The Relationship Between Growth and Economic Complexity: Evidence from Southeastern and Central Europe

The index of economic complexity is created by analyzing the relations between countries and the products they export. Constructed in such way, it defines the basis for the theory of economic complexity, which reflects the knowledge embedded in the productive structure of an economy. Exactly this knowledge is at the core of the endogenous theory of economic growth. Until now, all econometric analyses for the relationship between economic complexity and growth were done by implementing methods in which each country is valued equally. However, the countries are heterogeneous – they exhibit individual characteristics that directly encourage the complexity, and are in tight relation with growth. Therefore, in this paper the analysis is faced towards one region - Southeastern and Central Europe, and, in the spirit of the endogenous theory, a model is created which adequately captures the long run, as well as the short run relationship between the two variables. The results show that the economic complexity is a statistically significant explanatory variable of growth on the long run, and thus, it creates enormous economic implications. Contrarily, on the short run the productive knowledge has no effect on the income changes in Southeastern and Central Europe. All of this implies that the economic complexity reveals a structure which promotes development of long run strategies in the countries for inventing products. These strategies serve for the purpose of accumulating new capabilities that will help in creating and maintaining long term prosperity and economic growth.