22 surveys to only cover a sample of firms that meet the criteria of viability, and can represent the true economy’s potential.

Another important problem with the recognition of obstacles to growth is the fact that many other constraints to business development are endogenous to the industries that might be targeted by a developing country. Good examples are specific types of human capital, financing instruments, or infrastructure that may only be needed by firms moving to specific industries. Identifying and removing them may require the use of several complementary analytical tools. One useful tool is the Growth Diagnostics Framework suggested by Haussman, Rodrik and Velasco (2008). It is based on the observation that when presented with a laundry list of needed reforms, policymakers either struggle to try to solve all of the problems at once or start with reforms that are not critical to their country’s growth potential. Because reforms in one area may create unanticipated distortions in another area, focusing in the one that represents the biggest hurdle to growth is the most promising avenue to success. Therefore, countries should figure out the one or two most binding constraints on their economies and then focus on lifting those.

The Growth Diagnostics approach provides a decision tree methodology to help identify the relevant binding constraints for any given country. It starts with a taxonomy of possible causes of low growth in developing countries, which generally suffer from either a high cost of finance (due either to low economic and social returns or to a large gap between social and private returns), or low private return on investment. The main step in the diagnostic analysis is to figure out which of these conditions more accurately characterizes the economy in question. The use of that framework highlights the fact that in some countries, the growth strategy should identify the reasons for the low returns on investment, while it must explain why domestic savings do not rise to exploit large returns on investment in other countries. While the Growth Diagnostics Framework attempts to take the policy discussion of growth forward, its focus and the specification of its model remain quite macroeconomic. This is understandable, after all, growth is a macroeconomic concept and taking the analysis to a sector level would raise issues of sector interactions and trade-offs.

Moreover, the Growth Diagnostics Framework is also imprecise in its links to the institutions that facilitate the growth process. The methodology proposed for the identification of the binding constraints to growth is not always straightforward. Even if data on shadow prices were widely available, it is not obvious that this would accurately identify areas in which progress is most needed in each country. For example, one could imagine a simple model of growth for a lowincome country where technology and human capital are complementary. In such a country, the returns to education and technology adoption would both be low due to low levels of human capital and technology. An exclusive focus on shadow prices and an ignorance of cross-country comparison of levels would then suggest no need to improve education levels and encourage technology adoption.

In fact, even in situations where the Growth Diagnostics approach leads to relative certainty about the binding constraints to growth in any given country, there is still a wide range of policy options available to choose from. It is therefore necessary for policymakers to rely not just on one approach but to use several different macro and micro tools to identify binding constraints to growth. Microeconomic analyses of growth show that differentiated firm dynamics drive a good