Hausmann, R. & Rodrik, D., 2003. Economic development as self-discovery. Journal of Development Economics , 72 (2) , pp. 603-633. Copy at http://www.tinyurl.com/yeoerbss
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.
Keywords: Economic development, Self-discovery, Social value