Title: International Benchmarking for Country Economic Diagnostics: A Stochastic Frontier Approach
Abstract: This paper discusses the analytical foundations of international comparisons for assessing a country’s potential for improvement along various dimensions of social and economic development. The paper presents the Stochastic Frontier approach and applies it to estimate feasible frontiers or benchmarks for each variable, country, and year. It interprets a country’s departure from the benchmark as potential for improvement. This contrasts with the literature that compares countries by looking at raw 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 paper uses a panel of 142 countries for the period 2005-2014 with 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.