• DOI:10.2139/ssrn.313825
• Corpus ID: 10208456

Economic Development as Self-Discovery

@article{Hausmann2002EconomicDA,
  title={Economic Development as Self-Discovery},
  author={Ricardo Hausmann and Dani Rodrik},
  journal={Macroeconomics eJournal},
  year={2002}
}

• R. Hausmann, D. Rodrik
• Published 1 March 2002
• Economics
• Macroeconomics eJournal

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.