BTL 737 - Linkages

 

The Banking Tutor’s Lessons

BTL 737                                                                          24-12-2024

Linkages

 

Linkages in economics are the relationships between different sectors of an economy.

 

Industries depend on other industries to obtain goods and services as production inputs.

 

Linkages can be broadly classified as Production Linkages, Consumption Linkages and Fiscal Linkages.

 

Production Linkages involve two sub-categories, namely, forward linkages and backward linkages.

 

The strength of an industry’s linkage indicates the degree of interdependence that the industry has with the economy as compared to other industries. An expansion in an industry with a higher linkage would stimulate higher levels of domestic output production. An industry would be considered a key industry if both backward and forward linkages are larger than one.

 

For an industry, backward linkages are directed towards suppliers; while the forward linkages are directed towards consumers. We take an example of a steel mill here.

To perform its economic activity, the mill needs inputs from coal mining and iron ore mining. These constitute its backward linkages.

 

An industry’s backward and forward linkages measure the industry’s economic interdependence with other industries.

 

Forward Linkages

 

A forward linkage happens when a product from one industry is used as an input for another industry, like a textile mill selling fabric to a garment manufacturer.

 

Examples of forward linkages:

 

Steel industry: Selling steel to car manufacturers, construction companies, and appliance makers.

 

Textile industry: Selling fabric to garment manufacturers.

 

Oil refinery: Providing refined oil to gasoline stations and chemical companies.

 

Backward Linkages

 

A backward linkage occurs when one industry relies on another to provide inputs for its production, like a car manufacturer needing steel from a steel mill.

 

Examples of backward linkages:

 

Textile industry: Relying on cotton farmers for raw cotton.

 

Automobile manufacturing: Buying steel from steel mills, rubber from tire companies, and glass from glass manufacturers.

 

Food processing industry: Purchasing fruits and vegetables from farmers.

 

Paper industry: Depending on wood pulp producers

 

Backward linkages focus on the inputs needed to produce a good: while

forward linkages focus on where the finished product is used as an input.

 

Industries with strong backward and forward linkages are considered important for economic development as they stimulate multiple sectors within an economy.

 

Consumption Linkages

 

A consumption linkage is when a household's income from one activity leads to an increase in demand for products from other sectors in the local economy. For example, a farmer might use their income from agriculture to buy non-farm products, or a local entrepreneur might use their income from selling non-farm products to buy food and other agricultural products.

 

Consumption linkages can have a positive impact on the local economy, but they can also have a negative impact if the income is spent on imported products or shifts demand away from domestic products.

The concept of consumption linkages is important for development policy. A development strategy that only considers backward and forward linkages may have a pro-industry bias. However, when consumption linkages are taken into account, the bias disappears.

 

Fiscal Linkages

 

Fiscal linkage is the economic benefit that governments receive from the resource sector in the form of taxes and royalties. These taxes include corporate taxes, personal income taxes, and royalties.

 

There are two types of fiscal linkage:

 

Direct Fiscal Linkage

 

This type of linkage can be risky and sometimes results in "white elephants".

 

Indirect Fiscal Linkage

 

This type of linkage is more common and involves the state investing in infrastructure, such as transportation, communication, power generation, health, and education. The state's revenue comes primarily from tariffs on imports

 

Industries with higher linkages have more influence on the economic system. Industries with above average backward linkage and above average forward linkage are deemed key sectors.

 

Linkage can also refer to the ability to buy a security on one financial exchange and sell that same security on another exchange.

 

Sekhar Pariti

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