Conventional explanations for development policy failure are legion: weak property-rights regimes; a paucity of natural resources; deficient funding levels for education, culture, and religion; and, recently, geography. Yet throughout much of modern history of development policy, policy makers have largely ignored the varying contexts in which development reforms succeed or fail. Instead, the predominate view has been to prescribe a laundry list of proposals, the so-called Washington Consensus, as the best course of action for igniting economic growth in developing countries. It is no surprise then that much bad development policy has arisen from the neglect of the country-specific reasons that market-oriented reform packages have translated into sustained economic development in some historically poor countries, while at the same time having mixed, if not negative, results in others.
It is in this context that Hausmann, Rodrik, and Velasco have presented a novel methodology, Growth Diagnostics, which promises to set aside the Washington Consensus in favor of a unified framework for conceptualizing and formulating hypotheses about “binding constraints” on economic activity, the removal of which is the difference between stagnation and sustained economic growth. Put another away, three essential tenets form the conceptual underpinnings of the Growth Diagnostics approach: 1) development policy should be growth-oriented, entailing strategies for rising the standard of living in poor countries; 2) both evidence and experience indicate that development policy should be informed by the contextual realities existing within a developing country; and 3) development policy should be carried out in the context of a focused intervention.
The hallmarks of the successful application of Growth Diagnostics methodology can be placed into seven interdependent dimensions: 1) moving downwards in a decision tree that assumes that low levels of private investment and entrepreneurship are the key problem; 2) working off at least implicit models of neoclassical economic theories on what ignites (or will ignite) economic growth; 3) identifying the tell-tale clues that a particular constraint binds (Is economic activity constrained by saving? If so, both experience and theory indicate reforms should address this external balance of constraint; if human capital is the binding constraint, the problem arises from the fact that the skill premium is increasing at the same time that the economy is experiencing anemic returns to complimentary factors); 4) searching for clues that the theorized constraints sync with recent growth experience (i.e. did growth spurts occur in the aftermath of the removal of the hypothesized constraints); 5) careful use of firm-level surveys, knowing that complaints, alone, do not always a binding constraint make (notwithstanding business concerns about access to finance, the truth of the matter may be that businesses are not able to document profitable projects; or respondents potentially do not accurately represent the dynamic aspects of the economy); 6) identifying successful case-studies and syncing their success either to an alleviation of hypothesized constraints or the unique circumstances that allow them to overcome the existence of these constraints; and 7) stitching together a flexible patchwork of cross-country benchmarking, business-level surveys, and aggregate macroeconomic data as necessary.
Of course, there are some limitations associated with the growth diagnostics methodology that are worth examining. Admittedly the Growth Diagnostics methodology is a major improvement over the Washington Consensus reform packages that influenced a significant portion of the heretofore conventional thinking about sound development policy. Indeed, it offers a well-structured approach that draws on “neoclassical economics in all its flexibility” (Habermann and Padrutt 2). It is also true that this framework provides a context-specific model for thinking about why some developing countries just aren’t, and forces policy makers to seriously consider economic development as arising from an optimization process under binding constraints. Even so, it has been well documented that the Growth Diagnostics approach must be applied with care and in an economically sophistically way, as opposed to the straight-forward mechanical approach that is the hallmark of the Washington Consensus. For example, Growth Dynamics only economizes on outputs (i.e. the binding constraints that must be relieved in order to get growth going). And so, it is in this context that advocates of this framework also suggest that policy makers are cognizant of the limitations of Growth Diagnostics for the purposes of determining if it is the appropriate framework in light of the contextual realities of a particular country under study.
Hausmann, Rodrik, and Velasco acknowledge that the reasons for development policy failures are complex, but argue that incentivizing economic growth is the primary challenge facing developing countries (3). That the Growth Diagnostic’s methodology places an inordinate amount of focus on economic growth has caused some practitioners to question its applicability in developing countries with endemic multi-dimensional poverty and other intractable problems that run the gamut, from inequalities in wealth and environmental protection to basic human needs (Felipe and Usui 7). From this perspective, it’s not that practitioners argue that reforms packages that ignite growth have no place in the policy debate. On the contrary. However, the Growth Diagnostics model might be insufficient for the unique challenges of a country that would reap greater benefits from a reform package that grants equal weight to other policy reform objectives that target poverty reduction, environmental protection, etc.
Another limitation of Growth Diagnostics that has garnered a lot of attention is the fact that it identifies binding constraints that are relevant at the time of analysis, but does not anticipate unforeseen constraints that may emerge further down the line. From this perspective, while Growth Diagnostics might be the ideal framework for formulating hypotheses about stagnate economies, it might not be a suitable model for designing policy prescriptions for economies that experience shocks and adjustments in the medium to long run. Not surprisingly, Felipe and Usui conclude that “growing economies are outside the scope of growth diagnostics” (15). Habermann and Padrutt agree, questioning whether the Growth Diagnostic methodology offers “a clear-cut transition from igniting growth to sustaining it” (Habermann and Padrutt 8).
Works Cited
Felipe, Jesus and Norio Usui. “Rethinking the Growth Diagnostics Approach: Questions from the Practitioners.” ADB Economics Working Paper Series, no. 132. Asian Development Bank. (2008): 1-34. PDF.
Habermann, Harald and Pablo Padrutt. "Growth Diagnostics: Strengths and Weaknesses of a Creative Analytical Framework to Identify Economic Growth Constraints in Developing Countries." Journal of Knowledge Management, Economics and Information Technology 7 (2011): 1-25. PDF.
Hausmann, Ricardo, Dani Rodrik, and Andres Velasco. “Growth Diagnostics.” The John F.
Kennedy School of Government, Harvard University, Massachusetts. (2005): 1-35. PDF.
