ~:f.xio 0 = (diDio - diMio) + (e1E. 0 ) + (diMio - IJliMio) ~0 (11) Hodel II xiXio 0 = (diDio yMio) + (eiEio 0 ) + (yMio - miM. )

l.O

(12) Model III xiXio - y X. - (diDio yDio) + (eiEio - yE ) + (yM. - m.Mi ) J.O io ].0 ]. 0

Thus far, ~e have conformed to the theoretical models of international

trade that are formulated in terms of final goods to the exclusion of trade in

intermediate products. Next, 'We admit the existence of intermediate products,

'Which can be produced domestically or imported. Intermediate products may be

traded as if they were final products by decomposing changes (increments) in

an indu~try's output, irrespective of whether it is destined for final or for

intermediate uses (di·rect method). Aleternatively, one may trace back the

intermediate product requireffients of the various components of final demand

and imports by the use of the inverse of the Leontief matrix (total method).

Both of these ~ethods have their uses. Results obtained by applying

the direct method can be interpreted to indicate the effects of the system

of incentives on exports and on import substitution in individual industries.

•

- 11 -

In turn, the total method permits measuring the relative contribution of

changes in input-output coefficients which has been customarily equated to

technological ~hange. Finally, differences in the results obtained by the

use of the direct and the total method show the extent of backward linkages

for particular industries.

In previous uses of the direct method, the same norms were used for

an industry, irrespective of whether its products were destined for final

or for intermediate uses. While this calculation has advantages as it permits

decomposing import substitution into production and consumption effects in a

consistent manner, using separate norms for final and for intermediate demand,.

permits indicating separately import substitution for final and for intermediate

products. Accordingly, estimates based on the direct method will be made

using aggregate total demand as a norm for both final and intermediate uses

(Alternative A) as well as by using aggregate final demand and aggregate

intermediate demand as norms for final uses and intermediate uses, respectively

(Alternative B).

Under Alternative A, aggregate total demand will provide the ap-

propriate norm, since the direct method treats intermediate products in the

same way as final products. Nevertheless, for comparability with the

Chenery-Shishido-Watanabe procedure (Model III) that uses final demand as

the norm under the direct method, calculations will also be made with final

demand norms.

In turn, aggregate final demand will be the appropriate norm for

calculations ~~de under the total method. This method introduces a distinc-

tion between the effects on intermediate products of (a) changes in the

pattern of final demand and (b) changes in input-output coefficients. The

Appendix shows the derivation of the relevant formulas.

- 12 -

Measuring chanaes in in.put-output coefficients again raises the questioD

of the choice of the base period. Chenery, Shishido, and Watanabe (1962) use

the first period as the base for import shares and the last period as the

base for input-output coefficients. While this was necessary by reason

of the fact that the input-output matriJI~ was available only for the last period,

it gives rise to a bias in the estimates due to inconsistency in the choice

of the base year.

Input-output matrices for Norway are available for al} benchmat'k years,

so that consistency in the choice of the base year could be assured. We have

regarded this choice as an index number problem and made calculations with

both Laspeyres and Paasche indices, thus "bracketing" possible values by the

use of the two index number formulas. This solutlon was considered preferable

to assuming a coxu:atant rate of growth for all variables between the benchmark

years (Fa.:ne, 1973) that is necessarily arbitrary. At the same time, in adding

base-year weighted results for the two subperiods, we obtain the chained

measure used by Frank, Kim and lvestphal (1975).

Chenery, Shishido, and Watanabe (1962) measured the effect of changes

in total (domestic plus imported) input-output coefficients on intermediate

products. Since, however, we are attempting to explain changes in domestic

output, it is more appropriate to use domestic input-output coefficj.ents for

this purpose.!/ Both of these procedures, denoted as Alternatives A and B

under the total method, have been used in the present study.

!/ This alternative was suggested to the author by Larry Westphal.

- 13 -

III

Table I shows the percentage decomposition of the aggregate results

for Model II. The estimates are presented separately for the periods 1953-1969

as well for subperiods 1953-61 and 1961-69. All results are given using both

Laspeyres and Paasche formulas and, for the period 1953-69, by ustng the chain-

ing procedure as well.

The results point to the important role played by exports in economi.c

growth following the adoption of outward-looking policies in Norway. For the

1953-69 period, increases in exports account for one-third of the increment

in output, Within this period,the contxibution o~ exports to the growth of

output increased following Norway's entry into the European Free Trade Association.

This contribution was 28 percent between 1953 and 1961 and 37 percent between

1961 and 1965.

In turn, the contribution of import substitution to output growth was

negative throughout the entire period, irrespective of whether we use Laspeyres

or Paasche indices.l/ Differences between the results obtained with the

alternative index number formulations are 4 percentage points for both

subperiods, the Paasche results being lower in absolute terms as expected.

The general conclusions also apply to the chained measure that

combines the results for the two subperiods. By contrast, direct estimates

for the entire period lie outside the subperiod results, irrespective of

whether Laspey:res or Paasche indices are used. The results indicate the

superiority of the chained measure over direct estimates for the entire

period as the error possibilities of the latter procedure tend to increase

with the length of the period.

