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ECONOMIC DEVELOPMENT AS SELF-DISCOVERY* Ricardo Hausmann and Dani ...

Source: ksghome.harvard.edu
Topic: Economic Development

Sort Desciption: The theory and practice of economic development have converged in the last two decades .... We present here a different perspective on economic development ...

Content Inside: ECONOMIC DEVELOPMENT AS SELF-DISCOVERY* Ricardo Hausmann and Dani Rodrik Revised April 2003 John F. Kennedy School of Government Harvard University 79 Kennedy Street Cambridge MA 02138 (617) 496-3740 ricardo_hausmann@harvard.edu John F. Kennedy School of Government Harvard University 79 Kennedy Street Cambridge MA 02138 (617) 495-9454 dani_rodrik@harvard.edu 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. * We thank the Ford and Rockefeller Foundations and the Carnegie Corporation of New York for financial support and Zo McLaren and Anton Dobronogov for research assistance. We also thank Bill Easterly Murat Iyigun Devesh Kapur Michael Klein Andres Rodriguez-Clare Peter Schott Sebastian Edwards and participants at the NBER-IASE meeting in Monterrey Mexico November 15-16 2002 for helpful comments. ECONOMIC DEVELOPMENT AS SELF-DISCOVERY Ricardo Hausmann and Dani Rodrik Introduction The theory and practice of economic development have converged in the last two decades on a remarkably simple view of growth fundamentals. Stated in its starkest form this view is that economic growth requires two things: foreign technology and good institutions. This perspective is well grounded in the neoclassical model of economic growth which predicts that poor countries will experience rapid convergence with advance ...

self discovery economic growth

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