Abstract
Recent research on the effects of the productive structure of an economy has turned to examining whether economic complexity is associated with lower income inequality. In contrast to the commonly adopted approach that estimates the impact of economic complexity in a cross-country setting, we use panel data for Brazilian states to identify the relationship between economic complexity and income inequality at the sub-national level. Our findings show that the relationship between economic complexity and income inequality has an inverted U-shape, indicating that growing levels of complexity first worsen and then improve the income distribution in Brazilian states. Our findings also show that this relationship is particularly prominent in those states that have relatively high levels of urbanization and overall development. Furthermore, we identify separate effects on income inequality from the degree to which regional productive structures are characterised by diversity in terms of industries and occupations. These effects are particularly pronounced in less developed states with a more rural character. In combination, these findings confirm the important role that the productive structure plays in processes that drive improvements in income distributions and suggest that more research on this impact is warranted at the regional level.
Highlights
The notion that the productive structure and the structural transformation of an economy play important roles in processes of economic growth and development can be traced back to original contributions by economists including Rosenstein-Rodan [1], Prebisch [2] and Singer [3]
In line with this interpretation, it is likely that countries with a higher level of economic complexity are characterised by higher growth and that increases in economic complexity exercise a positive effect on economic growth rates
We find that industry and occupational diversity exercise additional effects on income inequality, further strengthening the notion that the regional productive structure constitutes an important factor in processes impacting on the distribution of income in Brazilian states
Summary
The notion that the productive structure and the structural transformation of an economy play important roles in processes of economic growth and development can be traced back to original contributions by economists including Rosenstein-Rodan [1], Prebisch [2] and Singer [3]. Brazil can be seen to be representative of a substantial number of countries in the world economy who, whilst according to their average income can be classified as lower-middle or upper-middle income countries, are still facing relatively high levels of poverty and income inequality These countries are often characterised by marked regional differences in terms of income and inequality, further supporting our focus on analysing the relationship between economic complexity and income inequality at the regional level. In section five we present our main empirical findings, which show that the relationship between economic complexity and income inequality follows an inverted U-shape, indicating that growing levels of complexity first worsen and improve the income distribution in Brazilian states This relationship is prominent in states with a relatively high level of urbanisation and overall development.
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