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

Growth Diagnostics Under Uncertainty: Comments on Peru and Paraguay Case Studies. Competitiveness and Growth in LAC IDB, II Discussion Seminar Washington, DC 20-21 September 2007. Augusto de la Torre and Daniel Lederman. Outline. The good Room for improvement

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

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  1. Growth Diagnostics Under Uncertainty:Comments on Peru and Paraguay Case Studies Competitiveness and Growth in LAC IDB, II Discussion Seminar Washington, DC 20-21 September 2007 Augusto de la Torre and Daniel Lederman

  2. Outline • The good • Room for improvement • Final thoughts: GD method and uncertainty

  3. The 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

  4. Room 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

  5. The 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

  6. END

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