1/ As the contribution of e:Kpo:rts to output is equated to the absolute increment in export value, there is no index nUll1ber problem; the Laspeyres and Passche results are identical. \

- 14 -

Negative import substitution is consistent with an outward-looking

policy that engenders increases in exports and impo~ts. Note further that,

on the national economy level, negative import substitution must be due to

production effects, since aggregate demand ~as used as the norm for calcu-

lating consumption effects. Thus, deviations .from zero shown in the estimates

for consumption effects are due to rounding errors associated with the use of

deflators.

We have discussed so fa'i.r estimates shown under Alternative A, derf:.ved

by using total demand as a norm.l/ Replacing the total demand norm by final

and intermediate demand norms (Alternative B) hardly affects the results.

At the same time, negative import substitution is shown for both final and

intermediate products for the entire period as well as for the second subperiod.

In the first subperiod, intermediate goods exhibit a small degree of positive

import substitution.

Table 1 also shows the results for Alternative A under the total

method, which i.nvolves separating the effects on intermediate products of

changes in final demand and in total (domestic plus imported) input-output

coefficients. Alternat:ive B, involving the further separation of domestic

and imported input-output coefficients, could not be estimated for the entire

period due to the lack of appropriate deflators for domestic and for imported

intermediates. Such estimates were made for the period 1961-69 and will be

discussed in connection with the results presented in Table 2 below.

Using the total method enhances the role of exports in explaning

increases in output, ~ith their contribution to the growth of output being

slightly below 50 percent in the 1953-61 period and nearly 70 percent in the

1/ Results derived by using final demand as a norm are shown in Table :.

- 15 -

1961-69 period. Negative import substitution too, is greater in absolute

terms under the total method than under the direct method. The results are

explained by the fact that the total method also accounts for the indirect

contribution of exports and import substitution through demand for domestically-

produced intermediate products.

Changes in input-output coefficients were a further contributing

factor to the growth of output. The results show a contribution of 16-19

percent in the 1953-61 period and 10-13 percent in the 1961-69 period; in both

cases, the first figure refers to the Paasche and the second to the Laspeyres

results. Thus, one tends to over (under) estimate the contribution of changes

in input-output coefficients using first (second) period weights.

The measured positive contribution of changes in input-output coef-

ficients to the growth of output indicates that increases in the share of

inputs in output value associated with changes in product composition or

reductions in processing costs (value added) outweighted any material-saving

imporvements that may have occurred. The methodology applie.d does not permit,

however, to separate the effects of these changes.

In Table 2, the results obtained by the use of Model II are

compared to those derived with Models I and III. For the 1953-69 period,

comparisons refer to arithmetic averages of the 1953-and 1969-based chained

measures. These estimates are available for the direct method only because

of the lack of appropriate deflators as noted above. In turn, estimates

obtained by the use of both the direct and total methods are shown for the

period 1961-69.

- 16 -

The estimates for the period 1953-69~ derived by using the direct

method under Alternative A, differ little as between Models I and II. The

differences are substantial, however, under Alternative B, with import

substitution being positive in the first case and negative in the second for

final and for intermediate products as well. However, in line with the

increased liberalization of trade consequent upon Norway's entry into EFTA,

for the 1961-69 period the import substitution term is negative for Model I

also.

Certain shortcomings of Model I for the purposes of measuring

import substitution have been noted above. Note further that the results

obtained by the use of this model differ to a considerable extent, depending

on the choice of the 1emand norms and the use of the Laspeyres and Paasche

indices.!/ For one thing, measured import substituion is positive under

Alternative A and negative under Alternative B; for another, Laspeyres and

Paasche results for import substitution under Alternative B are 11 percent and 3

percent respectively.

The differences in the Model I results are explained by the variability

of import-production ratios among industries and by changes in these ratios

overtime. By contrast, defining import substitution in relation to aggregate

norms as in Models II and III imparts a considerable stability to the results.

Further comparisons will be limited to the latter two models.

In Models I and II we explainclianges in domestic output in terms of

chanaes in domestic demand, exports, and import substitution. In turn, under

1J Both of those results refer to the 1953-69 period. The differences are even larger if final rather than total demand norms are used; the La~peyres index now gives import substitution of -4 percent and the Paasche index 45 percent.

)

- 17 -

Model III, deviations in output levels from proportionate growth are decomposed

in terms of deviations in domestic demand~ exports, and imports. Correspondingly,

as shown in Table 2, the same absolute magnitude of (negative) import substi-

tution.represents a larger proportion of the deviation in output under Model III

than of the increment in output under Model II.!/

The importance of the contribution of exports is apparent in Model III

results, although exports are now measured in terms of deviations from pro-

portional growth rather than as an absolute increment. The estimates derived

by the use of this model thus confirm our conclusions on the role of exports

in the growth process in Norway. This result, as well as negativ~ import

substitution,has been the effect of the outward-looking policy adopted by

Norway, as noted above.

