Transcript Inclusive Growth Framework

Income Benchmark
World Bank
Washington, DC
March 23, 2009
Leonardo Garrido
Practical elements of benchmarking
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A country growth performance and potential can be better
assessed by including comparisons with some benchmark
countries in the analytic work.
The choice of relevant benchmark countries depends on
the question one would like to be answered
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Are we interested in expected effect of proposed policies?
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Is it about potential or expected growth outcomes?
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Role models
Is it about linkages?
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Look up at similar countries and initial conditions
Is it about achieving long run targets?
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Look up at similar countries
Correlate countries on variables of interest
Keep in mind heterogeneity issues
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What constitutes a good benchmark?
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Similar countries to compare with
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Role models
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“Similarities”: Refer to the attribute that is thought to primarily
determine a given outcome
Ideally, one should aspire to a “natural experiment” where the
selected benchmark is a replica in all but one respect to the country
under study
A particular country or set of countries which performance or
welfare indicator wants to be attained by the studied country
Correlate countries
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Those in which macro variables of analyzed countries are affected
by macro variables in benchmark countries by means of some
transmission mechanism.
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Income Benchmark
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Once we identify benchmark countries, we may be interested in
answering one of the following questions
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How long would it take to analyzed country to reach benchmark’s
current income level at a given (hypothetical) growth rate?
How long would it take to analyzed country to catch up with benchmark
country at hypothetical growth rate?
How long would it take to attain a given income level category?
What growth rate would it be necessary to catch up / reach current
income level of benchmark country or reach threshold of next income
level category?
What income level will it be obtained growing at hypothetical growth
rate during specified period of time?
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Income benchmark: A reality check
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Important question to answer before making assumptions on
hypothetical growth rate:
– Is it feasible?
– If not feasible: What would it take?
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Feasibility:
– Observe Saving, Investment and Current Account Balances path compatibles
with a given income growth target.
– Compare with historical trends
– Scenarios for TFP
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Linked to:
– Reform
– Composition and level of government expenditures
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Potential growth benchmark
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Normally interested in accelerating and sustaining
growth rates
These are empirical definitions
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Growth accelerations (Hausmann, Pritchett & Rodrik, 2005)
Sustained growth (Johnson, Ostry & Subramanian, 2007)
Growth success stories (Commision on Growth and Development)
From benchmarking point of view, it is relevant to
compare “initial conditions” in analyzed countries
vis a vis initial conditions present benchmark
countries when growth began to accelerate.
(Johnson et al, 2007)
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Benchmarking examples
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Kenya: “Vision 2030”
IMF Paper
Zambia
Tajikistan
Mongolia
Benin
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I.B. Tool nuts and bolts (I)
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2 ways of calculating annual growth rate of
GDP for period T>2:
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From initial vs final period GDP
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From OLS regression using all data
y
ln  T
y
y   0
T


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ln  y       @ trend
Methods yields slightly different results, but highly correlated (See example)
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I.B. Tool nuts and bolts (II)
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Basic formula
Yt  Y0  e g t
How long would it take to analyzed country to reach
ln Yt   ln Y0   g  t 
benchmark’s income level, at analyzed country’s
hypothetical growth rate (g)?
ln Yt Y0
– Y0 is income level of analyzed country
t
– Yt is income level of benchmark country
g
– Solve for unknown t

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Time to catch up if analyzed country grows at (ga)
and benchmark country grows at gb?
– Y0 is income level of analyzed country
– Yt is income level of benchmark country
– Solve for unknown t

Yt  e g b t  Y0  e g a t 
ln Yt   gb  t  ln Y0   g a  t 
t
ln Yt Y0 
g a  g b 
Solve for “g” instead of “t” o answer questions regarding the growth rate
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I.B. Tool nuts and bolts (III)
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Excel commands to calculate historical growth rates:
Year ->
Ypc_analyzed
Ypc_benchmark
1
100.0
1,000.0
2
105.0
1,010.0
3
110.3
1,020.1
4
115.8
1,030.3
5
121.6
1,040.6
growth rate
4.88%
1.00%
4.6
6.9
4.7
6.9
4.7
6.9
4.8
6.9
4.8
6.9
4.88%
1.00%
ln(Ypc_analyzed)
ln(Ypc_benchmark)
9/A
10
11
12
13
14
15
Year ->
Ypc_analyzed
Ypc_benchmark
B
1
100
1000
C
2
105
1010
D
3
110.25
1020.1
E
4
115.7625
1030.301
F
5
121.550625
1040.60401
G
H
I
growth rate
=LINEST(LN(C11:G11))
=LINEST(LN(C12:G12))
ln(Ypc_analyzed)
ln(Ypc_benchmark)
=LN(C11)
=LN(C12)
=LN(D11)
=LN(D12)
=LN(E11)
=LN(E12)
=LN(F11)
=LN(F12)
=LN(G11)
=LN(G12)
=SLOPE(C14:G14,C10:G10)
=SLOPE(C15:G15,C10:G10)
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Income Benchmark Tool Demo
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Some definitions
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Income choice
Atlas Method GDP for allocating countries
by income groups
Navigating the file:
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Picking a country and benchmarks
Assumptions
Interpretation
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Profile of the labor force
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Knowledge of the distribution of working age population and labor
force is essential to identify productive and non-included groups
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