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Economic Development as Self-Discovery

  • Ricardo Hausmann
  • Dani Rodrik

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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8952.

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Date of creation: May 2002
Date of revision:
Publication status: published as Hausmann, Ricardo and Dani Rodrik. "Economic Development As Self-Discovery," Journal of Development Economics, 2003, v72(2,Dec), 603-633.
Handle: RePEc:nbr:nberwo:8952
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  1. Francesco Caselli & Wilbur John Coleman II, 2000. "The World Technology Frontier," NBER Working Papers 7904, National Bureau of Economic Research, Inc.
  2. Eduardo Lora & Ugo Panizza, 2002. "Structural Reforms in Latin America under Scrutiny," Research Department Publications 4301, Inter-American Development Bank, Research Department.
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  9. Wood, Adrian & Mayer, Jorg, 2001. "Africa's Export Structure in a Comparative Perspective," Cambridge Journal of Economics, Oxford University Press, vol. 25(3), pages 369-94, May.
  10. Eduardo Fern·ndez-Arias & Peter Montiel, 2001. "Reform and Growth in Latin America: All Pain, No Gain?," IMF Staff Papers, Palgrave Macmillan, vol. 48(3), pages 5.
  11. Eduardo Lora, 2001. "Structural Reforms in Latin America: What Has Been Reformed and How to Measure It," Research Department Publications 4293, Inter-American Development Bank, Research Department.
  12. Zeira, Joseph, 1987. "Investment as a Process of Search," Journal of Political Economy, University of Chicago Press, vol. 95(1), pages 204-10, February.
  13. Easterly, William & Loayza, Norman & Montiel, Peter, 1997. "Has Latin America's post-reform growth been disappointing?," Journal of International Economics, Elsevier, vol. 43(3-4), pages 287-311, November.
  14. Jorg Mayer & Adrian Wood, 2001. "South Asia's Export Structure in a Comparative Perspective," Oxford Development Studies, Taylor & Francis Journals, vol. 29(1), pages 5-29.
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