On the definition of key sectors and the stability of net versus gross multipliers

Jan Oosterhaven

No 04C01, Research Report from University of Groningen, Research Institute SOM (Systems, Organisations and Management)

Abstract: Industries often promote their interests by arguing that they have a large impact on the rest of the economy. The same line of reasoning is used when so-called key sectors for economic development are searched for. In both cases, a one-sided view of the dependence of the rest of the economy on the sector at hand is used, and sectors with large forward and backward linkages are selected as being strategically important to the region or nation at hand. This onesided approach, however, disregards that the sectors selected may be heavily dependent on the rest of the economy, and may therefore in fact not be able to generate the growth impulses that their larger linkages are assumed to pass on to the rest of the economy. To avoid doublecounting impacts and to reckon with the two-sided nature of the dependency between a sector and the economy at large, the net multiplier concept is shown to provide an adequate solution. However, both the standard (gross) multiplier and the new net multiplier are essentially static concepts. When the search is for strategic sectors for future development, the question of the stability of both measures unavoidably arises. Besides the stability of the input-output coefficients, the stability of net multipliers is also based on the stability of its additional “exogenous demand/total endogenous output” ratios, which are unstable by nature. We argue that this property should not be seen as a vice, but as an additional virtue of the net multiplier concept, as it forces the analyst to explicitly consider this inherent instability instead of assuming the problem away as is usually done when gross multipliers are used.

Date: 2004
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