Select a developing country that interests you and search for evidence suggesting which factors are the binding constraint on growth. (For inspiration, see the sources in Box 4. 2.)

Box 4. 2

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El Salvador HRV argue that this economy is constrained by a lack of productive ideas. The binding constraint is a lack of innovation and demand for investment to replace the traditional cotton, coffee, and sugar sectors, or low "self-discovery." So the best strategy focus for El Sal- vador would be to encourage more entrepreneurship and development of new business opportunities. Brazil HRV identify the country's binding constraint as lack of sufficient funds to invest despite an abundance of productive ideas. They argued that private returns in Brazil are high, and therefore other flaws (inadequate business environment, a low supply of infrastructure, high taxes, high prices for public services, weak con- tract enforcement and property rights, and inadequate education) are not as binding in Brazil. So investment is instead constrained by Brazil's inability to mobilize sufficient domestic and foreign savings to finance needed investments at reasonable interest rates. Al- though Brazil could increase national savings to a de- gree by reducing government expenditure, this may not be politically feasible. If so, HRV suggest that higher taxes and user fees and lower infrastructure and human capital subsidies might work. "If the country can move to a faster growth path and if waste does not grow with GDP, it may outgrow its burdens and gradually improve its tax and spending system as fiscal resources become more abundant." In subse- quent work, Hausmann has emphasized the impor- not over-borrow, over-tax or under-invest" to success- tance of "creating a financially viable state that does fully raise domestic savings. Dominican Republic HRV conclude that the Dominican Republic is con- strained by core public goods in sectors key for growth. The country began a new reform sequence during the 1980s, after it could no longer rely on sugar and gold exports. It followed a narrow strategy of in- vesting in needed public goods for two emerging sectors with high potential, tourism and maquila assembly manufacturing. The keys were security and infrastruc- ture near the main tourist destinations and special trade policy benefits for the light manufacturing as- sembly (maquila) sector. As the economy grew from these sources, other constraints were hit, notably in the financial sector; getting past them (particularly a costly financial crisis) was bumpy, but the binding constraints stayed or became visible, so policymakers could focus on relaxing them to keep growth going. Sources: Ricardo Hausmann, Dani Rodrik, and Andrs Velasco, "Growth diagnostics," in One Economics, Many Recipes: Globalization, Institutions, and Economic Growth, by Dani Rodrik (Princeton, N.J.: Princeton University Press, 2007), ch. 2; Ricardo Hausmann, "In search of the chains that hold Brazil back," October 31, 2008, http://papers .ssrn.com/sol3/papers.cfm?abstract_id-1338262. An ex- cellent practicum is found in "Doing Growth Diagnostics in Practice: A 'Mindbook'." See http://www.cid.harvard .edu/cldwp/177.html. The World Bank offers a set of growth diagnostics exercises at its Web site, http:// web.worldbank.org/.