Growth Diagnostics

Most well-trained economists would agree that the standard policy reforms included in the Washington Consensus have the potential to be growth-promoting. What the experience of the last 15 years has shown, however, is that the impact of these reforms is heavily dependent on circumstances. Policies that work wonders in some places may have weak, unintended, or negative effects in others. We argue in this paper that this calls for an approach to reform that is much more contingent on the economic environment, but one that also avoids an "anything goes" attitude of nihilism. We show it is possible to develop a unified framework for analyzing and formulating growth strategies that is both operational and based on solid economic reasoning. The key step is to develop a better understanding of how the binding constraints on economic activity differ from setting to setting. This understanding can then be used to derive policy priorities accordingly, in a way that uses efficiently the scarce political capital of reformers.