Diagnostics play a dual role in industrial development strategies: they must reveal where opportunities to move into activities with higher productivity lie, while also indicating the easiest way to increase growth in the short run, thus unlocking fiscal resources, generating aggregate demand, and creating a political constituency for growth-promoting policies.
At the economywide level, the methodology for growth diagnostics developed by Hausmann, Rodrik and Velasco can identify the most binding constraint to short-term growth. This methodology can be complemented by a more strategic and encompassing approach, noting the current drivers of growth and projecting a desirable growth pattern.
Identifying new sectors with growth potential. The full criteria for sector selection depend on the strategic priorities of the government, but a good starting point is Hidalgo and Hausmann’s ‘Product Space Analysis’. A selection between the sectors thus identified can be made based on criteria such as employment-intensity, access to potential markets or the length of the quality ladder.
At the sectoral level, the identification of constraints to growth depend in large part on communication between business and bureaucrats. At the same time, government agencies can perform their own analyses using a combination of methods, ranging from relatively costless surveys of perceptions data to more resource-intensive value chain analyses.
In all cases, diagnostic exercises must be embedded in the design of agencies responsible for industrial policy. For instance, a Ministry of Planning or Ministry of Industry must periodically conduct growth diagnostics and look out for new industries. Meanwhile, agencies set up to deal with constraints to growth in specific sectors must have fora for communication with business, complemented by their own routines for identifying the most binding constraints within a sector.
 For a more in depth treatment of diagnostics for industrialization, see Lippolis and Peel (2018) – “Diagnostics for Industrializatio” Background Paper for Programme on Rethinking African Paths to Industrial Development. Blavatnik School of Government and Centre for the Study of African Economies, University of Oxford.