Abstract
Development and growth are complex and tumultuous processes. Modern economic growth theories identify some key determinants of economic growth. However, the relative importance of the determinants remains unknown, and additional variables may help clarify the directions and dimensions of the interactions. The novel stream of literature on economic complexity goes beyond aggregate measures of productive inputs and considers instead a more granular and structural view of the productive possibilities of countries, i.e., their capabilities. Different endowments of capabilities are crucial ingredients in explaining differences in economic performances. In this paper we employ economic fitness, a measure of productive capabilities obtained through complex network techniques. Focusing on the combined roles of fitness and some more traditional drivers of growth—GDP per capita, capital intensity, employment ratio, life expectancy, human capital and total factor productivity—we build a bridge between economic growth theories and the economic complexity literature. Our findings show that fitness plays a crucial role in fostering economic growth and, when it is included in the analysis, can be either complementary to traditional drivers of growth or can completely overshadow them. Notably, for the most complex countries, which have the most diversified export baskets and the largest endowments of capabilities, fitness is complementary to the chosen growth determinants in enhancing economic growth. The empirical findings are in agreement with neoclassical and endogenous growth theories. By contrast, for countries with intermediate and low capability levels, fitness emerges as the key growth driver. This suggests that economic models should account for capabilities; in fact, describing the technological possibilities of countries solely in terms of their production functions may lead to a misinterpretation of the roles of factors.
Highlights
Why are some countries wealthier than others, and why do some countries exhibit sustained rates of growth over long periods, whereas others appear to be stuck in a low-income, low-growth path?These questions have been central to economics ever since its origin as a science, following AdamSmith’s [1] original enquiry
As discussed in the previous sections, the economic complexity approach has a structural interpretation in terms of growth and development, understood as the outcomes of a learning process through which new capabilities are added to the existing pool, opening up new and more complex productive possibilities, which will eventually lead to higher prosperity and faster economic growth
This paper builds a bridge between the economic complexity and the economic growth literature, and through a non-parametric analysis, it shows that complex network theory can be a powerful tool to understand the process of growth
Summary
Why are some countries wealthier than others, and why do some countries exhibit sustained rates of growth over long periods, whereas others appear to be stuck in a low-income, low-growth path?. Later developments in endogenous growth theories identify the main drivers of long-run growth in investment in education in the presence of externalities from human capital accumulation [12], expenditure in research and development in a stochastic Schumpeterian model of creative destruction [13] or the openness of the economy to international trade through learning-by-exporting [14,15]. A novel approach to the analysis of economic growth, goes beyond aggregate measures of the production inputs and considers instead a more granular and structural view of the production possibilities of the economy This approach examines the possible role of capabilities, which could be defined as a broad set of skills that could adapt to changing production requirements and which facilitate the introduction of new technologies. Tacchella et al [43] further developed this approach to growth forecasting and out-performed the accuracy of the IMF five-year forecasts by more than 25%
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