Economic Complexity and Economic Performance

Abstract

Economic complexity is relatively a new concept developed in recent years to provide a holistic measure of the production characteristics of countries. Economic complexity not only explains the countries’ productive structures but also helps examine the income and growth differences across countries. This study aims to analyze the link between complexity and economic performance for a group of countries for the period between 1981 and 2015 by using the Economic Complexity Index developed by Hidalgo and Hausmann (2009). This thesis contributes to literature in various ways. First, the effect of economic complexity on economic growth and convergence is examined by applying a dynamic panel data methodology. Second, causal relationship between growth and complexity is investigated. Finally, the link between output volatility and economic complexity is also analyzed for a group of countries using a panel vector autoregressive model. The estimation results reveal that economic complexity is an important determinant of economic growth. Furthermore, the findings show that complexity also positively affects the speed of convergence. In addition, it is demonstrated that economic complexity also helps to stabilize an economy through reducing the negative effects of output volatility. These findings suggest that improving the economic complexity contributes greatly to the performance of an economy. Therefore, policies that aim to increase the economic complexity should be one of the major objectives of economies.