Economic Complexity and Growth: Can value-added exports better explain the link?

TL;DR

This paper proposes a new method to measure economic complexity based on value-added exports, which provides more accurate rankings and better explains GDP growth than traditional gross export-based metrics.

Contribution

It introduces an innovative empirical approach to assess economic complexity through value-added exports, improving upon existing gross export-based measures.

Findings

Value-added export-based complexity rankings differ significantly from traditional metrics.

The new complexity measure better explains GDP per capita growth.

The approach enhances understanding of the link between complexity and economic growth.

Abstract

In economic literature, economic complexity is typically approximated on the basis of an economy's gross export structure. However, in times of ever increasingly integrated global value chains, gross exports may convey an inaccurate image of a country's economic performance since they also incorporate foreign value-added and double-counted exports. Thus, I introduce a new empirical approach approximating economic complexity based on a country's value-added export structure. This approach leads to substantially different complexity rankings compared to established metrics. Moreover, the explanatory power of GDP per capita growth rates for a sample of 40 lower-middle- to high-income countries is considerably higher, even if controlling for typical growth regression covariates.