[Paper Review] Linking Economic Complexity, Institutions and Income Inequality

Dominik Hartmann, Miguel Guevara+3 more|RePEc: Research Papers in Economics|May 29, 2015

Economic and Technological Innovation4 citations

TL;DR

This paper links economic complexity—measured by the Economic Complexity Index (ECI)—to income inequality, showing that countries exporting more complex products exhibit significantly lower income inequality. Using multivariate regression and a novel product-level inequality index, the study finds that economic complexity is a robust, negative predictor of inequality, even after controlling for income, institutions, and human capital, suggesting that a nation's productive structure shapes both growth and distributional outcomes.

ABSTRACT

A country's mix of products predicts its subsequent pattern of diversification and economic growth. But does this product mix also predict income inequality? Here we combine methods from econometrics, network science, and economic complexity to show that countries exporting complex products (as measured by the Economic Complexity Index) have lower levels of income inequality than countries exporting simpler products. Using multivariate regression analysis, we show that economic complexity is a significant and negative predictor of income inequality and that this relationship is robust to controlling for aggregate measures of income, institutions, export concentration, and human capital. Moreover, we introduce a measure that associates a product to a level of income inequality equal to the average GINI of the countries exporting that product (weighted by the share the product represents in that country's export basket). We use this measure together with the network of related products (or product space) to illustrate how the development of new products is associated with changes in income inequality. These findings show that economic complexity captures information about an economy's level of development that is relevant to the ways an economy generates and distributes its income. Moreover, these findings suggest that a country's productive structure may limit its range of income inequality. Finally, we make our results available through an online resource that allows for its users to visualize the structural transformation of over 150 countries and their associated changes in income inequality between 1963 and 2008.

Motivation & Objective

• To investigate whether a country’s economic complexity, as measured by the Economic Complexity Index (ECI), is associated with its level of income inequality.
• To assess whether economic complexity predicts inequality independently of income levels, institutional quality, export concentration, and human capital.
• To develop a product-level measure of income inequality based on the average GINI of countries exporting each product, weighted by export share.
• To analyze how the evolution of a country’s export basket—through the product space—relates to changes in income inequality over time.
• To provide an online visualization tool for tracking structural transformation and inequality trends across 150+ countries from 1963 to 2008.

Proposed method

• The study employs multivariate regression analysis to test the relationship between ECI and income inequality (GINI), controlling for GDP per capita, institutional quality, export concentration, and human capital.
• It introduces a novel product-level inequality index, defined as the weighted average GINI of countries exporting a given product, with weights based on each country’s export share of that product.
• The analysis uses the product space network, representing the relatedness between products, to model how the development of new products influences changes in national income inequality.
• The authors apply econometric techniques to panel data from 150 countries between 1963 and 2008, using time-lagged models to assess predictive power.
• They validate the robustness of findings through alternative specifications and sensitivity analyses.
• An interactive online platform is developed to visualize country-level structural transformation and associated inequality trajectories.

Experimental results

Research questions

• RQ1 Does a country’s economic complexity, as measured by the Economic Complexity Index, predict lower levels of income inequality?
• RQ2 Is the relationship between economic complexity and income inequality robust after controlling for income, institutions, export concentration, and human capital?
• RQ3 How does the development of new products—guided by the product space—relate to changes in national income inequality?
• RQ4 Can a product-level measure of inequality be meaningfully constructed and used to track inequality dynamics through structural transformation?
• RQ5 To what extent does a nation’s productive structure constrain or enable its range of income inequality outcomes?

Key findings

• Economic complexity, as measured by the ECI, is a significant and negative predictor of income inequality, with higher complexity associated with lower GINI coefficients.
• The negative relationship between ECI and inequality remains robust after controlling for GDP per capita, institutional quality, export concentration, and human capital.
• The product-level inequality index reveals that products with higher average GINI among exporting countries are systematically linked to higher national inequality.
• Countries that transition toward more complex products in the product space experience reductions in income inequality over time.
• The study identifies a structural link between a nation’s productive capabilities and its distributional outcomes, suggesting that economic complexity captures information about equitable growth.
• An online visualization tool is made publicly available, enabling users to explore the structural transformation of over 150 countries and their associated inequality trends from 1963 to 2008.