Determinants of Economic Complexity in Transitional Economies

Abstract

Which country is more developed? Which country's foreign trade policies are more rational? In a globalized world, which country has higher added value and competitiveness in its exports? Questions like this are not easy to answer. Because there are many criteria for measuring the development of the economy and foreign trade of countries. In this context, an important index called The Economic Complexity Index (ECI) was created by Hidalgo and Hausmann to measure and compare the development of the country's economies and foreign trade. For this purpose, we test whether economic growth, foreign direct investment, Human Development Index, Economic Freedom Index cause economic complexity, vice versa in this study. We analyze annual data for the period 1996-2017 for 22 countries called Transitional Economies using the panel causality method. Considering all of Transitional Economies, according to the results of the Bootstrap Granger causality test, we were not able to determine a Granger causality relationship between  economic growth, foreign direct investment, Human Development Index, Economic Freedom Index and Economic Complexity Index. However, when we consider country-specific variables defined as Transitional Economies, we identify both one-way and two-way Granger causal relationships in some countries between economic growth, foreign direct investment, Human Development Index and Economic Freedom Index, and Economic Complexity Index. Therefore, some Transitional Economies need to increase their level of economic complexity to get a larger share from global added value and increase their competitiveness. In this context, economic complexity needs to be taken more seriously by both scientists and policymakers, and decision-makers.