Economic complexity, human capital and income inequality: a cross-country analysis
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Economic complexity, human capital and income inequality: a cross‑country analysis Kang‑Kook Lee1 · Trung V. Vu2 Received: 7 September 2018 / Revised: 28 July 2019 / Accepted: 1 August 2019 © Japanese Economic Association 2020
Abstract This paper investigates the relationship between economic complexity, a measure of economic structures, and income inequality. Using cross-country OLS regression analysis, we show that countries with economic structures geared toward complex products have less inequality. Human capital is found to magnify this correlation but with subtle interaction effects. Concerns about endogeneity bias in the OLS estimates stemming from reverse causality motivate us to estimate a dynamic panel data model, using a system GMM estimator. From the system GMM estimates we find that an increase in economic complexity provokes higher inequality, not less. Keywords Economic complexity · Human capital · Income inequality · System GMM JEL Classification F16 · F40 · O11 · O15
1 Introduction Since the 1950s, there has been an intense discussion of the relationship between economic development and income inequality, following the path-breaking paper of Kuznets (Kuznets 1955). This line of research attempts to verify empirically the well-known inverted U-shaped “Kuznets curve”, in which economic development at first increases inequality but eventually reduces it. Findings remain inconclusive, with some papers providing empirical support for the Kuznets hypothesis (Ahluwalia 1976; Barro 2008), others finding support for only the downward sloping part of the curve (Perotti 1996; Galbraith 2007; Palma 2011), and still others refuting any systematic relationship between economic growth and the level of income inequality (Deininger and Squire 1996). * Trung V. Vu [email protected]; [email protected] 1
Faculty of Economics, Ritsumeikan University, Shiga, Japan
2
Department of Economics, University of Otago, Dunedin, New Zealand
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The Japanese Economic Review
A glaring limitation of the above strand of literature is that scholars have typically made use of aggregate indicators of economic development, such as GDP or the total contribution to GDP of agriculture, manufacturing or services (Hartmann et al. 2017). Economists, however, contend that an aggregate monetary measure of economic size is an inadequate proxy for economic development when it comes to explaining variations in income inequality (Kuznets 1973; Stiglitz et al. 2010; Sbardella et al. 2017; Hartmann et al. 2017). The basic problem with aggregate monetary measures of economic development is that economic outcomes depend on what a country produces and exports. Development indicators based upon broad categories, therefore, fail to capture effectively the complexity level of what is produced.1 By contrast, economic performance is not necessarily uniform across the diverse range of products. Analysis of the relation between economic development and income inequality requires a disaggregated approach.
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