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CID Working Paper No. 179

The Other Hand: High Bandwidth Development Policy

Ricardo Hausmann

September, 2008

Abstract

Much of development policy has been based on the search for a short to do list that would get countries moving. In this paper I argue that economic activity requires a large and highly interacting set of public policies and services, which constitute inputs into the production process. This is reflected in the presence, in all countries, of hundreds of thousands of pages of legislation and hundreds of public agencies. Finding out what is the right mix of the public inputs, and more importantly, what is a valuable change from the current provision is as complex as determining what is the right mix of private provision of goods. In the latter case, economists agree that this process cannot be achieved through central planning and that the invisible hand of the market is the right approach, because it allows decisions to be made in a more decentralized manner with more information. I argue that a similar solution is required to deal with the complexity of the public policy mix.

Keywords: structural transformation, coordination failures

JEL codes: O10, O20, H10

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