The relative contribution of exports and that of (negative) import

substitution is enhanced by using the total method, which takes account of

demand for intermediate products in producing final goods. At the same time,

the relationships between the Model II and Model III results remain by-and-

lar&e unchanaed. A contribution of changes in input-output coefficients of

~imilar maanitude in ab&olute terms however translates into a much higher

relative contribution under Model III than under Model II.

Finally, in both models, the use of domestic in the place of total

input-output coefficients under Alternative B of the total method reduces

somewhat the measured contribution of exports, that of changes in input-output

coefficients, as well as negative import substitution. Nevertheless, the two

sets of results are reasonably stable.

!/ Note further that, following Chenery, Shishido and Watanabe, only final demand norms were used in calculating Model III results under the direct method. These estimates are shown both under Alternative A and B.

- 18 -

IV

Thus far we have di£'cussed est_imates of the sources of growth in

Norway at the national economy level. Further interest attaches to the de-

composition of the aggregate estimates. This will be done for four major

sectors (primary products; food, beverages, and tobacco; manufacturing; and

services) as well as for individual industries within the sectors producing

traded goods. Tables 3 and 4 provide estimates for the period 1953-69,

derived by the use of Model II and expressed as the arithmetical average of

chained results with 1953 and 1969 base-years, under the direct method and

the total method respectively.

The estimates of Table 3 show that exports made a large contribution

to the growth of output in the manufacturing sector (42 percent) as-well as in

services (33 percent), and a much smaller contribution in the prtmary

sector (10 percent) and in the food, beveraaes, and tobacco sector (14 perc..c).

The results for manufacturing indicate the success of outward-looking policies

in this sector while those for services are largely due to th~arowing importance

of shipping. In turn, the small contribution exports made to increases of

output in primary activities and in food, beverages, and tobacco industries

~eflectSNorway's comparative disadvantage in these sector~/.

Negative import substitution is the most pronounced in

the manufacturing sector (-26 percent); it is smaller in primary activities

(-9 percent) and in food~ beverages, and tobacco (-7 percent) where trade

barriers were maintained during the period under consideration1 and it is

negligible in services (-1 percent) where by the nature of the activities

imports are small.

1/ See, however, the discussion of mining below.

- 19 -

Separating production and consumption effects in the manufacturing

~ector we find that production effects are negligible and consumption effects

account for the entire (negative) import substitution in this sector. This

means that production for domestic use in manufacturing kept up with national

income (more accurately, aggregate demand) but not with domestic consumption that

grew at a much faster rate. In turn, both production and consumption grew

less rapidly than national income in the other three sectors, thus giving

rise to negative import substitution in production and positive import

substitution in consumption.

Within the primary sector, large positive contribution of exports

and negative contribution of import substitution are shown for minin&

reflecting largely increases in the exports of iron ore and increased

reliance on the imports of other minerals. In turn, export expansion as

well as import substitution are negligible in agriculture, with increases

in both production and consumption falling substantially behind that of

national income.

As far as import substitution is concerned, food, beverages, as

well as tobacco exhibit the same characteristics as agriculture.

However, food products (largely processed fish) and tobacco (cigarettes)

made a positive contribution to exports.

The breakdown of the ~esults for the manufacturing sector reflects

Norway's comparative disadvantage in industries relying to a considerable

e~tent on unskilled labor and its comparative advantage in industries that

intensively use skilled-labor. They further show Norway's comparative advant-

age in energy-intensive industries, which benefit from the availability of

hydro-electricity at a low cost.

I I !

- 20 -

Among manufacturing sectors, leather and leather products seem to

be an aberrant case, with very large percentages shown in all the columns.

These results are explained by the fact that the absolute increment in pro-

duction -- the base of our calculations -- was negligible while exports expanded

and production for domestic consumption declined. This, in turn, reflects

Norway's comparative disadvantage in the leather and leather products industry,

which stems from the fact that the raw material, hides and skins, is not

available in substantial quantities and the processing of leather is intensive

in unskilled labor. This conclusion is nevertheless consistent with small

exports of some specialty products.

Norway's comparative disadvantage is further apparent in textiles

and in footwear and wearina apparel, which rely to a considerable extent on

unskilled labor. These industries exhibit large negative import substitution

in production that is partly mitigated by the fact that domestic consumption

grew at a lower rate than national income. However, the exports of sy~thetic

woven fabrics and special textile products expanded, giving rise to a substan-

tial export contribution as a proportion of output.

The contribution of exports to increases in output exceeded one-

fourth in the rubber products (37 percent), electrical machinery (32 percent),

engineering products (28 percent), and miscellaneous manufacturing (28 percent)

industries. All of these industries rely to a considerable extent on skilled

and technical labor that is relatively abundact in Norway.

But exports made the largest relative contribution to the increase

of output (80 percent) in basic metals, chiefly aluminum, pig iron, ferroalloys,

and nickel, which are highlyenergyintensive. Among chemicals and chemical

products, with an export contribution of 41 percent. the production of

fertilizers, too benefited from lo~ ~nergy costs. But expansion occurred also

- 21 -

in other chemical derivatives, in particular plastics, pointing to the in-

c~eased diversification of Norwegian industry. Finally, an export contribution

of 48 percent in paper and paper products indicates that Norway has exploited

its advantages in forest products.

