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Economic Development as Self Discovery

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  • Hausmann, Ricardo
  • Rodrik, Dani

Abstract

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.

Suggested Citation

  • Hausmann, Ricardo & Rodrik, Dani, 2002. "Economic Development as Self Discovery," CEPR Discussion Papers 3356, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:3356
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    Keywords

    development; industrial policy;

    JEL classification:

    • L50 - Industrial Organization - - Regulation and Industrial Policy - - - General

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