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Faculty Research Working Paper Series
Dani Rodrik
Ford Foundation Professor of International Political Economy
phone: (617)495-1407
Economic Development as Self-Discovery.
Rodrik, Dani, and Ricardo Hausmann. “Economic Development as Self-Discovery.” KSG Faculty Research Working Papers Series RWP02-023, March 2002.
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.



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