In turn, all manufacturing industries exhibited negative import

substitution, although for several industries production for domestic use grew

more rapidly than national income. These results reflect the effects of trade

liberalization that have led to larger imports and to intraindustry speciali-

zation through the increased exchange of consumer goods and different varieties

of machinery and intermediate products (Balassa, 1966).

The results derived by the use of the direct method indicate the

impact of the incentive system on export growth and on import substitution,

with further distinction made between production effects and consumption

effects in regard to the latter. Further interest attaches to the results

derived by the total method that show the contribution of changes in input-

output coefficients to the expansion of output. Also, differences between

the total and the direct results for particular industries reflect the extent

of backward linkages.

Apart from the aberrant case of leather and leather products noted

earlier, there are fe~ cases where input-output coefficients would have decline

in Norway. Increases in input-output coefficients have been especially large for

mining, textiles, chemicals and chemical products, miscellaneous manufactures,

and non-metallic mineral products. At the same time the available data do

not permit an explanation of the observed intra-industry differences.

Turning to the indirect effects of changes in final demand and in

import substitution, ~e find these to be relatively small for food, beverages,

and tobacco and for services; in the first case, Norway relies to a considerable

- 22 -

extent on imported materials, in the second there are few backward linkages.

The differences between direct and total effects are much larger in manufac-

turing and in primary products. As expected, backward linkages are the

greatest in industries utilizing domestic materials and energy.

v

The interpretation of the results reported in this paper is rather

straightforward. The adoption of an outw

- 23 -

In the period immediately following the Second World War, import

substituticm was given impetus by high protection. In 1962, tariffs on

manufactured goods averaged 16.2 percent and effective protection rates 29.5

percent in Japan (Balassa, 1965, p.588). Tariffs were even higher in the

early postwar period and the protective effects of tariffs were reinforced

by quantitative restrictions which applied to all competing imports until

1960.

The results obtained by Chenery, Shishido and Watanabe for the

1935-54 period in Japan may thus be explained by industrial transformation

elicited by isolation from import sources during war periods, war devasta-

tion, and high protection in the immediate postwar years. In turn, trade was

liberalized to a considerable extent during the nineteen-sixties and seventies.

Tariffs have been lowe.:rad in the framework of successive multilateral trade

negotiations and quantitative restrictions on imports have been reduced at a

rapid rate. By 1965, only 7 percent of imports were subject to quantitative

restrictions (Ho, 1973, p.25) and by the early seventies such restrictions

were practically eliminated.

Accordingly, particular attention attaches to results for the period

since trade liberalization has begun. A recent study by Chenery and Watanabe(l976)

shows that in the period 1955-65 export expansion was a positive factor

contributing to econotnic grcwth in Japan·while negative import substitution

took place. These results are also indicated by data on gross national

products, exports, and imports.

During the 1955-65 period, Japan's GNP grew at an average annuai

rate of 9.9 percent whereas the rate of growth of exports was 13.8 percent

- 24 -

and that of imports 13.2 percent.-!/ During this period, the actual increase

in exports was 2443 billion yen as against a hypothetical increase of 1454

billion yen had exports grown at the same rate as GNP; the corresponding

results were 2133 and 1377 billion yen for imports.

This process of transformation was accentuated during the 1965-73

period ~hen Japan practically completed the elimination of quantitative

restrictions on imports and also reduced tariffs further. During this period,

Japan 9 o gross national product increased at an average annual rate of 10.8

percent while the growth rates of exports and imports were 13.7 percent and

14.4 percent, respectively. 7he corresponding actual and hypothetical in-

creases in absolute terms were 6058 and 4272 billion'yen for exports and 5828

and 3816 billion yen for imports.

It should be added that the results reflect only the direct effects

of exports and of negative import substitution, to the exclusion of their

effects on domestically-produced intermediate inputs. These indirect effects

are likely to be substantial in Japan, given the relatively high degree of

vertical integration of its manufacturing sector. It may be suggested, there-

fore) that the adoption of an increasingly outward~-looking policy in Japan

has been an important factor contributing to a high rate of economic growth

in Japan once the postwar reconstruction had been completed.

It appears, then, that the experience of Norway and Japan during

the period of import liberalization has not been dissimilar, although exports

1/ Undet.the.Chenery, Shishido, Watanabe methodology, exports make a positive contr~but~on.t~ the g~owth of output if t?ey grow more rapidly than GNP; ~n turn, a s~m~lar result for imports ind~cates the existence of negative J.mport substitution. - The data have been expressed in 1963 constant prices, except for changes in exports and imports between 1955 and 1960 that are reported in cu~rent prices (World Bank, 1975). However, prices in world trade changed little during this period, so that an approximate constancy can be assumed.

