1. Income Benchmark World Bank Washington, DC March 23, 2009 Leonardo Garrido

2. 2 Practical elements of benchmarking  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 Are we interested in expected effect of proposed policies?  Look up at similar countries Is it about potential or expected growth outcomes?  Look up at similar countries and initial conditions Is it about achieving long run targets?  Role models Is it about linkages?  Correlate countries on variables of interest  Keep in mind heterogeneity issues

3. 3 What constitutes a good benchmark?  Similar countries to compare with “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  Role models A particular country or set of countries which performance or welfare indicator wants to be attained by the studied country  Correlate countries Those in which macro variables of analyzed countries are affected by macro variables in benchmark countries by means of some transmission mechanism.

4. 4 Income Benchmark  Once we identify benchmark countries, we may be interested in answering one of the following questions 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?

5. 5 Income benchmark: A reality check Important question to answer before making assumptions on hypothetical growth rate: Important question to answer before making assumptions on hypothetical growth rate: –Is it feasible? –If not feasible: What would it take? Feasibility: Feasibility: –Observe Saving, Investment and Current Account Balances path compatibles with a given income growth target. –Compare with historical trends –Scenarios for TFP Linked to: Linked to: –Reform –Composition and level of government expenditures

6. 6 Potential growth benchmark  Normally interested in accelerating and sustaining growth rates  These are empirical definitions 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)

7. 7 Benchmarking examples  Kenya: “Vision 2030”  IMF Paper  Zambia  Tajikistan  Mongolia  Benin

8. 8 I.B. Tool nuts and bolts (I)  2 ways of calculating annual growth rate of GDP for period T>2: From initial vs final period GDP From OLS regression using all data Methods yields slightly different results, but highly correlated (See example)

9. 9 I.B. Tool nuts and bolts (II)  Basic formula How long would it take to analyzed country to reach benchmark’s income level, at analyzed country’s hypothetical growth rate (g)? How long would it take to analyzed country to reach benchmark’s income level, at analyzed country’s hypothetical growth rate (g)? –Y 0 is income level of analyzed country –Y t is income level of benchmark country –Solve for unknown t Time to catch up if analyzed country grows at (g a ) and benchmark country grows at g b ? Time to catch up if analyzed country grows at (g a ) and benchmark country grows at g b ? –Y 0 is income level of analyzed country –Y t is income level of benchmark country –Solve for unknown t Solve for “g” instead of “t” o answer questions regarding the growth rate Solve for “g” instead of “t” o answer questions regarding the growth rate

10. 10 I.B. Tool nuts and bolts (III)  Excel commands to calculate historical growth rates:

11. 11 Income Benchmark Tool Demo  Some definitions Income choice Atlas Method GDP for allocating countries by income groups  Navigating the file: Picking a country and benchmarks Assumptions Interpretation

12. Profile of the labor force 12 Knowledge of the distribution of working age population and labor force is essential to identify productive and non-included groups Knowledge of the distribution of working age population and labor force is essential to identify productive and non-included groups