Growth Diagnostics in Practice

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Growth Diagnostics in Practice

• Applied Inclusive Growth Analytics Course
• March 23, 2009
• Susanna Lundstrom, PRMED

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Outline

• What is so special about diagnostics?
• Three common tools, with pros and cons
• Cross-country regressions
• (Growth Accounting)
• International Benchmarking and Indices
• All are used in Inclusive Growth Analytics, but
  more is added
• Basic Principles in Growth Diagnostics
• Applications throughout the course!

See Hausmann, Klinger and Rodrigo (2008)
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Growth research vs. Growth diagnostics

• In growth research the subject is growth with
  countries as observations
• What do policy X do on average, to a randomly
  selected country?
• In growth diagnostic, the subject is the country
• What particular problem does the country in
  question have? How would this specific country
  react to policy X?
• Informed by growth research
• Analogy Medical research and practice

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Cross-country growth regressions

• What factors affect growth in a typical
  country?
• Countries are just observations
• Very important in understanding potential
  constraints
• If used with interaction terms more context
  specific
• Given the presence of X2t, X1t will have this
  effect on gt

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Cross-country growth regressions- Some
characteristics

• Normally assumes separability (if no interaction
  terms)
• The impact of variable x1 on growth is
  independent of the level of the other xs
• No context-specific interactions taken into
  account
• Assumes linearity
• All xs are substitutes of each other
• You can compensate failures in one area by
  over-performance in other areas. But if there are
  binging constraints.
• Assumes monotonicity and linearity in the xs -
  in the absence of squared forms
• Increases in x from any level increases g
• Increases in x from any level has the same effect
  on g
• All ßs are the same for all countries

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Cross-country growth regressions- Some
characteristics, cont

• Only data that you have for all countries can be
  included often outcome rather than policy based
• Example Private credit/GDP ratio instead of a
  policy-based index of financial liberalization
• No price information in the equation
• Supply or a demand problem?
• Low supply, high price potential constraint
• Low supply, low price low demands and not
  necessarily a constraint
• Results sensitive to the elimination of outliers
• Sensitivity to groups of outlier indicates
  context-sensitive effects

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International Benchmarking - Comparative
countries

• Similar countries (landlocked, conflict) but
  with different GDP
• Ideally, one should aspire to a natural
  experiment where the selected benchmark is a
  replica in all but one respect to the country
  under study
• Role models
• Where would we want to be in 2, 10 and 20 years?
• A particular country or set of countries which
  performance or welfare indicator wants to be
  attained by the studied country

Partial correlation with a group of
countries Compare with the expected value (fitted
line) given the GDP level in the country
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International Benchmarking- Indices and rankings

• See examples on the IG website (Data and
  References)
• Complex systemic outcomes
• Does not map easily into policy
• How to collapse to a single dimension?
• Take the average
• Assumes linearity and separability
• Assumes monotonicity and linearity in xs
• Is the optimal number of licenses zero?
• Is an increase from 1 to 2 the same as from 9 to
  10?

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International Benchmarking - Surveys

• Sample selection bias
• The binding constraint causes firms not to exist
  and biases the survey
• You talk to camels rather than hippos
• International comparison of opinions
• What does it take for a Swede to complain about
  corruption?
• Do all nationalities have a tendency to complain
  more about taxes than human capital?

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International Benchmarking- General problem

• Not obvious the focus should be on the areas
  where you perform poorly compared to other
  countries
• Poor supply (and hence a constraint) ..or low
  demand (and hence not obvious)?
• Depends on the economic structure (human capital
  more important in the US than Zambia)

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Basic principles of country diagnosis- Examples
will follow throughout the course

• If a constraint is binding, then
• The (shadow) price of the constraint should be
  high
• Movements in the constraint should produce
  significant movements in the objective function
  (e.g. GDP, or income of a specific group of ind.)
• Agents in the economy should be attempting to
  overcome or bypass the constraint
• Camels and Hippos Agents less intensive in that
  constraint should be more likely to survive and
  thrive, and vice versa

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1. The (shadow) price of the constraint is high

• Relative scarcity of a factor.
• Look at prices (interest rates, wages, etc.)
• Estimate prices using regressions
• Example Mincerian regressions
• In other cases no market
• Infrastructure congestion as the price to pay
• Non-market valuation techniques, either based on
  revealed or in stated preferences.
• Ex Hedonic prices, ICAs stated preferences

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2. Differences in the constraint should produce
differences in growth

• A constant cannot explain a change
• Differences
• Between time periods (look at trend breaks)
• Do growth periods following a relaxation of the
  constraint? Do growth decrease when it is
  present?
• Between regions
• Why are some prosperous and some lagging? The
  constraint in question present in one but not the
  other?
• Between groups of firms differently affected by
  the potential constraint

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3. Agents in the economy must be engaging in
efforts to overcome or by-pass the constraint

• Examples 
• Border controls ? smuggling
• Poor financial intermediation ? growth occurs
  within business groups (conglomerates)
• Industry specific public goods binding ? growth
  in sectors less sensitive to specific inputs or
  unusual level of cooperation among successful
  producers.
• Property rights and contracting binding ? Mafia

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4. Camels vs. hippos

• The surviving sector (camels) are those least
  intensive in or least dependent on the binding
  constraint (water in a desert)
• In a good investment climate (environment with
  water) the economy, and the thought comparative
  advantages, may look differently (hippos)
• What do analysis of camels reveal about potential
  constraints?
• Are successful groups particularly connected to
  the political system?
• Any missing factors within the successful
  industry?
• The importance of analyzing hippos?
• Example Informal ICAs