Is the Financial Crisis Constraining Growth? Insights from Growth Diagnostics
Since the development of the Growth Diagnostics method developed by Ricardo Hausmann, Dani Rodrik, and Andrés Velasco (HRV 2005), over forty country case studies utilize this analytical framework to identify the binding constraints to economic growth. This paper provides an analytical survey of the Growth Diagnostics applications that have been undertaken in fifteen African countries and compares the findings to those of comparator countries in other regions. The paper finds a consistent relationship between the “binding constraints” identified under HRV and country characteristics, such as level of income, landlocked geographies, small economies, and post-conflict environments. Countries in a poverty trap are constrained by low social returns, which are accentuated in landlocked geographies. As countries start to achieve modest to rapid growth rates, the nature of the factors constraining growth are attributable to inadequate appropriability of returns, particularly in small economies and post-conflict environments. Only after countries have transitioned to converging growth do problems relating to lack of access to finance become constraining. Therefore, on the basis of findings from Growth Diagnostics applications, the current concerns on the impact of the financial crisis on growth decelerations in Africa appear to be overstated.