15 Growth Diagnostics

Abstract

Most well-trained economists would agree that the standard policy reforms included in the ‘Washington Consensus’ have the potential to be growth-promoting. What the experience of the last fifteen years has shown, however, is that the impact of these reforms is heavily dependent on circumstances. This chapter argues that this calls for an approach to reform that is much more contingent on the economic environment. It is possible to develop a unified framework for analyzing and formulating ‘growth strategies’ which is both operational and based on solid economic reasoning. The key step is to develop a better understanding of how the nature of the binding constraints on economic activity differs from setting to setting. This understanding can then be used to derive policy priorities accordingly, in a way that would use the scarce political capital of reformers efficiently. The methodology that it proposed here can be conceptualized as a decision tree. The first questions concern what keeps the level of domestic investment and entrepreneurship low. At each node of the decision tree, the kind of evidence that would help answer the question one way or another is discussed. The chapter draws on the experience of three specific countries: El Salvador, Brazil, and Dominican Republic. Aside from providing a useful manual for policy makers, this approach has the advantage that it is broad enough to embed all existing development strategies as special cases. It can therefore unify the literature and help settle prevailing controversies.

Governance and Growth Challenges for Africa

“…The argument that governance priorities for developing countries should be modest and should focus on the most important constraints has already been powerfully made by a number of observers, including Rodrik and his team (Hausmann, et al 2007). They have also pointed out that the detailed governance capabilities that have been found to work in different countries can vary widely (Qian 2003).…”

“…They have also pointed out that the detailed governance capabilities that have been found to work in different countries can vary widely (Qian 2003). However, Hirschman's perceptive observations made 50 years ago on the indeterminate nature of the feasibility studies that preceded the adoption of projects in developing countries are just as applicable today to the sophisticated 'growth diagnostics' methods that are often suggested for identifying binding constraints in developing countries (Hausmann, et al 2007). When the binding constraint approach is actually used in different countries, different economists can come up with very different conclusions about what the binding constraint is.…”

State–Business Relations as Drivers of Economic Performance

“…Its review of successful experiences of growth, mentioned, for example, the key role played by leadership in promoting economic growth, along four other key ingredients of growth. Hausmann et al (2008) made a significant further step, by emphasizing that the binding constraints to growth are country specific. Using a growth diagnostic tree, the method identifies whether growth is held back either by high costs of financing or by low returns to a project.…”

The Practice of Industrial Policy

“…Its review of successful experiences of growth, mentioned, for example, the key role played by leadership in promoting economic growth, along four other key ingredients of growth. Hausmann, Rodrik, and Velasco (2008) made a significant further step, by emphasizing that the binding constraints to growth are country specific. Using a growth diagnostic tree, the method identifies whether growth is held back either by high costs of financing or by low returns to a project.…”