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Inclusive Growth Analytics Guide

Overview: This guide is based on presentations and materials from the "Applied Inclusive Growth Analytics" course, where the analysis of growth and poverty reduction are linked in order to enhance our understanding of the country-specific binding constraints to inclusive growth. There is agreement on the basic policies for sustained, broad-based growth, but there is a need for country-specific diagnostics to prioritize and shape these policies to fit country needs. While keeping the focus on growth constraints, we will be looking at constraints from the perspective of different economic actors.

The guide will begin with a growth theory introduction followed by a discussion of the applied inclusive growth analytics frameworks. The guide will then present tools for macro- and micro-level analyses of sources of growth, economic diversification, employment and distributional dimensions of growth. Emphasis will be placed on applying these tools to real country cases from recent Bank reports, in order to understand growth and poverty reduction dynamics in a specific country context and help to make trade-offs between potential constraints. The guide will also discuss the political economy aspects of bottlenecks to growth and how to evaluate the political feasibility of reform options.

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Theory & Framework

Starting Point In Growth Theory

Purpose: This part reviews the major neoclassical growth models with the objective of introducing basic concepts, linking theory to applied growth work and motivating the growth diagnostic approach.

Presentation: Economic Growth Theory: How Does It Help Us To Do Applied Growth Work? [Document]

Literature:

  • Blanchard O. and S. Fischer (1989) Lectures on Macroeconomics, The MIT Press, Cambridge Massachusetts.
  • Ghosh, S. and A. Kraay (2000) “Measuring Growth in Total Factor Productivity,” PREM Note No. 42, Economic Policy Unit, September.
  • Hausmann, R., D. Rodrik, and A. Velasco (2005) “Growth Diagnostics,” mimeo.
  • Leipziger, D. and R. Zagha (2006) “Getting Out of the Rut,” Finance and Development 43(1).
  • Mankiw, G., E. Phelps and P. Romer (1995) “Growth of Nations” Brookings Papers on Economic Activity, Volume 1995(1): 275-326.
  • Ramsey, F. (1928) “A Mathematical Theory of Saving” Economic Journal 38(152): 543-59.

Growth Diagnostics

Purpose: This part introduces the HRV approach to identifying the most binding constraint to growth, how to apply it in practice, and its advantages and limitations. The three main problems with the Solow neoclassical model are also discussed and the ideas of looking at capital in a broader context, including human capital, are discussed. Different ways of factoring in human capital in growth theory and practical growth work are reviewed.

Presentation: Growth Diagnostics [Document]

Literature:

  • Hausmann, R., D. Rodrik, and A. Velasco (2005) “Growth Diagnostics,” mimeo.
  • Lucas, R. (1988) “On the Mechanics of economic Development” Journal of Monetary Economics 22(1): 3-42.
  • Romer, P. (1986) “Increasing Returns and Long-Run Growth” Journal of Political Economy 94(5): 1002-37.
  • Romer, P. (1990) “Endogenous Technological Change” 98(5).

The Inclusive Growth Analytics Framework

Purpose: This part introduces the Inclusive Growth Analytics framework and discuss similarities and differences to the Growth Diagnostics framework, as well as go through the three main parts of an Inclusive Growth Analytics study.

Presentation: Inclusive Growth Framework [Document]

Literature:

  • Ianchovichina and Lundstrom (2009). Inclusive Growth Analytics: Framework and Application, Policy Research Working Paper no 4851. World Bank, Washington, DC. [Document]

Case Study Overview: Zambia

Purpose: This part presents an overview of the Zambia application of the inclusive growth analytics framework. The purpose is to illustrate the process of applying the framework and the thinking behind it.

Presentation: Cast Study Overview: Zambia [Document]

Literature:

  • Ianchovichina, E. and S. Lundstrom (2009) “Inclusive Growth Analytics: Framework and Application” Policy Research Working Paper No. 4851, The World Bank, March.

Basic Principles of Applied Growth Diagnostics

Purpose: This part presents some of the more traditional growth analysis tools and how a growth diagnostics approach can complement those, as well as the basic principles when determining if a constraint is binding or not.

Presentation: Growth Diagnostics in Practice [Document]

Literature:

  • Hausmann, Klinger and Wagner (2008). Doing Growth Diagnostics in Practice: A ‘Mindbook’, CID Working Paper no 177. Center for International Development, Harvard University. [Document]

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STEP 1: Understanding the country-specific development dynamics

Income Benchmark Tool

Purpose: This part discusses practical elements of country benchmark in growth analytics. It introduces a simple tool that helps answer questions on income convergence, such as: How many years will it take for a country to reach benchmark's income level? or, What growth rate is necessary to achieve benchmark's income level in a pre-defined time span?

