The role of complex analysis in modeling economic growth

TL;DR

This paper explores how complex analysis and the concept of economic fitness, derived from network techniques, can enhance understanding of economic growth determinants, revealing fitness as a crucial and sometimes dominant factor.

Contribution

It introduces the use of economic fitness from complex network analysis into growth models, bridging economic growth theories with economic complexity literature.

Findings

Economic fitness significantly influences growth outcomes.

Fitness can complement or overshadow traditional growth drivers.

Empirical evidence supports the importance of capabilities in growth.

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, we build a bridge between economic growth theories and the economic complexity literature. Our findings, in agreement with other recent empirical studies, 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.