- 25 -

made a larger contribution to growth in Norway than in Japan .• These dif-

ferences may have beeu dus to factors such as~the size of the domestic market,

rates of import protection, and Norway's free trade ar1tangement in manufactured

goods within EFTA.

r-

Table 1

Factors Contributing to Economic Growth in Norway: Model II

Domestic Demand Contribution ExEort ImEort Substitution Contribution Contribution of Change in Changes in Input-

Period of Estimation Base Period Production Total Final Intermediate Contribution Total Output CoaCfic:ients ---- ---r million kroner % % % % (4) '· Dir:ect Method

Alternative A Production r.onsumEtion 1953-1961 1953 21883 85.5 - - 27.9 -13.4 -13.2 -0.2 1953-1961. 1961 21883 81.5 - - 27.9 - 9.4 - 9.5 0.1 1961-1969 1961 34682 75.2 - - 37.4 -12.6 -11.3 -1.3 1961-1969 1969 34682 71.3 - - 37.4 - 8.7 - 7.7 -1.0 1953-1969 1953 56565 81.5 - - 33.7 -15.2 -15.3 0.1 1953-1969 1969 56565 73.7 - - 33.7 - 7.4 - 7.4 0.0 1953-19691/ 1953 56565 79.2 - - 33.7 -12.9 -12.1 -0.8 1953-1969}/ 1969 56565 75.3 - - 33.7 - 9.0 - 8.4 -0.6

Alternative B Final Intermediate

1953-1961 1953 21883 84.3 47.1 37.2 27.9 -12.2 -15.8 3.6 1953-1961 1961 21883 81.2 ~!.8 38.4 27.9 - 9.1 -11.5 2.4 1961-l969 1961 34682 74.9 38.0 36.9 37.4 -12.3 - 4.2 -8.1 1961-1969 1969 34682 71.0 36.8 34.2 37.4 - 8.4 - 3.0 -5.4 1953-1969 1953 56565 80.2 43.8 36.4 33.7 -13.9 -11.0 -2.9 1953-1969 1/ 1969 56565 73.4 38.6 34.8 33.7 - 7.1 - 5.8 -1.3 1953-1969 l/ 1969 56565 78.6 41.5 37.1 33.7 -12.3 - 8.7 -3.6 1953-1969 - 1969 56565 74.9 39.1 35.8 33.7 - 8.6 - 6.2 -2.4

Total. Method

Alternative A 1953-1961 1953 21883 65.5 - - 46.9 -31.8 - - 19.4 1953-1961 1961 21883 59.9 - - 48.4 -24.4 - - 16.1 1961-1969 1961 34682 51.8 - - 68.0 -33.0 - - 13.2 1961-1969 1969 34682 45.2 - - 69.4 -24.6 - - 10.0 1953-1969 1953 56565 60.8 - - 58.1 -36.5 - - 17.6 1953-1969 1969 56565 48.4 - - 61.5 -21.1 - - 11.2 1953-19691/ 1953 56565 57.1 - - 59.8 -32.5 - - 15.6 1953-1969:!/ 1969 56565 50.9 - - 61.3 -24.6 - - 12.4

};;/ Arithmetical averages of chained results for 1953-61 and 1961-69 periods.

l.

1953-196~/

Model I DAr II DAT !I DAF III DAF

Model I DB II DB III DB

1961-196~~/

Model I DAT II DAT II DAF III DAF

Model I DB II DB III DB

Model I TA II TA III TA

Model I TB II TB III TB

Table 2

Factors Contributing to Econ~mic Growth in Norway,Growth Contributions: Models I, II, and III

Change (Deviation) in Output

Million Kroner

56565 56565 56565

7768 56565 56565

7768

34682 34682 34682

5544 34682 34682

5544

34682 34682

5544

34682 34682

5'544

Domestic Demand Contribution Final Intermediate Total

%

0 25.2 40.3

0

0 37.5 37.3

0

%

83.6 32.9 36.4 83.6

68.8 33.5 35.7 68.8

%

73.4 77.2 80.1 83.6 58.1 76.7 83.6

70.6 73.3 76.2 68.8 71.0 73.0 68.8

-21.6 48.4

- 3.8

58.0 57.6

- 6.3

Export Contribution

~~

33.7 33.7 33.7

117.5 33.7 33.7

117.5

37.4 37.4 37.4

116.0 37.4 37.4

116.0

68.7 68.7

215.4

49.8 49.8

152.6

Import Substitution Contribut;ion Total Final Intermediate

%

- 7.1 -10.9 -13.8

-101.1 8.2

-10.4 -101. 1

- 8.0 -10.7 -13.6 -84.8 - 8.4 -10.4 -84.8

-41.3 -28.7

-179.4

-15.6 -15.2 -95.1

%

7.6 - 7.4 -48.7

- 4.8 - 4.6 -28.7

-·8.3 - 7.9 -49.2

%

-0.6

- 3.0 -52.4

- 3.6 - 5.8 -56.1

- 7.3 - 7.3 -45.9

lJ 26 sectors, arithmetic average of chained results derived by Laspeyres and Paasche indices. !/ 30 sectors, arithmetic average of estimates derived by Laspeyres and Paasche indices.

r

Contribution of Changes in Input-Output Coefficients

%

11.6 11.6 67.8

7.8 7.8

48.8

Note: The table provides estimates for models I, II and III obtained by the use of the direct (D) and total (T) methods, for alternatives A and B. using total (T) and final (F) norms.

