Economic Development as Self-Discovery
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.
Year of publication: |
2002-05
|
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Authors: | Hausmann, Ricardo ; Rodrik, Dani |
Institutions: | Kennedy School of Government, Harvard University |
Saved in:
freely available
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