The Hausmann-Rodrik-Velasco Growth Diagnostics Framework;1

1. Specialization – specifics beyond comparative advantage, i.e. labor-intensive activities is hardly enough. The idea behind “self-discovery” --- figuring out what the impediments to growth are.

2. The building towards self-discovery recognizes 3 building blocks:

a. Uncertainty about what a developing country can produce cost-effectively and also profitably.

b. Need for the local adaption of imported technology to prevent easy entry – might require local reverse engineering.

c. With (a) and (b) in place, “imitation” is very rapid. It shows as many countries who are labor-intensive will produce different labor intensive products.

3. Growth Diagnostics (GD)– once efficient investment & entrepreneurship are accepted for economic growth & development, there is need for country-specific binding constraints. GD is a decision tree for identifying the most binding constraints for each country currently and in future.

The Hausmann-Rodrik-Velasco Growth Diagnostics Framework;2

1. Focus on a country’s most binding constraints on economic growth & alleviating pressing constraints.

2. Suppose a country is constrained by low level of private investment & entrepreneurship. The decision tree identifies the-how-to-solve the problem. The initial causes could be (a) low return to economic activity and (b) high cost of finance.

3. Not that the solution to these binding constraints are so many and multi-dimensional. This shows that No “one size fits all” in development policy, i.e. GD is a much more broader approach to development policy that complements econometric modelling.

• Not simple to find the binding constraint. Uncertainty leads to probabilistic assessments

Figure :Hausmann-Rodrik-Velasco Growth Diagnostics Decision Tree

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The Hausmann-Rodrik-Velasco Growth Diagnostics Framework;3

Growth diagnostics1. Key constraint is inadequacy of public goods especially on 2 emerging

sectors (tourism & light manufacturing).

2. Financial sector constraints –credit and loans

SignalsProblem of “arriving late” for public eventsIllustrates the idea of multiple equilibria --- moving from one inferior equilibrium to a superior one