TY - JOUR AU - Hausmann, Ricardo AU - Rodrik, Dani TI - Economic Development as Self-Discovery JF - National Bureau of Economic Research Working Paper Series VL - No. 8952 PY - 2002 Y2 - May 2002 DO - 10.3386/w8952 UR - http://www.nber.org/papers/w8952 L1 - http://www.nber.org/papers/w8952.pdf N1 - Author contact info: Ricardo Hausmann Harvard Kennedy School 79 JFK St. Cambridge MA 02138 Tel: 617-496-3740 E-Mail: ricardo_hausmann@harvard.edu Dani Rodrik John F. Kennedy School of Government Harvard University 79 J.F. Kennedy Street Cambridge, MA 02138 E-Mail: dani_rodrik@harvard.edu AB - 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. ER -