The Hausmann-Rodrik-Velasco Growth Diagnostics Framework;1

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The Hausmann-Rodrik-Velasco Growth Diagnostics
Framework1

• 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.
• The building towards self-discovery recognizes 3
  building blocks
• Uncertainty about what a developing country can
  produce cost-effectively and also profitably.
• Need for the local adaption of imported
  technology to prevent easy entry might require
  local reverse engineering.
• 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.

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The Hausmann-Rodrik-Velasco Growth Diagnostics
Framework2

• 1. Focus on a countrys 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

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Figure Hausmann-Rodrik-Velasco Growth
Diagnostics Decision Tree
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The Hausmann-Rodrik-Velasco Growth Diagnostics
Framework3

• Growth diagnostics
• Key constraint is inadequacy of public goods
  especially on 2 emerging sectors (tourism light
  manufacturing).
• Financial sector constraints credit and loans

Signals Problem of arriving late for public
events Illustrates the idea of multiple
equilibria --- moving from one inferior
equilibrium to a superior one