Economic Complexity and Human Development: Comparing Traditional and Slack Based Data Envelopment Analysis Models

Abstract

Several studies argue that economic growth cannot well explain human development. The economic complexity approach is an alternative understanding of how economic sophistication can affect well-being. Moreover, there is increasing literature using traditional Data Envelopment Analysis (DEA) models to measure the transformation of wealth into human development. However, we did not find studies comparing more advanced models, such as Slack Based Models (SBM), and which considers the economic sophistication as an input to generate human development. To fill this gap, the aim of this article is to compare traditional and SBM-DEA models, measuring the countries' efficiency in converting economic complexity into human development. We analyzed 50 countries through Data Envelopment Analysis (DEA) in 2013, comparing Constant and Variable returns of scale traditional and Slack Based models. We also proposed the Composite Index of Human Development and Economic Complexity (CIHD-EC). Our findings show that the traditional variable return of scale model tends to overestimate efficient countries. It occurs especially in developed and rich economies. In contrast, the slack-based model provides a better understanding of the problem under analysis. Finally, our CIHD-EC shows that only Singapore is efficient to transform economic complexity into human development around the world.