Linking Economic Complexity, Institutions and Income Inequality

The mix of products that a country exports predicts that country’s 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 that export complex products – products that are exported by a few diversified countries – have lower levels of income inequality – at comparable levels of GDP per capita and education – than countries exporting simpler products. Using multivariate analysis we show that the connection between income inequality and economic complexity is stronger than what can be explained using aggregate measures of income, institutions, export concentration, and human capital, and also, that increases in economic complexity are accompanied by decreases in income inequality over long periods of time. Finally, we use the position of a country in the network of related products – or product space – to explain how changes in a country’s export structure translate into changes in income inequality. We interpret these results by combining the literature in institutions with that on economic complexity and structural transformations. We argue that the connection between income inequality and economic complexity is also evidence of the co-evolution between institutions and productive activities.

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