Working Paper: NBER ID: w8952
Authors: Ricardo Hausmann; Dani Rodrik
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: No keywords provided
JEL Codes: O0; L1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| quality of policymaking in Latin America improved in the 1990s (O54) | economic growth remained disappointingly low (O49) |
| inadequate incentives for entrepreneurship to discover new production costs (D24) | economic growth remained disappointingly low (O49) |
| reforms increased market mobility (J62) | reduced incentives to invest in new activities (E22) |
| government-provided rents through trade protection and subsidies (R38) | stimulated the cost discovery process in successful Asian economies (O53) |
| lack of appropriability of cost discoveries (D23) | undermines incentives for entrepreneurs to invest in discovering production capabilities (O31) |
| reforms of the 1980s and 1990s did not adequately address the need for spurring investment in nontraditional activities (E69) | economic growth remained disappointingly low (O49) |
| government-provided rents without accompanying policies to rationalize industries (R38) | could backfire (G41) |