Discussion Paper Details

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Title: Economic Development as Self Discovery

Author(s): Ricardo Hausmann and Dani Rodrik

Publication Date: May 2002

Keyword(s): development and industrial policy

Programme Area(s): International Trade and Regional Economics and Public Economics

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.

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Bibliographic Reference

Hausmann, R and Rodrik, D. 2002. 'Economic Development as Self Discovery'. London, Centre for Economic Policy Research.