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Economic Development as Self-Discovery

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  • Hausmann, Ricardo

    (Harvard U)

  • Rodrik, Dani

    (Harvard U)

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," Working Paper Series rwp02-023, Harvard University, John F. Kennedy School of Government.
  • Handle: RePEc:ecl:harjfk:rwp02-023
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    More about this item

    JEL classification:

    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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