The Relationship Between Growth and Economic Complexity: Evidence from Southeastern and Central Europe

Stojkoski, Viktor and Kocarev, Ljupco (2017): The Relationship Between Growth and Economic Complexity: Evidence from Southeastern and Central Europe.

Abstract

The index of economic complexity is created by analyzing the relations between countries and the products they export. Constructed in such way, it defines the basis for the theory of economic complexity, which reflects the knowledge embedded in the productive structure of an economy. Exactly this knowledge is at the core of the endogenous theory of economic growth. Until now, all econometric analyses for the relationship between economic complexity and growth were done by implementing methods in which each country is valued equally. However, the countries are heterogeneous – they exhibit individual characteristics that directly encourage the complexity, and are in tight relation with growth. Therefore, in this paper the analysis is faced towards one region - Southeastern and Central Europe, and, in the spirit of the endogenous theory, a model is created which adequately captures the long run, as well as the short run relationship between the two variables. The results show that the economic complexity is a statistically significant explanatory variable of growth on the long run, and thus, it creates enormous economic implications. Contrarily, on the short run the productive knowledge has no effect on the income changes in Southeastern and Central Europe. All of this implies that the economic complexity reveals a structure which promotes development of long run strategies in the countries for inventing products. These strategies serve for the purpose of accumulating new capabilities that will help in creating and maintaining long term prosperity and economic growth.

• Item Type: MPRA Paper
• Language: English
• Keywords: Economic Complexity, Economic Growth, South Eastern and Central Europe, Cointegration, Error Correction Model
• Subjects: C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C51 - Model Construction and Estimation; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O11 - Macroeconomic Analyses of Economic Development; O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O40 - General; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O47 - Empirical Studies of Economic Growth ; Aggregate Productivity ; Cross-Country Output Convergence

References

Manuel Arellano and Stephen Bond. “Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations”. In: The review of economic studies 58.2 (1991), pp. 277–297.

Jens Arnold, Andrea Bassanini, and Stefano Scarpetta. “Solow or Lucas? Testing speed of convergence on a panel of OECD countries”. In: Research in Economics 65.2 (2011), pp. 110–123.

Richard Blundell and Stephen Bond. “GMM estimation with persistent panel data: an application to production functions”. In: Econometric reviews 19.3 (2000), pp. 321–340.

Jorg Breitung. “The local power of some unit root tests for panel data”. In: (1999).

Chris Brooks. Introductory econometrics for finance. Cambridge university press, 2014.

Matthieu Cristelli, Andrea Gabrielli, et al. “Measuring the intangibles: A metrics for the economic complexity of countries and products”. In: PloS one 8.8 (2013), e70726.

Matthieu Cristelli, Andrea Tacchella, and Luciano Pietronero. “The heterogeneous dynamics of economic complexity”. In: PloS one 10.2 (2015), e0117174.

Paul H Douglas. “The Cobb-Douglas production function once again: its history, its testing, and some new empirical values”. In: The Journal of Political Economy (1976), pp. 903–915.

Robert F Engle and Clive WJ Granger. “Co-integration and error correction: representation, estimation, and testing”. In: Econometrica: journal of the econometric Society (1987), pp. 251–276.

Ronald Aylmer Fisher et al. “Statistical methods for research workers. Biological monographs and manuals. No. V.” In: Statistical methods for research workers. Biological mono-graphs and manuals. No. V. 11th ed. (1950).

Kaddour Hadri. “Testing for stationarity in heterogeneous panel data”. In: The Econometrics Journal 3.2 (2000), pp. 148–161.

Lars Peter Hansen. “Large sample properties of generalized method of moments estimators”. In: Econometrica: Journal of the Econometric Society (1982), pp. 1029–1054.

D Hartman. “A global comparative perspective on innovation and economic diversification in Turkey”. In: ˙Istanbul: IPC 1 (2013).

Ricardo Hausmann et al. The atlas of economic complexity: Mapping paths to prosperity. Mit Press, 2014.

Cesar A Hidalgo and Ricardo Hausmann. “The building blocks of economic complexity”. In: proceedings of the national academy of sciences 106.26 (2009), pp. 10570–10575.

Cesar A Hidalgo, Bailey Klinger, et al. “The product space conditions the development of nations”. In: Science 317.5837 (2007), pp. 482–487.

Dierk Herzer, Holger Strulik, and Sebastian Vollmer. “The long-run determinants of fertility: one century of demographic change 1900–1999”. In: Journal of Economic Growth 17.4 (2012), pp. 357–385.

Dierk Herzer and Sebastian Vollmer. “Inequality and growth: evidence from panel cointegration”. In: The Journal of Economic Inequality 10.4 (2012), pp. 489–503.

Jaroslava Hlouskova and Martin Wagner. “The performance of panel unit root and stationarity tests: results from a large scale simulation study”. In: Econometric Reviews 25.1 (2006), pp. 85–116.

Kyung So Im, M Hashem Pesaran, and Yongcheol Shin. “Testing for unit roots in heterogeneous panels”. In: Journal of econometrics 115.1 (2003), pp. 53–74.

Søren Johansen. “Statistical analysis of cointegration vectors”. In: Journal of economic dynamics and control 12.2 (1988), pp. 231–254.

Chihwa Kao and Min-Hsien Chiang. “On the estimation and inference of a cointegrated regression in panel data”. In: Available at SSRN 1807931 (1999).

Michael Kremer. “The O-ring theory of economic development”. In: The Quarterly Journal of Economics (1993), pp. 551–575.

Andrew Levin, Chien-Fu Lin, and Chia-Shang James Chu. “Unit root tests in panel data: asymptotic and finite-sample properties”. In: Journal of econometrics 108.1 (2002), pp. 1–24.

Ross Levine and David Renelt. “A sensitivity analysis of cross-country growth regressions”. In: The American economic review (1992), pp. 942–963.

N Gregory Mankiw, David Romer, and David N Weil. A contribution to the empirics of economic growth. Tech. rep. National Bureau of Economic Research, 1990.

Gangadharrao S Maddala and Shaowen Wu. “A comparative study of unit root tests with panel data and a new simple test”. In: Oxford Bulletin of Economics and statistics 61.S1 (1999), pp. 631–652.

Peter Pedroni. “Panel cointegration: asymptotic and finite sample properties of pooled time series tests with an application to the PPP hypothesis”. In: Econometric theory 20.03 (2004), pp. 597–625.

Peter Pedroni. “Critical values for cointegration tests in heterogeneous panels with multiple regressors”. In: Oxford Bulletin of Economics and statistics 61.s 1 (1999), pp. 653–670.

David Ricardo. Principles of political economy and taxation. 1817.

Paul M Romer. “The origins of endogenous growth”. In: The journal of economic perspectives 8.1 (1994), pp. 3–22.

John D Sargan. “The estimation of economic relationships using instrumental variables”. In: Econometrica: Journal of the Econometric Society (1958), pp. 393–415.

Monica Ioana Pop Silaghi et al. “Do business and public sector research and development expenditures contribute to economic growth in Central and Eastern European Countries? A dynamic panel estimation”. In: Economic Modelling 36 (2014), pp. 108–119.

Adam Smith. An Inquiry Into the Nature & Causes of the Wealth of Nations: Vol 1. 1776.

Andrea Tacchella et al. “A new metrics for countries’ fitness and products’ complexity”. In: Scientific reports 2 (2012).

Martin Wagner and Jaroslava Hlouskova. “The performance of panel cointegration methods: results from a large scale simulation study”. In: Econometric Reviews 29.2 (2009), pp. 182–223.