Presentation: Income Benchmark [Document]

Tools: Income Benchmark Tool [Website]

Growth Decomposition and Estimation of Productivity Trends

Purpose: This part presents the main approaches to decomposing aggregate level income information into different sources of growth. Users learn how to decompose income per capita in order to determine whether an economy has grown because of adding capacity or becoming more efficient over time. They also learn how to estimate the contribution of demand-side components to growth as well as the contribution of different sectors to growth. Country examples illustrate these techniques.

Presentation: Growth Decomposition and Productivity Trends [Document]

Literature:

  • Ghosh, S. and A. Kraay (2000) “Measuring Growth in Total Factor Productivity,” PREM Note No. 42, Economic Policy Unit, September.
  • Ianchovichina, E. (2008) “What are the Bindings Constraints to Growth in Benin?” Chapter 1 in Benin Country Economic Memorandum, The World Bank, September.
  • Ianchovichina, E. and S. Gooptu (2007) “Growth Diagnostics for a Resource-rich Transition Economy: The Case of Mongolia” Policy Research Working Paper No. 4396, The World Bank.

Poverty-Growth Links

Purpose: The objective of this part is to encourage and facilitate wider use of existing tools for analyzing the empirical links between growth, poverty and inequality. It will focus on quantitative tools for examining the incidence of growth and the impact on poverty reduction. It is especially geared to provide support to those who may not be familiar with analyzing microdata from household surveys.

Measuring the Growth-Poverty Link: [website]

Presentation: Poverty-Growth Links [Document]

Literature:

  • Datt, G. and M. Ravallion (1992). "Growth and Redistribution Components of Changes in Poverty Measures: A Decomposition with Applications to Brazil and India in the 1980s." Journal of Development Economics, 38, 275-295. (Journal link is Science Direct subscribers. [Document]
  • Other versions are available: Living Standards Measurement Study (LSMS) Working Paper No.83) [Document]
  • Kakwani, N. and E. Pernia (2000). "What is Pro-Poor Growth?" Asian Development Review 18(1): 1-16. [Document]
  • Klasen, S. and M. Misselhorn (2006). "Determinants of the Growth Semi-Elasticity of Poverty Reduction," Proceedings of the German Development Economics Conference, Berlin 2006 No. 15, Verein für Socialpolitik, Research Committee Development Economics. [Document]
  • McKay, Andy. (2005). “Tools for analysing growth and poverty: An introduction.” Mimeo. [Document]
  • Ravallion, M. (2001). "Growth, Inequality and Poverty: Looking Beyond Averages." World Development 29(11): 1803-1815. Journal link is for Science Direct subscribers. [Document]
  • Other versions are available: World Bank Policy Research Working Paper – No. 2558.) [Document]
  • Ravallion, M. (2004). "Pro-Poor Growth: A Primer." The World Bank, Policy Research Working Paper No. 3242. [Document]
  • Ravallion, M. and S. Chen (2003). "Measuring Pro-Poor Growth." Economics Letters 78: 93–99. (Journal link is for Science Direct subscribers. [Document]
  • Other versions are available: World Bank Policy Research Working Paper – No. 2666) [Document]
  • Ravallion, M. and G. Datt (2002). "Why has Economic Growth been more Pro-Poor in Some States of India than Others?" Journal of Development Economics, 68(2), pp. 381-400. (Journal link is for Science Direct subscribers. [Document]
  • Other versions are available: World Bank Policy Research Working Paper # 2663 [Document]
  • Ravallion, M. and M. Huppi (1991). "Measuring Changes in Poverty: A Methodological Case Study of Indonesia during an Adjustment Period." World Bank Economic Review, 5, pp. 57-82. [Document]

Economic Diversification and Transformation

Purpose: By the mid 1990s, governments of most developing countries had implemented the macroeconomic and trade liberalization reforms that are necessary for economic diversification. More than a decade after the reforms, structural transformation and sustainable growth remain elusive in many countries. Pressurized by socio-political conflicts, their impatient governments have announced their own brand of industrial policies targeted at industries they believe can deliver faster growth. Many industry-choices are ad hoc and uninformed and cover industries in which the country may not have a comparative advantage. This shift in the public policy stance from an industry-neutral to an industry-focused approach has created among policy makers and development specialists alike a new demand for analytical tools to understand the economic growth implications of active development policies presently being practiced in an increasing number of our client countries. This part is designed to meet this demand. The framework it presents can be analyzed with the aid of two user-friendly toolkits.

