The sensitivity of developing countries to external shocks in an interdependent world

North-South interdependence is illustrated by means of a general equilibrium model, in which the rural and urban sectors are treated entirely separately and urban real wages are downward rigid. We explain why such an approach may be more meaningful for long-run analysis than one that stresses the role of demand. The model's properties are illustrated by a theoretical analysis based on a simplified version of the system, and by simulations based on assumptions made by World Bank Staff in the 1983 World Development Report.