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JET and the Power of Diagnostic Thinking by Theresa Osborne

Created Aug 18 2020, 1:44 PM by Teuta Gashi

JET and the Power of Diagnostic Thinking 

by Theresa Osborne

The World Bank’s Jobs and Economic Transformation (JET) agenda has met with enthusiasm by governments and other stakeholders, given its centrality to the Bank’s goals. Of course, it is not a new insight that better jobs represent a principal route to prosperity. Had there remained any doubt, the coronavirus pandemic has cast a sharp light on the role of employment income for welfare. To be sure, fostering jobs and economic transformation has been a motivation for many World Bank Group programs over the years. So, one may fairly ask, what is new here? Is JET just old wine in new bottles? And what does it imply for Bank operations? Here, I share my views on what is new and important about JET, from the standpoint of my experiences at an “upstart” aid agency, MCC, which strives continually to strengthen the links between evidence and development programming.

Thanks to its authors, the JET initiative could mark an important shift for the Bank. JET knowledge products provide clarity on the benefit for jobs of firms operating at productive scale, innovating, and competing (as documented in the Pathways study), as well as an understanding of evolving trends in world and regional labor markets. Not only does JET provide focus and knowledge on this essential source of poverty reduction. It also aspires to base JET-related operations on three key pillars for enhancing results — better and more informative (i) diagnostics, (ii) economic analyses, and (iii) results measurement (M&E).

Take the pillar of better diagnostics. (Other pillars are topics for future blogs). Jobs Diagnostics (JD) utilize a data-driven, country-level diagnostic approach to informing JET-relevant programs (as explained in this Guide). Bank-wide, staff  conduct an array of assessments, analyses, and research outputs which provide detailed problem description and empirical analyses that are unique and valuable. Just as medical diagnostic testing differs from medical research in the question posed and approach, economic diagnostic testing differs fundamentally from economic research. Research is typically focused on answering a single question, such as what the impact is of trade on job creation, in as rigorous a manner as possible. Diagnosis, in contrast, starts with a broader “Why” question — in this case Why are jobs outcomes not as expected or hoped? — without privileging ex ante the role of trade. It takes descriptive and research findings into account but seeks to pinpoint the foremost drivers of a problem. It is at once agnostic and exhaustive in its search for causes and discriminating in its assessment of the main ones. The diagnosis process of sequentially ruling in or out of hypotheses based on their consistency with the data allows for a prioritization of “the binding constraint giving rise to the key jobs problem,” and, crucially, to an elimination of “other non-binding constraints.” (JD Guide).

In my experience, a diagnostic approach to understanding an economy’s problems is a powerful tool. If deployed well, its answers often do not accord with analysts’ priors; and principal constraints emerge that had been missed (such as on the importance of tax rates in Togo, labor market regulations in Tunisia). By discriminating among possible causes, it enables focused efforts on those areas of policy that are most promising for achieving lasting results (a consideration espoused by HRV 2005). At a minimum, objective diagnostics can help guarantee that main (binding) constraints are not left off a list of priorities to address. Both research and diagnostic inquiry are indispensable to the Bank’s work. However, when a “patient” or economy is sick, a good diagnosis is critical to appropriately treating the disease.

Diagnostics for jobs, like other economic diagnostics, must consider the simple but crucial distinction between supply-side and demand-side constraints. For example, in an economy where employment levels are low, this could be either because of low supply or low demand for labor. The logic of supply and demand will naturally suggest hypothesis tests to conduct. Some tests are simple and obvious; others may require more creative use of the data. If the symptoms expressed indicate that low demand for labor is the proximate cause of low employment, then by taking a series of additional questions to the data, one can further understand what causes this low demand. The candidates are wide ranging, from distortions in labor markets, macroeconomic risks, regulation, poor management of market or climatic risks, underdeveloped infrastructure, or costly financing. On the other hand, the problem could arise from constraints to labor supply, such as a lack of human capital, pressing home care demands, or costly transportation to workplaces. With the understanding in hand from such an investigation, policymakers can decide whether and how to treat the underlying causes of low employment, rather than just the symptoms (though, keeping with the medical analogy, this may also be called for).

Jobs diagnostics are a critical element of the Bank’s current JET agenda. They create the potential for Bank operations to be based on a clear, evidence-based diagnosis of chief constraints to a central driver of poverty reduction and prosperity. For the time being, the Bank will need to focus on understanding and addressing the effects of the current pandemic. Public health risks and collapsing global demand will likely be the binding constraints on improving jobs outcomes. Nonetheless, the diagnosis of binding constraints in normal times, based on data from before the pandemic, remains as important as ever as the Bank prepares to aid countries to restructure and recover. Jobs diagnostics and other diagnostic approaches can provide essential insights to SCD’s, CEM’s, and other strategic analyses, without which key constraints might be missed. By shifting to a more diagnostic mindset, analysts can aid the Bank to be more evidence-based in its country engagements. This would create the promise of greater impact, which is, after all, what the JET agenda is all about.