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This paper presents an analytical framework that captures the informational problems and tradeoffs that policy makers face when choosing between public goods (e.g., infrastructure) and industrial policies (e.g., firm or sector-specific subsidies). The paper first provides a discussion of the literature on industrial policies. It then presents an illustrative model, where the economy consists of a set of firms that vary by productivity and a government that can support firms through general or targeted expenditures. The paper examines the cases of full and asymmetric information on firm productivity. Working under full information, it describes the first-best allocation of government resources among firms according to their productivity. It then introduces uncertainty by restricting information regarding firm productivity to be private to the firm. The paper develops an optimal contract (which replicates the first-best) consisting of a tax-based mechanism that induces firms to reveal their true productivity. As this requires high government capacity, the paper considers other simpler policies, one of which is the provision of public goods to all firms. The paper concludes that providing public goods is likely to dominate industrial policies under most scenarios, especially when government capacity is low. [ABSTRACT FROM AUTHOR]

This is the background paper for the productivity extension of the World Bank's Long-Term Growth Model (LTGM). Based on an extensive literature review, the paper identifies the main determinants of economic productivity as innovation, education, market efficiency, infrastructure, and institutions. Based on underlying proxies, the paper constructs indexes representing each of the main categories of productivity determinants and, combining them through principal component analysis, obtains an overall determinant index. This is done for every year in the three decades spanning 1985-2015 and for more than 100 countries. In parallel, the paper presents a measure of total factor productivity (TFP), largely obtained from the Penn World Table, and assesses the pattern of productivity growth across regions and income groups over the same sample. The paper then examines the relationship between the measures of TFP and its determinants. The variance of productivity growth is decomposed into the share explained by each of its main determinants, and the relationship between productivity growth and the overall determinant index is identified. The variance decomposition results show that the highest contributor among the determinants to the variance in TFP growth is market efficiency for Organisation for Economic Co-operation and Development countries and education for developing countries in the most recent decade. The regression results indicate that, controlling for country- and time-specific effects, TFP growth has a positive and significant relationship with the proposed TFP determinant index and a negative relationship with initial TFP. This relationship is then used to provide a set of simulations on the potential path of TFP growth if certain improvements on TFP determinants are achieved. The paper presents and discusses some of these simulations for groups of countries by geographic region and income level. In addition, as a country-specific illustration, the paper presents simulations on the potential path of TFP growth for Peru under various scenarios. An accompanying Excelbased toolkit, linked to the LTGM, provides a larger set of simulations and scenario analysis at the country level for the next few decades. [ABSTRACT FROM AUTHOR]

This paper analyzes the experience of economic growth in Peru during the last five decades. It describes its principal characteristics, explains the changes along the period and predicts its future path. The methodological approach consists in a combination of accounting and econometric techniques, both based in comparisons between countries and periods of time. The study discovers that the most important turning points of the economic growth were caused by changes in the productivity of all inputs, instead of the simple accumulation of capital. Specifically, the paper finds out that the recover of the economic growth in Peru during the 1990's was caused by the process of structural reforms and stabilization and lasts until now. The future growth of the economy depends on the continuation and deepness of this process. [ABSTRACT FROM AUTHOR]