Growth Diagnostics: A Crash Course

In the mid-2000s, Ricardo Hausmann and Dani Rodrik developed a growth diagnostics framework for dealing with persistent economic growth failures:

Hausmann et al. - Doing Growth Diagnostics in Practice A Mindbook
Hausmann et al. – Doing Growth Diagnostics in Practice A Mindbook

With this decision tree:

Hausmann et al. - Doing Growth Diagnostics in Practice A Mindbook
Hausmann et al. – Doing Growth Diagnostics in Practice A Mindbook

The symptoms in the table indicate binding constraints. According to Hausmann and Rodrik, easing binding constraints would accelerate economic growth. Therefore, government should address its country’s constraints first. But before it must find these constraints.

Such evidence-based prioritizing could balance politics and fashion as the major determinants of public policies. It’s worth remembering that the major cost of government is not public spending, but the time wasted on implementing wrong reforms. This cost grows exponentially when measured against the scenario in which evidence-based policies indeed change things for better.

To be sure, governmental decisions are always accompanied by some sort of research. This research, however, often suffers from biases and politics. An economist needs a framework that keeps him disciplined. Hausmann-Rodrik growth diagnostics is such a framework.

A crash course in this framework would look like this:

  1. Hausmann, Klinger, and Wagner, “Doing Growth Diagnostics in Practice.”
  2. Hausmann, Rodrik, and Velasco, “Growth Diagnostics,” in Serra and Stiglitz, The Washington Consensus Reconsidered.
  3. World Bank, Country case studies.

I’d add two things to these materials.

First, a formal growth model. Doing diagnostics without modeling may seem easier, but after a while you’ll lose the big picture. As you lose the big picture, you can no longer rank priorities, even with microeconomic estimates of returns to policies. The Solow model and its modifications would suffice.

Also, unlike the authors, I’m more cautious about focusing on a single constraint. First, economic evidences are often inconclusive (but better than non-economic non-evidences). Second, governments fail to implement at least some of the policies that they’ve planned. In the end, you may advocate a wrong policy that isn’t going to be implemented anyway! As a remedy, I recommend stylized diversification akin to the Kelly criterion, when government allocates efforts proportionally to the expected payoffs from each constraint-policy pair.

In the next posts, I’ll review a couple of major economies in the spirit of Hausmann and Rodrik. Stay tuned!