- 1) The sample of existing firms included in ICAs is a biased sample excluding the firms that would have existed if the relevant constraints were removed.<sup>14</sup>

- 2) Comparing hedonic scales across individuals and countries is rifled with cultural issues, as well as the particular economic structure in a country<sup>15</sup> .

- 3) The business enterprise sample may not be representative of the span of business enterprises across the country<sup>16</sup> .

Thus, a growth diagnostics exercise has to be undertaken to confirm or reject the reliability and interpretation of these types of surveys.

**Box 1: Is Togo in a Poverty Trap?**

**<mark>When a country is poor, everything seems to be binding and in addition, having a very low level of income may in itself constitute an impediment to growth.</mark>** <mark>Economic literature refers to these cases as</mark> _<mark>poverty traps</mark>_ **<mark>,</mark>** <mark>a situation where growth cannot be ignited in a country just because productive inputs are so scarce that sustained growth cannot kick in. The HRV approach does not explicitly deal with poverty trapped countries. The framework assumes well behaved aggregate production function, which are not amenable to explain a country’s stagnation at very low level of income. Extending the analytical approach to include potential poverty traps is a challenging task, but maybe a necessary one for gaining understanding on constraint to growth in countries at very low levels of income – such as in Togo.</mark>

**<mark>The identification and possible growth implications of being in a poverty trap or another particular growth state could be analyzed by approaching growth analytics as suggested in Pritchett (2008).</mark>** <mark>The key question in all growth analytic processes is: “What are the feasible actions</mark> _<mark>in the country’s current circumstances</mark>_ <mark>that would initiate (or sustain) an episode of sustained, broad‐based, rapid growth?” Hence, a necessary first step, prior to a growth diagnostic exercise, is the “Identification of the country’s</mark> _<mark>current growth state</mark>_ <mark>based on its past and recent performance”. Pritchett (2008) defines 6 possible (exhaustive) growth states</mark> 17 <mark>, which are used to generate empirical transition probabilities from past to current states or from current to desired states. These probabilities are shown to depend on the set of policy actions leading to the next state, but also the initial state.</mark> **<mark>If one were to use Pritchett’s criteria, Togo could be classified as a country that has in the course of the last three decades transitioned from a phase of fast‐growing pre‐independence state, to economic decline post‐1980, and from there to a state of stagnation in the 2000s</mark>** <mark>. Now, being stagnant at a low level of income is not the same as being in a poverty trap. The difference is subtle, yet, important. Being in a poverty trap implies that a country may not be able to endogenously foster and sustain a moderate to high growth rate even if it properly and systematically address main, binding constraints to growth with the available resources and adequate political support. This is so because the low quality, scarce productive factors and the very low level of technology associated with mostly traditional, low scale, subsistence activities; coupled with extremely weak local demand (due to low income) and foreign demand (due to low competitiveness) make business unable to consistently growth, even when good policies are in place. Some exogenous intervention is needed to help the country jump towards a higher growth path.</mark>

**<mark>The question whether Togo is in a poverty trap or simply stagnant at low level of income is not an easy one, but there exist a few indications that Togo is</mark>** **_<mark>not</mark>_** **<mark>poverty trapped</mark>** <mark>. First, per capita income in Togo in 2008 remains 30% below its post‐independence historical maximum, but still 34% above its pre‐independence level when a period of strong growth started. Second, Togo is better equipped in terms of endowment such as human capital per capita which has steadily increased in the last half a century. Physical capital has been added at a much slower pace than the growth of employment, resulting in a physical capital stock per worker at the same low level as at independence. However, not lower than the amount available when country’s growth began to accelerate in the 1960s. Also, it is perceived that the conditions that were present when post‐independence growth ignited in the 1960s are nowadays still in place.</mark>

**<mark>This growth diagnostics exercise will hence identify constraints that prevent a shift from current stagnation towards a desired state of rapid, converging growth in Togo</mark>** <mark>. This is not to say that all countries in a given state will have to follow similar recipes (as the extrapolation of lessons is precisely what GD is</mark> _<mark>not</mark>_ <mark>about) but, as Pritchett explains “the set of diagnostics and therapeutics recommended are likely to be more similar across countries starting from similar states”.</mark>

14 As Hausmann et al (2008) explain: “The surviving firms may be politically well connected; form part of financial conglomerates; or be exempt from taxation because of some specific provision, making them less sensitive to problems of governance, finance or taxation, respectively”.

15 For cultural reasons, what is outrageous corruption in Sweden may not raise too many eyebrows elsewhere (Hausmann et al. 2008). Also, a specific growth determinant such as education may be more important in the US than in Zambia due to their different economic structures.

16 For instance, Togo’s business enterprise survey was restricted to firms in Lomé. Also, the agricultural sector or the informal sector is normally not surveyed, posing problems for lower income countries that rely mostly upon primary activities. 17 The six possible growth states according to Pritchett (2008) are: (i) poverty traps, (ii) a status of economic decline or collapse, (iii) stagnation (or non converging growth), (iv) modest converging growth, (v) rapid converging growth and (vi) growth leaders.

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