Rethinking the literature on economic complexity indexes

Economic Complexity Indexes have gained prominence but exhibit conceptual and empirical shortcomings. This study delineates four primary deficiencies in the economic complexity literature and introduces a novel framework to fill these gaps. The deficiencies include (1) the absence of a formal, explicit definition, (2) the lack of a theoretical framework, (3) biases stemming from using gross exports in algorithms, and (4) inconsistencies between motivational concepts and estimation methods. The proposed framework defines product complexity as the latent sophistication inherent in goods production and country complexity as the weighted sum of a country’s export specialization, with weights reflecting product complexities. Therefore, its scope is limited to countries’ export competitiveness. Both product sophistication and country specialization depend on national technology levels. The empirical approach, termed the Technology-Based Economic Complexity Algorithm (TBECA), employs supervised principal component analysis of export specialization and country-level total factor productivity to estimate unobserved product and country complexities. TBECA ensures consistency in meaning and methodology, demonstrating robust predictability and stability for forecasting countries’ total factor productivity based on export composition.