standards covering banking transparency, banking supervision and accounting
standards, further increasing this cost (Rodrik, 2000). That sum would have
represented a very sizeable chunk of the annual government budget of many
African countries. The demanding complexities of such reforms may over-
whelm the limited skilled personnel and capacity of the civil service.
Once we have accepted the idea that we should prioritize reform we face the
daunting task of selecting those key policies. One method of doing just this
was developed by Hausman et al.(2005) and is known as ‘growth diagnostics’.
This method seeks to derive policy priorities from an understanding of how the
binding constraints on economic activity differ from setting to setting, and it
asks a series of questions derived from specific country case studies. As we
noted using the model of proximate and deeper determinants in the
Introduction, growth can be low because of slow productivity growth or the
lack of investment, education or land. Starting from this model of economic
growth we first need to examine a country case study in detail to ascertain
which of these factors are responsible. Low investment of significantly below
20 per cent of GDP (various studies in this book have shown investment rates
above 30 per cent of GDP are associated with rapid and sustained growth) can
be due to three factors:there are inadequate returns to investment (so little
incentive to invest); there could be high returns but these are lost to the origi-
nal investor (called a problem of appropriability); or investors are unable to
access the finance necessary to undertake even profitable investment projects.
If returns are low this could be due to lack of investment in complementary
factors such as roads to transport goods to market, tariffs hindering the import
of necessary technologies or to the lack of skilled labour to engage in produc-
tion. If returns are high but lost to the original investor the causes could be high
taxation,poor property rights and contract enforcement, or labour conflicts. If
potential investors lack access to necessary finance this could be due to prob-
lems with domestic or external financial markets. If savings were scarce and
were constraining investment we would expect to see high foreign debt or a
high current account deficit as signals that the country was drawing resources
from elsewhere to compensate for low domestic savings; or we would expect
to see competition to attract the existing limited pot of savings leading to high
interest rates for depositors or government bondholders. If the amount of
education/human capital is a constraint we would expect to see evidence of
limited schooling such as low average years of schooling and low literacy and
also that those with schooling and skills were in high demand so returns
(wages) of the most educated would be very high, leading to substantial labour
market inequality. Once we have identified key constraints related to the prox-
imate determinants of growth then we can look to the deeper determinants to
complete our analysis.
Qayyum et al.(2008) use the method to look for constraints on growth in
Pakistan in the mid-2000s. Availability of investible resources was not a
constraint on growth. In the mid-2000s savings in Pakistan (around 24 per cent
of GDP) were similar to those in other developing countries. Other indicators
292 Patterns and Determinants of Economic Growth