Presentations:

  • A Conceptual Framework for Export Diversification and Sustainable Growth [Document]

Applied Papers:

  • Ghana: Meeting The Challenge of Accelerated and Shared Growth: CEM - Volume II Background Papers [Document]
  • Chapter 4: Diversification and Innovation Opportunities in Benin: Benin: Constraints to Growth and Potential for Diversification and Innovation: CEM [Document]

Tools: Export Diversification in Developing Countries - A Toolkit [Website]

Literature:

  • Collier, P. and J. Gunning (1999). “Explaining African Economic Performance,” Journal of Economic Literature, vol. XXXVII, pp. 62-111.
  • Collier, Paul. 2002. Primary Commodity Dependence and Africa’s Future. The World Bank.
  • Hausmann, Ricardo, Jason Hwang, and Dani Rodrik. 2007. What you export matters. Journal of Economic Growth (U.S.) 12, No. 1:1-25.
  • Imbs, J. and R. Wacziarg. (2003) Stages of Diversification. American Economic Review, Vol. 93 (1), pp. 63-86.
  • Lall, Sanjaya, John Weiss, and Jinkang Zhang. 2006. The "sophistication" of exports: a new trade measure. World Development (U.K.) 34, No. 2:222-37.
  • Lederman, Daniel, William F. Maloney, and World Bank. 2007. Natural resources, neither curse nor destiny, Latin American Development Forum. Palo Alto, CA Washington, DC: Stanford Economics and Finance,World Bank.
  • Rodrik, D. (2006). “What’s So Special About China’s Exports,” NBER Working Paper Series, No. 11947.
  • Wood, Adrian, Jörg Mayer, African Development in a Comparative Perspective (Project), and United Nations Conference on Trade and Development. 2001. Africa's export structure in a comparative perspective. Cambridge Journal of Economics 25:369-394.

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STEP 2: Understanding the profile of the economic actors

The Profile of the Economic Actors

Purpose: This part highlights the relevance of an employability analysis within the Inclusive Growth framework. It is intended to provide a "mindbook" that helps characterize the profile of the economic actors, with special emphasis in dimensions of education and health of the labor force. It discusses the need for discovering what labor sectors are not included in the process of generation of wealth, and in what sectors are the poor working. This way, it helps build the basis for policy analysis and prescriptions for the growth to be sustained and accompanied by generation of productive employment and poverty reduction.

Presentation: Profile of the Economic Actors [Document]

Tools: ADePT: Stata Software Platform for Automated Economic Analysis [Website]

Literature:

  • Nelson and Phelps (1966) : Investment in Humans, Technological Diffusion and Economic Growth" [Document]
  • Lucas (1988) :"On the Mechanics of Economic Development" [Document]
  • Benhabib and Spiegel (1994): 'The Role of Human Capital in Economic Development. Evidence from Aggregate Cross Country Data" [Document]
  • Mankiw, Romer and Weil (1992) : "A Contribution to thd Empirics of Economic Growth" [Document]
  • Jones (2002): "Sources of U.S. Economic Growth in a World of Ideas" [Document]
  • White and Anderson (2001): "Growth vs Distribution: Does the Pattern of Growth Matter?"
  • Benhabib and Spiegel (2003) "Human Capital and Technology Diffusion" [Document]
  • Lutz, Crespo Cuaresma and Sanderson (2008): The Demography of Educational Attainment and Economic Growth [Document]

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STEP 3: Going through the diagnostic tree

Growth Diagnostics in Africa: A Review

Purpose: This part provides an overview of findings from Growth Diagnostics exercises in Africa and in comparator countries from other regions. The purpose of this review is to distill insights from studies applying the HRV method and relevant extensions, exploring patterns that start to emerge between prevailing "binding constraints" and country characteristics such as the level of income, landlocked geographies, small economies, and post-conflict environments. The part also considers the relative benefits and limitations of applying the HRV framework to African economies.

Presentation: Review of Growth Diagnostics in Africa: Emerging Findings and Questions [Document]

Cost and Access of Capital as Constraints to Growth

Purpose: This part discusses ways of assessing whether cost of finance is a binding constraint to inclusive growth in a country. It presents indicators that can help diagnose issues, the various sources of objective and subjective data and the different ways to check whether perceptions correspond to reality in a country. This part is built around three very different country case studies that illustrate the proposed techniques.

