Speaker
Description
This paper aims to fill the methodological gap in development economics that until now there exists no quantitative tool that allows to prioritize reforms in a systematic nor optimal way. Following the recent debate on the issues Randomized Control Trials (RCTs) have with establishing external validity and general equilibrium effects, this paper proposes a micro-founded Growth Diagnostics framework to consider general equilibrium effects and prioritize policy prescriptions. Building conceptually on Hausmann et al. (2005), we set up two continous-time Overlapping Generations (OLG) models to account for the different net-marginal valuations of various economic activities rigorously. We solve the household and planner problem to respectively obtain the private and social net-marginal valuations of economic activities via the corresponding co-state variables. With these in hand, we define the wedges in the net-marginal private and social valuations to set up a new planner problem (we call super policy maker problem), where the planner minimizes the sum of wedges. We illustrate our framework with an application to the literature on structural change. The final wrapping optimization problem allows to prioritize optimally economic reforms in a second-best framework, thus, to put it in the words of Rodrik (2010), to first diagnose before one prescribes the remedy.
| Keyword | Economic Growth |
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