Development economists should stop acting as categorical advocates (or detractors) for specific approaches to development. They should instead be diagnosticians, helping decisionmakers choose the right model (and remedy) for their specific realities, among many contending models (and remedies). In this spirit, Ricardo Hausmann, Andres Velasco, and I have developed a "growth diagnostics" framework that sketches a systematic process for identifying binding constraints and prioritizing policy reforms in multilateral agencies and bilateral donors. Growth diagnostics is based on the idea that not all constraints bind equally and that a sensible and practical strategy consists of identifying the most serious constraint(s) at work. The practitioner works with a decision tree to do this. The second step in growth diagnostics is to identify remedies for relaxing the constraint that are appropriate to the context and take cognizance of potential second-best complications. Successful countries are those that have implemented these two steps in an ongoing manner: identify sequentially the most binding constraints and remove them with locally suited remedies. Diagnostics requires pragmatism and eclecticism, in the use of both theory and evidence. It has no room for dogmatism, imported blueprints, or empirical purism.
This paper updates our previous work on the level and evolution of original sin. It shows that while the number of countries that issue local-currency debt in international markets has increased in the past decade, this improvement has been quite modest. Although we find that countries have been borrowing at home, thanks to deepening domestic markets, we document that foreign participation in these markets is more limited than what is usually assumed. The paper shows that the recent decline of currency mismatches and the consequent ability to conduct countercyclical macroeconomic policies is due to lower net debt (abstinence) and not to redemption from original sin. We conclude that original sin continues to make financial globalization unattractive and developing countries have opted for abstinence because foreign currency debt is too risky. The promised paradise of financial globalization will need to wait for redemption from original sin.
For Adam Smith, wealth was related to the division of labor. As people and firms specialize in different activities, economic effi- ciency increases, suggesting that development is associated with an increase in the number of individual activities and with the complexity that emerges from the interactions between them. Here we develop a view of economic growth and development that gives a central role to the complexity of a country’s economy by interpreting trade data as a bipartite network in which countries are connected to the products they export, and show that it is possible to quantify the complexity of a country’s economy by characterizing the structure of this network. Furthermore, we show that the measures of complexity we derive are correlated with a country’s level of income, and that deviations from this relationship are predictive of future growth. This suggests that countries tend to converge to the level of income dictated by the complexity of their productive structures, indicating that development efforts should focus on generating the conditions that would allow complexity to emerge to generate sustained growth and prosperity.
Over the last year, the world has seen the biggest recession in almost a century. It is clear that recovery will require, among other things, the best of talent, ideas and innovation. It is therefore more important now than ever before for countries and companies to pay heed to one of the fundamental cornerstones of economic growth available to them—the skills and talent of their female human resource pool.As consumers, voters, employees and employers, women will be integral to global economic recovery. However, it is not only the financial and economic system that is in need of rethinking, redesigning and rebuilding. Global challenges such as climate change, food security, conflict, education and health require our immediate, collective efforts to find solutions and will, in fact, be intimately linked to our long-term global economic recovery. Girls and women make up one half of the world’s population—without their engagement, empowerment and contribution, we cannot hope to effectively meet these challenges nor achieve rapid economic recovery. And yet, there is still much work to be done in education, health, the workplace, legislation and politics before women around the globe enjoy the same opportunities as men.There are still millions of “missing” women each year because of the preference for sons in some parts of the world.There are too many female infants who do not receive adequate access to healthcare because of the lower value placed on girls, adding to the global burden of infant mortality. Girls are still missing out on primary and secondary education in far greater numbers than boys, thus depriving entire families, communities and economies of the proven and positive multiplier effects generated by girls’ education and instead aggravating poverty, the spread of HIV/AIDS, and maternal and infant mortality. In those countries where women do indeed receive the benefits of health and education, far too many are then unable to contribute fully and productively to the economy because of barriers to their entry into the workforce or barriers to accessing positions of leadership. Finally, women still remain vastly under-represented in political leadership and decision-making.The combined impact of these gaps entails colossal losses to the global society and economy. Measuring the size of the problem is a prerequisite for identifying the best solutions.Through the Global Gender Gap Reports, for the past four years, the World Economic Forum has been quantifying the magnitude of genderbased disparities and tracking their progress over time. By providing a comprehensive framework for benchmarking global gender gaps, the Report reveals those countries that are role models in dividing resources equitably between women and men, regardless of their level of resources. The World Economic Forum places a strong emphasis on a multi-stakeholder approach in order to engage leaders to design the most effective measures for tackling global challenges. In 2008, we launched our Global Gender Parity Group and Regional Gender Parity Groups in Latin America, the Middle East,Africa and Asia.To date, these multi-stakeholder communities of highly influential leaders—50% women and 50% men—from business, politics, academia, media and civil society have jointly identified the biggest gaps in each region, based in part on the findings of this Report, and have collectively committed to strategies to improve the use of female talent. In addition, our Global Agenda Council on the Gender Gap, an expert council, is using the findings of this Report as one of the inputs for developing proposals to address gaps in international cooperation towards gender equality. Each of the individuals and organizations represented in these communities work collectively towards empowering women, developing globally replicable frameworks and bringing the world ever closer to achieving gender parity.
