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Economic development as self-discovery

  • Hausmann, Ricardo
  • Rodrik, Dani

In the presence of uncertainty about what a country can be good at producing, there can be great social value to discovering costs of domestic activities because such discoveries can be easily imitated. We develop a general-equilibrium framework for a small open economy to clarify the analytical and normative issues. We highlight two failures of the laissez-faire outcome: there is too little investment and entrepreneurship ex ante, and too much production diversification ex post. Optimal policy consists of counteracting these distortions: to encourage investments in the modern sector ex ante, but to rationalize production ex post. We provide some informal evidence on the building blocks of our model.

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Article provided by Elsevier in its journal Journal of Development Economics.

Volume (Year): 72 (2003)
Issue (Month): 2 (December)
Pages: 603-633

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Handle: RePEc:eee:deveco:v:72:y:2003:i:2:p:603-633
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