Title: Linking Economic Complexity, Institutions and Income Inequality
Author: Hartmann, Hidalgo et al
Scope: 3 stars
Readability: 2 stars
My personal rating: 4 stars
See more on my book rating system.

Topic of Article

The researchers examine the relationship between economic complexity and income inequality.

Key Take-aways

• Nations with complex economies tend to have less unequal distribution of income.
• Nations that gain expertise in producing more complex products, lower their levels of inequality

Important Quotes from Book

We contribute to the literature on economic complexity, income inequality, and structural transformations, by documenting a strong, robust, and stable correlation between a country’s level of economic complexity (as proxied by the Economic Complexity Index) and its level of income inequality during 1963–2008… Moreover we find that, over time, countries that experience increases in economic complexity are more likely to experience decreases in their level of income inequality.

We can understand the coevolution between productive structures, institutions, and

human capital, by assuming a model of heterogeneous firms in which firms survive only when they are able to adopt or discover the institutions and human capital that work best in the industry that they participate in. This model assumes that institutions are to a significant extent created at work and depend on the type of industry. This assumption is extremely likely, because on the one hand, people learn to interact and collaborate with others in work settings, and on the other, there are clearly marked differences in the institutions (or culture) of different sectors.

Therefore, we argue in this paper that countries exporting complex industries tend to be more inclusive and have lower levels of income inequality than countries that are exporting simpler products. Some countries may be able to achieve comparable high levels of average income based on natural resources, but those comparably high levels of income will rarely come with inclusive institutions when they are not the result of sophisticated industrial structures.

The products associated with the highest levels of income inequality (high PGI) mainly consist of commodities, such as Cocoa Beans, Inedible Flours of Meat and Fish, and Animal Hair. Low PGI products, on the other hand, include more sophisticated forms of machinery and manufacturing products, such as Paper Making Machine Parts, Textile Machinery, and Road Rollers.

This means that complex products—such machine parts or electronic equipment for industrial chains or I-Phones, robots, or 3D printing devices—tend to be produced in more equalitarian countries than simpler and resource-exploiting products like cocoa beans or copper. It is common sense that complex products require a larger network of skilled workers, related industries, and inclusive institutions making the economic competitiveness of these products possible, than simpler industrial products and resource exploiting activities whose competitiveness is mainly based on resource richness, low labor costs, routinized activities, and economies of scale.

Related Books and Articles

• “Atlas of Economic Complexity: Mapping Paths to Prosperity” by Hausmann, Hidalgo et al
• Observatory of Economic Complexity (this is a free online website displaying data related to economic complexity)
• “The Product Space Conditions the Development of Nations” by many
• “Dynamic of Economic Complexity over a 42 Year Period” by Cesar Hidalgo
• “Economic Development as Self-Discovery” by Hausmann and Rodrik
• “Discovering Southern and East Africa’s Industrial Opportunities” by Cesar Hidalgo
• “Shooting High or Low: Do Countries Benefit from Entering Unrelated Activities” by many