How does economic complexity influence income inequality? New evidence from international data

Abstract

This paper examines the relationship between economic complexity and income inequality. Using panel data on eighty-eight countries from 2002 to 2017 and two estimation methods, this paper finds that economic complexity is significantly associated with higher income inequality. Moreover, because building economic sophistication is a long and costly process, we further identify whether the changes in the nature of this relationship is conditional on the evolution of other economic and social factors. The results provide qualified evidence that when the level of education, government spending, and trade openness reach certain thresholds, they facilitate the beneficial aspects of higher economic complexity on reducing with income inequality. Conversely, in an environment with less education, ineffective government spending, and low economic openness, economic complexity fails to reduce income inequality. Our findings are relevant for policymakers in tailoring their policies toward combating inequality in the process of developing a knowledge-based economy.