Economic Development 12th Edition by Michael Todaro

Exercise 10

Select a developing country that interests you and search for evidence suggesting which factors are the binding constraint on growth. (For inspiration, see the sources in Box.)
Box
BOX FINDINGS Three Country Case Study Applications of Growth Diagnostics
El Salvador
HRV argue that this economy is constrained by a lack of productive ideas. The binding constraint is a lack of innovation and demand for investment to replace the traditional cotton, coffee, and sugar sectors, or low "self-discovery." So the best strategy focus for El Salvador would be to encourage more entrepreneurship and development of new business opportunities.
Brazil
HRV identify the country's binding constraint as lack of sufficient funds to invest despite an abundance of productive ideas. They argued that private returns in Brazil are high, and therefore other flaws (inadequate business environment, a low supply of infrastructure, high taxes, high prices for public services, weak contract enforcement and property rights, and inadequate education) are not as binding in Brazil. So investment is instead constrained by Brazil's inability to mobilize sufficient domestic and foreign savings to finance needed investments at reasonable interest rates. Although Brazil could increase national savings to a degree by reducing government expenditure, this might not be politically feasible. If so, HRV suggest that higher taxes and user fees and lower infrastructure and human capital subsidies might work. "If the country can move to a faster growth path and if waste does not grow with GDP, it may outgrow its burdens and gradually improve its tax and spending system as fiscal resources become more abundant." In subsequent work, Hausmann has emphasized the importance of "creating a financially viable state that does not over-borrow, over-tax or under-invest" to successfully raise domestic savings.
Dominican Republic
HRV conclude that the Dominican Republic is constrained by core public goods in product sectors key for growth. The country began a new reform sequence during the 1980s, after it could no longer rely on sugar and gold exports. It followed a narrow strategy of investing in needed public goods for two emerging product (or service) sectors with high potential, tourism and maquila assembly manufacturing. The keys were security and infrastructure near the main tourist destinations and special trade policy benefits for the light manufacturing assembly ( maquila ) sector. As the economy grew from these sources, other constraints were hit, notably in the financial sector; getting past them (particularly a costly financial crisis) was bumpy, but the binding constraints stayed or became visible, so policymakers could focus on relaxing them to keep growth going.
Sources: Ricardo Hausmann, Dani Rodrik, and Andrés Velasco, "Growth diagnostics," in One Economics, Many Recipes: Globalization, Institutions, and Economic Growth , by Dani Rodrik (Princeton, N.J.: Princeton University Press, 2007), ch. 2; Ricardo Hausmann, "In search of the chains that hold Brazil back," October 31, 2008, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1338262. An excellent practicum is found in "Doing Growth Diagnostics in Practice: A 'Mindbook.'" See http://www.cid.harvard.edu/cidwp/177.html. The World Bank offers a set of growth diagnostics exercises at its Web site, http://web.worldbank.org/.