Growth Diagnostics Under Uncertainty:Growth Diagnostics Under Uncertainty:Comments on Peru and Paraguay Case StudiesComments on Peru and Paraguay Case Studies

Competitiveness and Growth in LACCompetitiveness and Growth in LACIDB, II Discussion SeminarIDB, II Discussion Seminar

Washington, DC20-21 September 2007

Augusto de la Torreand

Daniel Lederman

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OutlineOutline

The good

Room for improvement

Final thoughts: GD method and uncertainty

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The GoodThe Good

A “disciplined” approach for setting policy priorities with multiple storylines

Peru: getting monkeys on new and taller trees through a process of industrial policy, exchange-rate protection, reducing (perception of) risk of expropriation, and possibly labor market reform

Paraguay: getting monkeys on new and taller trees through improvements in infrastructure and governance

Approach relies on well thought out descriptive statistics and underpinned by existing empirical papers

No new evidence (linking explanatory variables to growth) is presented

Significant reliance of GD process on results of cross-country regressions

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Room for ImprovementRoom for Improvement

Some alternative stories are dismissed too readily

Education in Peru: levels versus quality and skill mismatches

Finance in Peru or Paraguay: interest rates vs. financial system quality

Fuzzy distinction between correlates and constraints to growth

Export structure is endogenous, and can be due to multiple causes

Unexplored hypotheses

Poor integration between Lima and the Andes – a latent constraint?

If policy-making process matters, then even Peru needs to keep an eye on governance issues and politics

Check consistency of method and recommendations

RER depreciated dramatically during the 1980s and export structure did not change in Peru

Expand discussion and be more cautious

A venture-capital Development Bank for Peru? Devil is in the details

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The GD Method and UncertaintyThe GD Method and Uncertainty

GD method rests on good judgment –“argumentation” rather than formal or mathematical logic

Preponderance of evidence rather than formal proofs

A degree of uncertainty is at the heart of “argumentation”

Model uncertainty

Inconclusive evidence to reject one model over another

Even if chosen “model” is correct, methodology does not explicitly recognize margin of error around claims and recommendations

Problem of Type I and Type II errors

Layers of constraints or “nested” constraints

Uncertainty in policy implementation

Perhaps a diversified “portfolio” of reform agendas is optimal after all

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