Fast-rising inflation has exacerbated poverty and affected household spending all over the country. But at the same time, this inflation is not a result of a “hot economy.” In fact, we are still at the critical stage of recovering our economy and returning to pre-pandemic levels of income and output.
Instead of assessing the country’s current economic situation and the policy recommendations, this piece will focus on explaining how to do the growth diagnostics approach. This policy tool comes from a 2005 paper by Ricardo Hausmann, Dani Rodrik, and Andres Velasco, entitled “Growth Diagnostics.” The first is “wholesale reform,” in which all issues are simultaneously eliminated. This is practically impossible. In the first place, policymakers lack the relevant information regarding all the distortions in order to do wholesale reform. In the second place, pursuing reforms everywhere stretches and exhausts institutional capacity.
We cannot thus afford to undertake what Hausmann et al. call a “spray-gun” approach, which has too many targets. As worldwide experience has shown, it is not only ineffective; it also leads to unintended adverse consequences, making the situation worse. Using the problem tree requires answering the following questions: What keeps growth low? What hinders the flow of productive investments? Is the main problem the low return to economic activities or the high cost of finance?
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