The “African growth support” initiative, multi-stakeholder study group
Second meeting minuteDate: 24th April, 2008
(18:40 – 20:50)
Place: GRIPS Room 4B
Participants: 12 people with background in government, aid implementation
agencies, research institutes, and 7 people from the GDF secretariat participated.
I. Opening
The secretariat introduced the second growth support initiative study meeting with abrief summary of the first study meeting’s proceedings and introduced the day’s
agenda. Two presentations were made before discussions were opened. The firstpresentation from the secretariat highlighted the significance of the “growthdiagnostics” (the framework pioneered by Harvard University professors Hausmann,
Rodrik and Valesco, hereinafter HRV) to understand its implication for development
assistance, and conditions for a more effective participation by Japan; and thesecond presentation from one of the participants focused on private sector
development tools in Africa, with reference to the experiences of other donors.
II. Discussions
1. Growth diagnostics•Participants agreed that the HRV approach provides substance in that it helps
confront binding constraints to growth in a systematic way and recognized that,
unlike the Washington consensus, it is more contingent with the recipient
country’s economic environment and represents a key element in the efforts tosearch for new approaches to growth strategy as it comes with a decision tree to
identify binding constraints to growth and prioritizes reform in the desiredsequence.

•Nevertheless, despite the theoretical claim that the framework not be amenable
to simple formulas as it requires the judicious use of evidence to look for clues(contingenttocountryenvironment)
thatwill
identify
themostbinding constraints, in practice though, it is feared the degree of convergencewith which the method is applied (just checking a series of boxes) will end up
identifying constraints that are not feasible to remove. It is yet to be known towhat extent donors are prepared to work on customized prescription, based onrealistic assessment of the institutional capacity of respective countries•Participants further noted that many of the growth diagnostics lack prescription
which leaves the important task of planning, designing, and implementing reform
policies to remove identified binding constraints to developing countries to deal
with on their own, despite their weak capacity. This raised questions of the true
purpose of the HRV approach. Is it (i) a tool for donors to obtain analytical1

insights for formulating their country assistance strategies or (ii) a tool for therecipient countries to avail for prioritizing reforms to support growth? The
uncertainty creates a gap between the diagnosis on the one hand and the remedy(prescription) on the other.
•The language of "growth diagnostics" has become commonplace in multilateralagencies and donor organizations, and the approach has already been pilottested by the World Bank and the DFID in a number of countries. Under suchcircumstances, participants concurred that the need to fill this gap presented agood entry point for Japan to effectively participate in the growth diagnostics
framework by working closely with recipient governments, through policy
dialogue to help clarify the options available for them to respond to the identified
binding constraints and to design growth strategies together. Japan has theexperience and track record in development assistance (especially in East Asia)that she could bring to bear.

•Another weakness of the HRV model is that it assumes that economic activity is
usually constrained by at least one of two factors: either (A) the private return toinvestment is too low, or (B) the cost of finance is too high. While many, if not
most countries in Africa fall in category (A), their economies are characterized byconstraints listed not only in (A) but also in (B). With such a laundry list ofneeded reforms in (A) and (B), developing countries either tried to fix all of themat once or started with reforms that were not crucial to their country's growthpotential. The often generalized nature of the CEM report prepared by the WorldBank (for example Morocco) exemplifies such dilemma.

The case of El Salvador•Five to six years ago, El Salvador’s private think-tank, FUSADES (Fundacion
Salvadorena para el Desarrollo Economico y Social) - which has close link withthe government - invited Hausmann and Valesco to carry out a study to identify
binding constraints to economic growth. This study, thought of as the precursor
to the 2005 HRV methodology - indeed El Salvador is included as one of the casestudies in the 2005 HRV paper - was prompted by the failure to achieve growth
despite implementation of drastic economic reforms following advice andrecommendations from the Chicago (neo-classical) school. Therefore, this time,
the government sought advice, from a “market failures” perspective. Participants
noted however that ever since the study by the Harvard researchers concluded
that “self-discovery” was to single most binding constraint to economic growth in
El Salvador, there has not been any mention of Hausmann and Valesco in thecountry.

•Participants concurred that while the requirement for the “self discovery” process
may be essential, more analysis for the best method to carry that farther would
be needed. In principle, close collaboration with partner countries to assess areasof comparative advantage would enable division of labour accordingly, especiallywith regard to sector-specific tasks.

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Meaningful Japanese participation•Participants noted that despite the difference of approach between Japan andwestern donors – Japan’s practical, hands-on approach and western theoretical,
framework approach – there is complementarity between them. Nevertheless,participants agreed for there being a need for Japan to aggressively publicize herapproach. Even though the World Bank and the DFID are already implementing
the HRV approach, efforts to make growth diagnostics a practical and more
effective growth enhancing tool should be continued. Far from challenging or
defying the current growth diagnostics, Japan would build on her long exposure
with growth in East Asia to deepen the approach, and lead to what participants
called “second generation” growth diagnostics. Whereas Hausmann and Valesco
are more familiar with Latin America, Japan has significant local knowledge
advantage in Asia.

•To leave Japan’s footprint on the “second generation” growth diagnostics, thefollowing elements would have to be incorporated; (1) cooperation with recipient
countries stakeholders for policy dialogue, (2) hands-on planning process, and(3) focus on the “positive list” of things to start with instead of focusing solely on
the negative binding constraints, which in the case of Africa will be pretty
negative. Here, participants recognized the importance of motivating the recipient
country by focusing on the areas of their greatest potential for breakthrough. Thisapproach was used with good effect in Asia where specific industry sectors andregions with the greatest potential were carefully targeted with short-term“doable” objectives and ring-fenced from the forces reinforcing the low level traps
of corruption, poor governance, and others, to create growth poles.

•Even when Japan could only piggyback on the on-going growth diagnostics
framework, the important thing would be to showcase that Japan’s commitment
and support were critical in ensuring success. This would require Japan to focus
her assistance on a few carefully selected countries. One possibility would be towork with countries where Japan provides wide ranging support from budget
support to policy dialogue, to dispatch of industrial policy advisers (for example,Tanzania).

2. Private sector development tools•

This presentation described how the economic environment in developing
countries is not adequate for the development of small and medium-sizedenterprises (SMEs). In the current environment, (i) lack of suitable policies andinstitutional frameworks, (ii) lack of access to finance, (iii) lack of access tobusiness support, (iv) poor value chain management, and (v) poor infrastructure,remain considerable bottlenecks. Tapping into innovative, donor-funded, aid
instruments as a means to help SMEs acquire the finances and skills they needfor private sector development was discussed. Concrete examples such as theIFC’s microfinance loan guarantee program (in collaboration with City group), andthe USAID portable guarantee (both in Uganda) were described.

3III. Closing•••

There is consensus among participants on the need to deepen our understandingof the growth diagnostics, as well as the need for Japan’s engagement indeveloping the 2nd generation growth diagnostics and for promoting her
intellectual contribution to the process.
Within this context, the next meeting (to be held in May) shall discuss concrete
steps Japan can take to support infrastructure development for growth promotion.
Discussions on private sector development tools shall be continued in the next
meeting, as well.

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