Economic Complexity and Income Inequality: Does Country Risk Matter?

Abstract

This research sets out to determine the nexus among economic complexity (ECI; which reflects a country’s productivity), income inequality, and country risk and whether country risk affects the complexity-inequality nexus. By applying balanced panel data of 43 countries from 1991 to 2016 to a data-driven econometric methodology-finite mixture model, we provide fresh insight into this relationship from the perspective of country risk. The results indicate that the two-group finite mixture model is able to best fit our data, and that increasing economic complexity has no impact on income inequality in group A, whereas improving the structure of productivity mitigates the income gap in group B. Furthermore, country risk and the subcomponents of the former (i.e., economic risk, financial risk, and political risk) all exert effects on the complexity-inequality nexus. Specifically speaking, an increase in ECI is associated with more equal income distribution in a country with low country risk, while the improvement in productive structure cannot improve an unequal income distribution in countries under high country risk. Finally, it is noteworthy that the finite mixture model also captures information about the transformation of this nexus, with evidence demonstrating that 5 countries experience a variation in their complexity-inequality relationship over the sample period.