The past 20 years have been a period of important reforms in Mexico. Since the late 1980s, the country has undergone an impressive process of liberalization, opening of the economy, and macroeconomic stabilization. Extreme vulnerability to external shocks, double-digit inflation, and current account and fiscal deficits seem to have been overcome. However, a number of weaknesses continue to drag the country’s productivity and hence its potential for sustained economic growth and the well-being of its citizens. In spite of a very benign external environment in the period 2003–07, Mexico’s growth rates have been disappointing, and the challenges facing the country have become even greater in the context of the current major economic and financial crisis — one of the most serious in decades — affecting the United States and the rest of the world. The Mexico Competitiveness Report 2009 aims at providing Mexico’s policymakers, business leaders, and all relevant stakeholders with a unique tool that identifies the country’s main competitiveness flaws and strengths, together with an in-depth analysis of areas that are key to the country’s potential for long-term growth. In doing so, the Report aims to support the country’s reform process and contribute to the definition of a national competitiveness agenda of the priority issues that need to be tackled for Mexico to boost its competitiveness in the face of the present daunting economic outlook. The Report is organized into three thematic parts. Part 1 assesses the current state of Mexico’s competitiveness and its potential for sustained growth using the broad methodological framework offered by the Global Competitiveness Index (GCI) 2008–2009. Part 2 features contributions from a number of experts providing additional insights and diagnostics related to particular aspects of the competitiveness challenges faced by the country. Part 3 includes detailed profiles for Mexico and 10 selected countries and offers a comprehensive competitiveness snapshot for each of these countries.
For Adam Smith, wealth was related to the division of labor. As people and firms specialize in different activities, economic efficiency increases, suggesting that development is associated with an increase in the number of individual activities and with the complexity that emerges from the interactions between them. Here we develop a view of economic growth and development that gives a central role to the complexity of a country's economy by interpreting trade data as a bipartite network in which countries are connected to the products they export, and show that it is possible to quantify the complexity of a country's economy by characterizing the structure of this network. Furthermore, we show that the measures of complexity we derive are correlated with a country's level of income, and that deviations from this relationship are predictive of future growth. This suggests that countries tend to converge to the level of income dictated by the complexity of their productive structures, indicating that development efforts should focus on generating the conditions that would allow complexity to emerge in order to generate sustained growth and prosperity.
Hausmann, R., Rodrik, D. & Velasco, A., 2008. Growth Diagnostics. In The Washington Consensus Reconsidered: Towards a New Global Governance. Oxford University Press, pp. 324-355.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 15 years has shown, however, is that the impact of these reforms is heavily dependent on circumstances. Policies that work wonders in some places may have weak, unintended, or negative effects in others.1 We argue in this chapter that this calls for an approach to reform that is much more contingent on the economic environment, but one that also avoids an ‘anything goes’ attitude of nihilism. We show it is possible to develop a unified framework for analyzing and formulating growth strategies that is both operational and based on solid economic reasoning. The key step is to develop a better understanding of how the binding constraints on economic activity differ from setting to setting. This understanding can then be used to derive policy priorities accordingly, in a way that uses efficiently the scarce political capital of reformers.
This paper systematizes the implementation of the Growth Diagnostics framework. It aims to give the meta-steps that a persuasive growth diagnosis should have, and elaborates on the strategies and methods that may be used. Rather than a step-by-step instruction manual or handbook, this paper is meant to be a ‘mindbook’, suggesting how to think about the problem of identifying a country’s constraints to growth.
This paper presents a growth diagnostic of Peru. It notes that although Peru has recently enjoyed high rates of economic growth, this growth is actually a recovery from a significant and sustained growth collapse that began in the 1970s. The growth collapse was caused by a decline in export earnings due to the fall in international prices and an inadequate investment regime in export activities that led to a fall in market share. This situation led to collateral damage in the form of a balance of payments, fiscal and financial crisis, accompanied by hyperinflation and violence, but these aspects were corrected in the 1990s. However, the transformation of the export sector has been surprisingly small: the same activities that declined – mining and energy – are the ones that are leading the current recovery in exports to levels that in real per capita terms are similar to those achieved 30 years ago. We argue that the lack of structural transformation is associated with Peru’s position in a poorly connected part of the product space and this accentuates coordination failures in the movement to new activities. In addition, Peru’s current export package, is very capital intensive and generates few jobs, especially in urban areas where the bulk of the labor force is now located. This limits the welfare benefits of the current growth path. The key policy message is that the public sector must act to encourage the development of new export activities that better utilize the human resources of the country. This involves action on the macro front to achieve a more competitive real exchange rate, improvements in the capacity to solve coordination failures in the provision of specific public sector inputs and programs to stimulate investment in new tradable activities.