Table 3

Factors Contributing to Economic Growth in Norway: Sectoral Res;ults ~irect Method.!./

Agriculture Mining

Primary Products Food Beverages Tobacco

Food, Bev., Tobacco Textiles Footwear and Wearing Apparel Wood and Cork Products Paper and Paper Products Printing and Publishing Leather and Leather Products Rubber Products Chemicals and Chemical Products Nonmetallic Mineral Products Basic Metal Industry Metal Products Except Electrical

Machinery Electrical Machinery Miscellaneous Manufacturing

Manufacturing Construction Electricity, Gas, and Water Trade Banking and Insurance Real Estate Transport and Communication Other Services

Services All Sectors

Change in Production

million kroner

2180 SOB

2688 3547

413 55

4015 353 259

1649 2119

744 2

206 3911

739 3621

5033 1341

773 20750

3664 2007 7417

794 1589 9563 4078

29112 56565

Domestic Demand Contribution

%

92.0 132.7

99.4 87.4

129.5 232.5 93.7 61.2

276.4 111.4

70.9 108.1

-7700.0 143.0

96.3 87.7 19.5

87.5 93.3

160.5 84.2 99.7 95.1 95.5 85.7

100.0 26.1

105.8 67.9 77.2

Import Substitution Contribution Exp0rt

Contribution %

-3.0 67.7 9.8

14.9 1.0

15.6 13.5 63.5 19.4

7.8 46.8 2.5

Total %

11.0 -100.4

-9.2 -2.3

-30.5 -148.1

-7.2 -24.7

-195.8 -19.2 -17.7 -10.6

22800.0 36.1 41.2 21.0 89.7

-15100.0

29.1 31.7 29.7 41.8

0_.3 3.4 5.2 2.7 0.0

74.2 1.0

32.9 33.7

-79.1 -37.5 -8.7 -9.2

-16.6 -25.0 -90.2 -26.0

0.0 1.5

-0.7 11.6 0.0

-0.3 -6.8 -0.8

-10.9

Production %

-103.9 -8.2

-86.5 -21.6 -59.4

-641.8 ..:34.2

-168.0 -291.5

4.6 4.5

-21.0 -652.00.0

-3.9 24.9 3.2

-2.3

9.4 12.9 29.4 0.5

-39.0 42.8 4.6 4.3

-4.0 -1.8

-12.8 -7.5

-10.2

Consumpt?.on %

114.9 -92.2

77.3 19.3 28.9

493.7 27.0

143.3 95.7

-23.8 -22.2 10.4

50100.0 -75.2 -62.4 -11.9 -6.9

-26.0 -37.9

-119.6 -26.5

39.0 -41.3

-5.3 7.3 4.0 1.5 6.0 6.7

-0.7

.!./ Model II, Alternative A, arithmetical averages of chained results, calculated with 1953 and 1961 as base years.

Results for the 26th sector, transfers, are not reported as this sector does not involv~ a value-producing activity.

r-

TABLE 4

FACTORS CONTRIBUTING TO ECONOMIC GROWTH IN NORWAY: SECTORAL RESULTS - TOTAL METHOJJ

Change in Domestic Import Changes in Production Demand Export Substitution Input-Output

(mill. kroner) Contribution Contribution Contribution Coefficients --or-- h -0 0 Agriculture 2,180 53.0 65.1 -37.6 19.5 Mining 508 -30.3 260.6 -198.6 68.3

Primary Products 2,688 38.0 100.3 -66.5 28.2 Food 3,547 50.3 24.5 -7.9 33.1 Beverages 413 142.0 3.9 -37.8 -8.1 Tobacco 55 242.9 16.2 -158.0 -1.1

Food, Bev., Tobacco 4,015 62.3 22.3 -13.1 28.5 Textiles 353 78.4 107.4 -138.9 53.1 Footwear & Wearing Apparel 259 283.8 23.6 -212.9 5.5 Wood & Cork Products 1,649 97.2 20.3 -33.0 15.5 Paper & Paper Products 2,119 27.2 81.9 -39.2 30.1 Printing & Publishing 744 104.9 28.0 -26.1 -6.8 Leather & Leather Products 2 1,962.2 1,233.3 -1,904.4 -1,191.1 Rubber Products 206 129.2 48.5 -97.3 19.6 Chemicals & Chemical Products 3,911 24.4 99.5 -71.8 47.9 Nonmetallic Mineral Products 739 44.0 36.2 -20.5 40.3 Basic Metal Industry 3,621 1.0 137.2 -31.8 -6.4 Metal Products Except Elec. Mach. 5,033 72.9 47.1 -35.4 15.4 Electrical Machinery 1,341 71.1 45.2 -38.1 21.8 Miscellaneous Manufactures 773 117.9 47.6 -113.1 47.6

Manufacturing 20,750 54.5 74.0 -49.7 21.2 Construction 3,664 99.7 0.4 -0.2 0.1 Electricity, Gas & Water 2,007 44.6 46.0 -15.1 24.5 Trade 7,417 85.0 32.2 -25.8 8.6 Banking and Insurance 794 94.4 17.0 7.3 -18.7 Real Estate 1,589 90.0 8.7 3.9 5.2 Transportation & Communication 9,563 20.7 82.2 -4.2 1.3 Other Services 4,078 71.6 43.6 -19.3 4.1

Services 29,112 54.0 52.5 -11.9 5.4 All Sectors 56,565 54.0 60.5 -28.5 14.0

~/ Model II, Alternative A, arithmetical average of chained results calculated with 1953 and 1961 as base years. Results for the 26th sectorjtransfers,are not reported as this sector does not involve a value-producing activity.

