State Capacity and Economic Complexity

• In Event: State Capacity and Taxation

Abstract

The literature on developmental states has advanced numerous arguments about when states are able to transform their economies through programs of rapid industrialization, capital accumulation, and productivity growth. A central claim in this line of research is that the success of such programs of state-led development is conditional on the quality of state institutions, especially the capacity of the state to effectively implement its policy goals. Thus far, most of this research has relied on qualitative case studies due to the lack of reliable panel data on state capacity and economic transformation. This paper leverages two new datasets that help us address this gap in the literature for a global sample of countries from 1960 to 2017. We examine under what conditions states not only facilitate short-term economic growth but can also foster more fundamental changes in the economic structure. To do so, we evaluate the relationship between state capacity and changes in the complexity of a country’s export portfolio, that is, how diversified and sophisticated its exports are relative to the rest of the world. To our knowledge, this is the first statistical analysis of the institutional determinants of economic complexity. We find evidence that on average higher levels of state capacity are associated with larger increases in economic complexity over five-year periods. However, consistent with previous findings, this relationship tends to play out differently depending on a country’s distance from the technological frontier. Moreover, these datasets also allow us to explore whether specific dimensions of state capacity are associated with the development of specific economic sectors.

Authors

• Jonathan Hanson, University of Michigan

• Agustin Alonso Goenaga Orrego, Lund University