The Evolution of Economic Complexity: Policy Implications of Global, Regional, and Country-Specific Factors

Abstract

This study analyzes the contributions of global, regional, and country-specific factors to the evolution of economic complexity, using a dynamic factor model with time-varying parameter and stochastic volatility for 48 countries from 1965 to 2022. The global factor dominated complexity from 1970s to early 2000s, but weakened significantly in recent decades. Meanwhile, regional factors have gained prominence in Europe but weakened in Asia-Pacific and Latin America. Notably, Asian Tigers and fast-industrializing economies seem exhibiting highly idiosyncratic complexity dynamics, representing the role of endogenous development strategies. Future complexity gains therefore can depend on adaptive and targeted industrial strategies to sustain structural transformation.