Unraveling the Effects of Economic Complexity on Governance in Developing Countries. New Evidence from Instrumental Variable Quantile Regression Estimates

Abstract

This study examines the effect of economic complexity on governance indicators. We use instrumental variable quantile regression to estimate a panel data model for 78 developing countries over the period 2000–2019. The results show that there is a positive relationship between economic complexity and overall governance; however, the effect varies according to the distribution of the different governance indicators. More specifically, our results show that economic complexity improves political governance only for the higher quantiles. The effect varies positively along the distribution of economic governance. For institutional governance, the effect of economic complexity is statistically significant for the median and upper quantiles. Our results also allow us to show that the effects of economic complexity on governance differ significantly between quantiles of the distribution in low- and middle-income countries. Finally, human capital, FDI inflows and reductions in income inequality are the channels through which economic complexity affects governance.