Multidimensional Economic Complexity and Fiscal Crises

TL;DR

This paper demonstrates that a multidimensional approach to economic complexity, incorporating both trade and research activities, more effectively predicts fiscal crises than single-dimension measures, emphasizing balanced development.

Contribution

It introduces a combined measure of trade and research complexity and shows its superior predictive power for fiscal crises compared to individual indices.

Findings

Interaction of complexity dimensions reduces crisis likelihood

Single-dimension indexes are less robust predictors

Balanced development across multiple complexity areas enhances resilience

Abstract

Recent studies highlight economic complexity's role in mitigating fiscal crises, often measured via an economy's trade structure. Trade, however, is just one facet of an economy's structure and omits critical innovative activities like research. Here, we investigate how a multidimensional approach to economic complexity-including both trade and research structures-relates to fiscal instability. By using data on over 230 national fiscal crises from 1995 to 2021 and hazard duration analysis, we assess how measures of trade and research complexity combine to explain crisis likelihood. We find that the interaction of complexity dimensions significantly reduces crisis probability, whereas individual indexes alone are not robust predictors. This suggests that economies focusing on a single dimension may be more vulnerable, thus highlighting the importance of balanced development across multiple areas. These findings offer valuable insights for policymakers aiming to enhance economic resilience and mitigate fiscal risks.