would actually require them in their production process never get to come to life, precisely due to the lack of these factors. It is the typical chicken and egg vicious circle, as explained by Hausmann et al. (2008).

**Two categories of market failures are identified within this type of problems: Coordination failures and self‐ discovery.** Coordination problems arise when inputs and activities that are necessary to undertake other economic activities are underprovided or not provided at all, precisely because there is no demand from those yet‐to‐exist activities, or they have the character of public goods and there are hence limited incentives for an individual firm to start those activities. Self discovery problems arise from lack of _information_ about what goods or services, not yet locally provided, can be profitably produced; this is so because the process of “discovering” new goods entails initial costs for entrepreneurs, that may not be able to be recovered, because of high uncertainty on demand, or because the possibility that new entrants in the market (after the product has been found to be profitable) will, by means of competition, wipe away potential excess benefits for the entrepreneur (Hausmann and Rodrik, 2004). Thus way, new profitable products will be under‐provided ex‐ante, and over‐provided (in a sense that free entry will eliminate excess profits) ex‐post. Both, coordination failures and self discovery problems are said to justify some sort of public policy.

# **_6.9.1 Self­Discovery_**

**The task of identifying potential constraints to growth from lack of self‐discovery is a most difficult one, especially as it involves assessing activities that are** **_not_ in the country’s current production sphere.** However, as Hausmann et al. (2008) explain, one can think of a series of tests applicable to actual production data which refer to the degree of sophistication of existing activities; their relative position compared to products closer to the “production frontier”; and the number of new, successful activities. These tests permit to check whether, ex‐post, things are taking place in the country’s innovation arena. If innovation is indeed happening as a widespread phenomenon in the economy, then market failures associated with lack of self‐discovery may not be a major problem. This is, low ex‐ante entrepreneurship (before discovery time) and excess ex‐post entry into the new market (hypothesized under laissez faire conditions) are not a binding constraint in the country. A practical problem that arises in attempting to make these tests is the lack of highly disaggregated production data necessary to pinpoint activities by degree of sophistication and discoveries. That is why it has been suggested (Klinger and Lederman, 2006) the use of export data instead. Having in mind these caveats<sup>49</sup> , a battery of export indicators for diversification, sophistication, proximity to technological frontier and discovery, as defined in works by Hausmann et al. (2005) and Hausmann and Klinger (2006), and Klinger and Lederman (2006), can be used to assess whether new higher quality activities are taking place within a country.

**We have in Section 4 already defined proxies for the degree of sophistication of products (PRODY) and the export basket (EXPY) and concluded that Togo exports low‐income products but is improving.** An additional indicator refers to the “density” of exported products and their position in the “open forest”. Products that are “closer”<sup>50</sup> to other higher income value products (as defined by PRODY) are said to be in a “denser” part of the product space, implying that the ability of the country to “jump” (as one measure of self‐discovery) to these higher income value products is actually higher.

> 49 COMTRADE provides a good source of information, where goods can be disaggregated in thousands of subcategories, depending on the used nomenclature<sup>49</sup> . An additional advantage of using export data, as opposed to production data is that exporting can be seen as a sort of demonstration that a firm was able to pass a “quality” test in the international market. Being purchased in the world market, a locally produced and exported good can thus be regarded as one produced under satisfactory minimum standards, with entrepreneurs being able to break into a more competitive stage. On the flipside, using exports data omits considering the possibility that the goods were actually successfully produced within the country with good quality standards for already a long time and that the inability to bring them to the international market may be linked to some form of obstacle or intervention.  It also restricts the analysis to tradable goods and is silent in the –equally important‐ service area, including the touristic, and information technology sectors.

> 50 “Closeness” between product groups A and B refers to the probability that a country exporting product group “A” will also export product group “B”. In turn, this probability is derived from the export record, by product group, from the rest of the world. It is the minimum of the pairs of conditional probabilities going in both directions as an inverse measure of distance: min{P(A|B),P(B|A)}. See Hausmann and Klinger (2006)

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