Much of development policy has been based on the search for a short to do list that would get countries moving. In this paper I argue that economic activity requires a large and highly interacting set of public policies and services, which constitute inputs into the production process. This is reflected in the presence, in all countries, of hundreds of thousands of pages of legislation and hundreds of public agencies. Finding out what is the right mix of the public inputs, and more importantly, what is a valuable change from the current provision is as complex as determining what is the right mix of private provision of goods. In the latter case, economists agree that this process cannot be achieved through central planning and that the invisible hand of the market is the right approach, because it allows decisions to be made in a more decentralized manner with more information. I argue that a similar solution is required to deal with the complexity of the public policy mix.
This paper establishes a robust stylized fact: changes in the revealed comparative advantage of nations are governed by the pattern of relatedness of products at the global level. As countries change their export mix, there is a strong tendency to move towards related goods rather than to goods that are farther away. The pattern of relatedness of products is only very partially explained by similarity in broad factor or technological intensities, suggesting that the relevant determinants are much more product-specific. Moreover, the pattern of relatedness of products exhibits very strong heterogeneity: there are parts of this ‘product space’ that are dense while others are sparse. This implies that countries that are specialized in a dense part of the product space have an easier time at changing their revealed comparative advantage than countries that are specialized in more disconnected products.
This book identifies the binding constraints to growth of Morocco. It applies an innovative procedure known as 'growth diagnostic' and has a central finding. The Moroccan economy suffers from a too slow process of structural transformation for achieving higher growth, especially for its exports that face unfavorable external shocks arising from competitor countries in the main markets for Moroccan exports. This process of so-called 'productive diversification' requires that Morocco enhance its competitiveness. Four government failures are identified as the binding constraints to growth in Morocco: a rigid labor market; a taxation regime that represents a heavy burden for firms and an obstacle to hiring skilled human capital; a fixed exchange rate regime that has allowed regaining price stability, but, given existing rigidites in the labor market, does not favor international competitiveness; and an anti-export bias, featuring a still high level of trade protectionism despite recent progress in tariff reductions and the signing of several Free Trade Agreements. In parallel, three market failures affect competitiveness and innovation: information failures, coordination failures between the public and private sector, and training failures that rank the country among those with the lowest level of training offered by businesses.
In this paper we examine the product space and its consequences for the process of structural transformation. We argue that the assets and capabilities needed to produce one good are imperfect substitutes for those needed to produce other goods, but the degree of asset specificity varies widely. Given this, the speed of structural transformation will depend on the density of the product space near the area where each country has developed its comparative advantage. While this space is traditionally assumed to be smooth and continuous, we find that in fact it is very heterogeneous, with some areas being very dense and others quite sparse. We develop a measure of revealed proximity between products using comparative advantage in order to map this space, and then show that its heterogeneity is not without consequence. The speed at which countries can transform their productive structure and upgrade their exports depends on having a path to nearby goods that are increasingly of higher value.
El Salvador is a star reformer. After the civil war of the 1980s, the country was able to adopt important political and institutional reforms. These included the incorporation of all political groups into the electoral process, the adoption of a new constitution, the elimination of the military police, the creation of a civilian police with members from both sides of the war, and the adoption of rules to strengthen the independence of the judiciary. On the economic front, the country consolidated its fiscal position, modernized its tax system, liberalized trade and banking, improved the regulation and supervision of its financial system, privatized most state productive assets including energy and telecommunications, and reformed its social security system in line with the Chilean model. It also expanded and granted local autonomy to the school system through the Community-Managed Schools Program (EDUCO). Finally, El Salvador dollarized its financial system in November 2000. Given the investment-grade rating earned by the country, domestic money market rates have converged to U.S. levels.
Unfortunately, El Salvador is not a star performer. Standard theory would predict that such an improvement in the institutional and regulatory environment should be followed by convergence to a higher income level. Instead, after an initial period of recovery that lasted until 1997, real gross national income per capita stagnated at levels comparable to those achieved by the country in the late 1970s. Its income relative to the United States has not recovered from the fall associated with the civil war and is just over half the ratio achieved in the late 1970s.
El Salvador is not alone in finding that reform efforts have had smaller-thanexpected growth effects. With the exception of Chile, the effects of reform ongrowth throughout Latin America have been smaller than the initial estimates carried out in the mid-1990s.In this context, El Salvador is an interesting case, since it has been particularly effective in applying wide-ranging reforms.
This paper explores why these reforms have failed to produce more growth and what can be done about it.2 We begin by placing the economic choices faced by the incoming Salvadoran administration in a regional and historical perspective. The late 1980s and early 1990s in Latin America were preceded by a decade of stagnation, but coincided with a time of unusual confidence in the future. The collapse of communism, the failure of many interventionist policies in Latin America in the 1980s, and Chile’s success gave governments a clear idea of the road they wanted to leave and the road they wanted to take. Inadequate past performance and consensus on the road ahead led to a forceful policy agenda.