# **<mark>International Benchmarking for Country Economic Diagnostics</mark>**

## **1. Introduction**

This paper discusses and illustrates the analytical foundations of international comparisons (or benchmarking) for assessing a country’s potential along various dimensions of social and economic development. It can add value to the country economic diagnostics (or assessments) that are regularly produced by the worldwide community of development practitioners, including governments and international organizations.

The World Bank’s Systematic Country Diagnostics (SCDs) is an example of an assessment that uses both international comparisons and detailed country-specific information. The SCDs, mandated for every country on a 3-5 yearly frequency, have become a valuable tool for assessing a country ́s prospects for achieving the World Bank ́s goals of eliminating poverty and promoting shared prosperity.

By providing a methodology for international benchmarking, discussing various alternatives and choices, and presenting a cross-country illustration, this paper can help practitioners and institutions be less arbitrary and more systematic in their approach to international comparisons, as well as more realistic regarding their expectations for improvement. Avoiding arbitrariness is an important consideration for international benchmarking. Practitioners may be tempted to manipulate the set of comparator countries to prove a point: by choosing a particular set of comparators, they can show that a country is deficient in a certain respect, while changing the comparator set can render the opposite conclusion. Another important consideration is that countries have different levels of development and different endowments. Assessing what improvements can be reasonably projected from a country at a point in time can guide policy decisions and moderate expectations. The present paper consists of two interrelated components. The first provides a conceptual framework where the rationale, principles, and challenges of international benchmarking are presented. It uses selected examples to make the discussion concrete. The second component proposes a methodology for systematic and realistic benchmarking. Among the various potential methodologies in the received literature, we select the stochastic frontier (SF) approach. This allows us to measure the inefficiency or room for improvement for a given development indicator while considering the structural endowments or predetermined conditions that can limit the indicator ́s potential.

The paper illustrates the use of the SF benchmarking methodology by constructing and using a large crosscountry panel data set, consisting of 142 countries, yearly data for 2005-14, and 10 development indicators. Despite its large scope, this exercise should be mainly considered as an illustration because it takes specific choices from the array of possibilities presented in the conceptual framework and assumes homogeneity of structural endowments across all indicators. Further work can strengthen the benchmarking exercise, focusing on a smaller set of development indicators and using more appropriate assumptions for their structural endowments and distribution functions.

The paper is organized as follows. After this introductory section, we discuss a conceptual framework for international benchmarking. Next, we present a selected review of the literature, where we consider the relative advantages of the stochastic frontier approach. We then present in detail the SF methodology and the cross-country panel data used for its application. Finally, we discuss the results on a set of development indicators and conclude by summarizing the paper ́s contributions and proposing extensions for further research.

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