My colleague Ricardo Hausmann along with two co-authors (Bailey Klinger and Rodrigo Warner) have just put up an interesting essay on the practice of growth diagnostics (GD). Ricardo calls this a "mindbook"--i.e. a manual on getting your mind around GD. It is chock-full of illustrative examples, and also discusses some common misunderstandings.
Here is the kind of insight you will get from the piece:
Suppose you were asking: what is the binding constraint to animals thriving in the Sahara desert? This is not unlike the question of what limits economic growth in a country. However, in the Sahara, it is instructive to note that of those few animals that do thrive in that environment, a very large proportion are camels and a very small proportion are hippopotamus. The fact that the animals most intensive in the use of water, hippopotamus, are scarce while the animals least intensive in the use of water, camels, are thriving suggests that the supply of water may be a binding constraint to the spread of animals in the Sahara.
In general, the idea is that looking at the nature of the most successful parts of the economy can be informative of the constraints that affect others. We would expect to observe that those who are either structurally less intensive in the constrained factor, or at least more able to bypass it, will be doing comparatively well. Conversely, those sectors most intensive in the constraint will be doing relatively poorly.
A very simple principle, but it can be surprisingly powerful in practice. For example, it suggests that asking successful firms what are the main problems they face--a very common strategy both in business consulting and in country analysis--is not only uninformative about the binding constraints of the economy, it may lead the analyst precisely in the wrong direction. After all, successful firms are successful (relative to other firms) because they have been able to surmount the binding constraints. So they are least likely to complain about the blockages that are holding the rest of the economy back.