DP3356 Economic Development as Self Discovery
Author(s): | Ricardo Hausmann, Dani Rodrik |
Publication Date: | May 2002 |
Keyword(s): | development, industrial policy |
JEL(s): | L50 |
Programme Areas: | Public Economics, International Trade and Regional Economics |
Link to this Page: | cepr.org/active/publications/discussion_papers/dp.php?dpno=3356 |
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.