"

• References

Balassa, Bela (1965), "Tariff Protection in Industrial Countries: An Evaluation", Journal of Political Economy~ 73(6), pp. 573-594.

(1966), "Tariff Reductions and Trade in Manufactures Among the Industrial Countries", American Economic Review~ 56(3) pp. 466-73.

(1969), "Industrial Development in an Open Economy: The Case of Norway", Oxford Economic Papers_, 21(3), pp. 344-359.

(1970), "Growth Strategies in Semi-Industrial Countries", Quarterly Journal of Economics_, 84 (1) pp. 24-47.

(1971), The Structure of Protection in Developing Countries~ Baltimore, Maryland, The Johns Hopkins University Press.

Chenery, H. B. (1960), "Patterns of Industrial Growth", American Economic Review_, 50 (4), pp. 624-654.

-----

Shishido, S., and Watanabe, T. ( 1962), "T'he Pattern of Japanese Growth, 1914-1954", Econometrica_, 30 (1), pp. 98-139.

and Watanabe, T. (1976), "The Role of Industrialization in Japanese Development, 1914-1965", unpublished.

Desai, Padma (1969), "Alternative Measures of Import Substitution", Oxford Economic Papers_, 21 (3), pp. 312-324.

Fane, George (1971), "Import Substitution and Export Expansion: their measurement and an example of their application", Pakistan Develop-ment Review_, 11 (1), pp. 1-17.

(1973), "Consistent Measures of Import Substitution", Oxford Economic Papers~ 25 (2), pp. 251-261.

Frank, C., Kim, K., and Westphal, L. (1975), Foreign Trade Regimes and Economic Development: South Korea_, New York, Columbia University Press, for the National Bureau of Economic Research.

Ho, Alfred K. (1973), Japan's Trade Liberalization in the 1960's_, White Plains, N.Y.~ International Arts and Sciences

Johnson, H. G. (1959), "Economic Development and International Trade", National~konomiak Tidj skrift., 97 (5-6), pp. 253-272. Reprinted in Johnson, H. G. (1962), "Money Trade and Economic Growth". Cambridge. Massachusetts, Harvard University Press.

Joshi, Vi:Lay (1972), "The Rationale and Relevance of the Little-Mirrlees Ctiterion", Bulletin of the Oxford University of Economics and Statistics_, 34 (1), pp. 3-32.

- 2 -

Lewis, S. and Soligo, R. (1965), "Growth and Structural Change in Pakistan's Manufacturing Industry, 1954 to 1964", Pakistan Development Review 5 (1) pp. 94-139.

Morley S. H. and Smith, G. W. (1970), "On the Measurement of Import Substitution", American Economic Review~ 60 (3), pp. 728-735.

_____ "Import Substitution and Foreign Investment in Brazil", Oxford Economic Papers~25 (1), pp. 120-28.

Nurkse, Ragnar (1961), Equilibrium and Growth in the World Eaonomy., Cambridge, Massachusetts, Harvard University Press.

Prebisch, Raul (1954), "Conunercial Policy in the Underdeveloped Countries", American Economic Review~ 49 (2), pp. 251-73.

Raj, K. N. and Sen, A. K. (1961), "Alternative Patterns of Growth under Conditions of Stagnant Export Earnings", Oxford Economic Papers~ 13 (1), pp. 43-52.

World Bank (1975), World Tables.

•

I

• Accounting for Economic Growth: The Case of Norway

Appendix

Jonathan Levy

Formulas Used under the Total Method

While the direct method treats intermediate demand as an e~ogenous

source of growth, total method decompositions are based on the assumption

that intermediate demand is endogenously determined by final demand (domestic

and export) and imports. Under the total method, input-output matrices

are used to trace back the total (direct plus indirect) intermediate input

requirements of a given vector of goods and services. The procedure may be

illustrated by an example from Model III, which is based on the work of

Chenery, Shishido, and Watanabe (1962).

oX= (I-A0)-1/oDF + oE- oM+ (A -A

0) X )j (Al)

t t_

The subscripts 0 and t represent time periods, while the o operator is defined

as oXi = xiXiO - yXiO' with y being the growth rate of income; and A the

input-output matrix. In the equation itself, all terms are vectors or

matrices. Multiplying the final demand and import terms by the Leontief

inverse gives the total requirements for the final demand terms and indicates

the direct and indirect intermediate inputs implicit in the import term (i.e. changes

in intermediate input requirements involved in substituting domestic

production for imports, or vice versa).

