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Income Benchmark

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

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Income Benchmark

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

  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. 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. 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. Income benchmark: A reality check • Important question to answer before making assumptions on hypothetical growth rate: • Is it feasible? • If not feasible: What would it take? • 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: • Reform • Composition and level of government expenditures

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

  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. 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)? • Y0 is income level of analyzed country • Yt is income level of benchmark country • Solve for unknown t • Time to catch up if analyzed country grows at (ga) and benchmark country grows at gb? • Y0 is income level of analyzed country • Yt is income level of benchmark country • Solve for unknown t • Solve for “g” instead of “t” o answer questions regarding the growth rate

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

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

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