Citation:
Hausmann, Ricardo. 2002. “Economic Development as Self-Discovery”. Copy at http://www.tinyurl.com/y9mu8bfw
525_rodrik1.pdf | 294 KB |
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.