The final term in the square brackets, (A -A0)x , represents t t

the change in direct input requirements for production at time t, due to

changes in the input-output matrix. The change in total requirements i~ obtained

by multiplying this term by the Leontief inverse.

.,..., 2 .,..

Estimating the effects of changes in input-output coefficients necessitates

the choice of a base period. In equation(Al~the change in input-output

coefficients is applied to Xt; it could as well be applied to x0

; in turn,

the Leontief inverse could be formed using At rather than A0

.

In order to be consistent in making the choice, it is desirable

to recall that there is a base period choice implicit in the definition

The former implies that period 0 is the base. In that case, it is appropriate

to consider A0 the base technology and use it to form the Leontief inverse.

·:;:-his t..rill give the term representing changes in input-output coefficients in equation

(Al), and is equivalent to assuming that such changes occur at timet. A symmetrical

equation has been derived with period t as the base; At is now used to form the Leontief

inverse and changes in input-output coefficients are assumed to take place at time 0.

In an unpublished paper on Korea, Westphal ha..s suggested an

alternative procedure in which domestic and imported input-output coefficients are

distinguished. Equation (A2) illustrates this approach. The superscripts d

oX= (I-A~)- 1 /oDF + oE- oM!- (A~- A~) Xt + (At- A0) Xt] (A2) and m refer to matrices of domestic and imported input-output coefficients, while

MF is imports for final demand. The (At-A0)xt term has the same interpretation as

d before; however, now the change in total requirements is calculated using the A0

matrix.

This means that the domeatic totai input requirements,resulting from changes

in the A matrix)are being calculated. Since what is being decomposed here is

domestia production X, this is preferable to the use of the A matrix.

The next to last term. in the square brackets represents changes in

the direct requirements of imported intermediates. As in the case of the final

imports term, it enters with a negative sign. Multiplying this term by the

I

•

'·

- 3 -

Leontief inverse gives the direct and indirect domestic input requirements

associated with the vector of changes in intermediate import demand.

Since A= Ad +Am, it is possible to combine the two terms to get

(A~ - A~)Xt. This measures the change in direct domestic input requirements due to changes in i~..: input co~?ff icicnts. Multiplying by the Leontief

inverse translates this into total domestic requirements. The last term of

equation (A2) is reported in Table 2 under the heading the contribution of changes

in input-output co effie ients T. :lile the previous term appears as changes in

intermediate input requireMentR under import substitution.

Multiplying the final demand and final import term in equation (A2)

by the Leontief inverse gives the total domestic input requirements of those

vectors. Note finalJy, that the decomposition shown in equation (A2) is for

a first period base. A synnnetrical decomposition has been derived with period t

as the base.

The Interaction Term in Models I and II

Let us consider the simplified decomposition used in equation (1) to

(9), which excludes exports and intermediate demand. In this situation, domestic

demand equals product ton plus i.mports. Denoting the domestic supply share

(S1/Di) of a particular industry by u~, the derivation of the increment of output

under the share method is sho\m bv equation (A3) •

6S . = u . .~n . + 1. 1.0 l.

~:.u 1 + t.n ... 'lu. ~ 1 (A3)

In the equation, the first term refers to changes in domestic production

associated with increases in domesti.c demand with an unchanged domestic supply

share, the second term tc changes in domestic production, associated with changes

:i.n the domestic supply share tvith unchanged domestic demand; while the third term,

... ·'

- 4 -

the so-called interaction term, is affected by changes in both. The inter-

action term disappears in the continuous time formulation (i.e. dSi • u 1dDi

+ Didui). Most authors have included the interaction term in the IS contribu-

tion, thus obtaining the decomposition shown in equation (A4) where the

expressions in brackets refer to domestic demand and import substitution effects,

respectively. Letting small letters denote growth rates, equation (A4) can be

rewritten as in (AS) which corresponds to equation (10) in the text.

s.S. = /d.Di - d.M. 7+ /(d.- m.) M. 7 (AS) 1 10 -1 0 1 10 - 1 1 10

In turn, Model II may be written as shown in equation (A6) which

s . S • = (d.. D . - yM. 7 + I !J - m . ) M. 7 (A6) 1 10 -1 10 10 1 10

derives from equation (11). Denoting the share of domestic constnnption in

national income (D./Y) by ~. and the share of domestic production in national 1 ~

revenue (S./Y) by B., this can be further transformed as in (A7), of which the 1 1

flS = iS. flY-tfla Y +~a flY/- /"X(a .. -8 )Y +fl (a4-B )flY/ (A7) i -10 i 0 i - - l. i 0 1 i -

continuous time formulation is dSi = Si0

dY + Y0

dcti - Y0

d (cti - Bi) .•

While in Model I there was an interaction term, indicating the

simultaneous effects of changes in domestic demand and in the domestic supply

share for the particular commodity, there is no such term in Model II where

all the terms are unambiguously allocated between domestic demand and import

substitution effect. In the latter case, adopting a continous formulation

simply means dropping terms including two finite differences.

•