Presentation: Cost and Access To Capital As Constraints To Growth [Document]

Literature:

  • Ianchovichina, E. (2008) “What are the Bindings Constraints to Growth in Benin?” Chapter 1 in Benin Country Economic Memorandum, The World Bank, September.
  • Ianchovichina, E. and S. Gooptu (2007) “Growth Diagnostics for a Resource-rich Transition Economy: The Case of Mongolia” Policy Research Working Paper No. 4396, The World Bank.
  • Ianchovichina, E. and S. Lundstrom (2009) “Inclusive Growth Analytics: Framework

Social Returns to Investments as Constraints to Growth

Purpose: This part illustrates, with country examples, how the analysis of social returns to investments can be pursued, depending on country context and data availability. The focus will be on infrastructure as a potential binding constraint.

Presentation: Returns to Investments as Potential Constraints [Document]

Literature:

  • World Bank (2008). What Are the Constraints to Inclusive Growth in Zambia? Report no. 44286-ZM, Washington DC: World Bank. [Document]

Human Capital as a Constraints to Growth

Purpose: The aim of this part is to analyze constraints to inclusive growth from the perspective of human capital accumulation. It will concentrate on the estimation of returns to education and on labor demand (firm) constraints. In order to understand the challenges and barriers of a given country with respect to human capital accumulation, the tools will be based on both macroeconomic and microeconomic (survey) data. The aim will be to analyze both the demand and supply factors playing a role in the potential constraints to inclusive growth. The use of such tools is exemplified using Zambia as a reference economy.

Presentation:

  • Human Capital and Inclusive Growth [Document]
  • Human Capital and Inclusive Growth: A Tentative Framework and an Application to Zambia [Document]

Data and Tools:

We will use the IIASA/VID dataset to analyze demographic/educational dynamics. The dataset can be downloaded here.

Future projections of educational attainment by sex and age, which will also be used in the session, can be found here.

The analysis for Zambia will also be based on survey data from:

  • DHS EdData Survey, 2002.
  • Data from different sources compiled by the Education Policy and Data Center [Link]
  • Productivity and Investment Climate Survey 2007 [Link]

All these datasets will also be provided to course participants.

Literature:

The PRMED Knowledge Brief “Human capital and economic growth” summarizes relevant empirical research on the relationship between human capital accumulation and economic growth. [Document]

For the discussion on the interaction between demography and human capital accumulation the following references are of interest:

  • Bloom, D. and Finlay, J.E. (2008) Demographic Change and Economic Growth in Asia. PGDA Working Paper#41.2008. [Document]
  • Bloom, D., Canning, D. and Fink, G. (2008) Population Aging and Economic Growth. PGDA Working Paper#41.2008. [Document]
  • Cohen, J.E. (2008) Make secondary education universal. Nature, 456, pp. 572-573.
  • Lutz, W., Crespo Cuaresma, J. and Sanderson, W. (2008) The Demography of Educational Attainment and Economic Growth. Science, 22, 319. 5866, pp. 1047 – 1048.
  • Crespo Cuaresma J. and Lutz W. (2007) Human Capital, Age Structure and Economic Growth: Evidence from a New Dataset. IIASA Interim Report IR-07-011. [Document]
  • Simatele, D.E. (2007) A snapshot at Zambia’s contemporary migration patterns. Paper presented at the African Migrations workshop, Accra, Ghana.
  • Nielsen, H.S. and Rosholm M. (2001) The public-private sector wage gap in Zambia in the 1990s: A quantile regression approach. Empirical Economics, 26, pp. 169-182. [Document]

Private Appropriability: Government and Market Failures as Constraints to Growth

Purpose: After defining the two types of failures that constrain returns to private investments, this part discusses specific government and market failures and how one can assess whether they present a major obstacle to inclusive growth. It discusses examples from World Bank reports and the literature as illustrations to the concepts.

Presentation: Private Appropriability Issues: Government and Market Failures [Document]

Literature:

  • Dahlman, C. (2009) “Innovation Strategies in the BRICKs,” mimeo, Georgetown University.
  • Hausmann, R., D. Rodrik, and A. Velasco (2005) “Growth Diagnostics,” mimeo.
  • Ianchovichina, E. (2008) “What are the Bindings Constraints to Growth in Benin?” Chapter 1 in Benin Country Economic Memorandum, The World Bank, September.
  • Ianchovichina, E. and S. Gooptu (2007) “Growth Diagnostics for a Resource-rich Transition Economy: The Case of Mongolia” Policy Research Working Paper No. 4396, The World Bank.
  • Ianchovichina, E. and S. Lundstrom (2009) “Inclusive Growth Analytics: Framework and Application” Policy Research Working Paper No. 4851, The World Bank, March.

Last updated: 2009-09-11




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