International Benchmarking for Country Economic Diagnostics : A Stochastic Frontier Approach
This paper discusses and illustrates the analytical foundations of international comparisons (or benchmarking) for assessing a country's potential for improvement along various dimensions of social and economic development. By providing a meth...
| Main Authors: | , , |
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| Format: | Working Paper |
| Language: | English |
| Published: |
World Bank, Washington, DC
2020
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/369581593438524015/International-Benchmarking-for-Country-Economic-Diagnostics-A-Stochastic-Frontier-Approach http://hdl.handle.net/10986/34019 |
| Summary: | This paper discusses and illustrates the
analytical foundations of international comparisons (or
benchmarking) for assessing a country's potential for
improvement along various dimensions of social and economic
development. By providing a methodology for international
benchmarking, discussing various alternatives and choices,
and presenting a cross-country illustration, the paper can
help practitioners be less arbitrary and more systematic in
their approach to international comparisons, as well as more
realistic in their expectations for a country's
improvement. The paper presents the stochastic frontier
approach and applies it to estimate feasible frontiers or
benchmarks for each variable, country, and year. It then
interprets a country's (one-sided) departure from the
benchmark as inefficiency or potential for improvement. This
contrasts with the literature that compares countries by
looking at raw variables or indicators, without considering
that countries differ in structural endowments that
constrain the maximum performance that a country could
achieve in a policy-relevant horizon. The Stochastic
Frontier approach also improves upon the literature that
uses regression residuals to measure performance. Regression
residuals are hard to interpret as inefficiency, because
they are mixed with noise and take positive and negative
values. As an illustration, the paper uses a panel of 142
countries with yearly data for 2005-14 and considers a set
of 10 development indicators. It finds that the potential
for improvement does not follow a simple relationship with
economic development, with some lower-income countries being
closer to their own feasible frontier than more advanced
countries are. |
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