How do countries deal with global uncertainty? Domestic ability to absorb shock through the lens of the economic complexity and export diversification

Abstract

This study examines the extent to which countries’ economic complexity and export diversification can help them to absorb external shocks in a context of global uncertainties. Our findings show that countries are vulnerable to external shocks of commodity prices and geopolitical risk. Furthermore, a higher economic complexity reduces the economic growth volatility and the misery index (sum of inflation and unemployment)—however, a higher export diversification can also only reduce the economic growth volatility while it indices higher misery index. Interestingly, countries with a higher economic complexity appear to be more vulnerable to external shocks, while countries with higher export diversification seem to be less vulnerable in terms of misery index. This study further analyses the roles of economic complexity and export diversification during two periods, pre- and post- the 2008 global financial crisis. Our results show that both associations of economic complexity and export diversification with external shocks are reduced in the post crisis period. This implies that the economic complexity seems to generate a higher vulnerability to global shocks in the pre- crisis time, while export diversification can help countries to absorb the consequences of such crisis.