The synergetic effect of economic complexity and governance on quality of life: policy thresholds

Abstract

Abstract This study aims to bridge the empirical research gap in governance-modulating effects on the link between a country’s productive structure and individuals’ well-being. In doing so, this study utilizes the economic complexity index to quantify a country’s productive structure and the social progress index to measure quality of life. The empirical strategy relies on the system-GMM approach, covering 75 developing countries from 2011 to 2021. The following conclusions were drawn from the empirical analysis. (1) Economic complexity and governance consistently and unconditionally improve quality of life. (2) Governance substantially modulates economic complexity to enhance quality of life, generating an overall positive net effect. (3) The results remain robust and consistent across several GMM specifications, regardless of whether the six governance indicators compiled by the World Bank were clustered using principal component analysis into four categories (i.e., general, political, economic, and institutional) or used individually. (4) Of the six governance indicators, government effectiveness, the rule of law, and control of corruption were found to be particularly significant, as were economic and institutional governance. (5) An additional threshold analysis was implemented to identify the critical governance levels that further improve quality of life. The thresholds for complementary policies are then established as follows: 0.8435, 1.846, and 1.717 for government effectiveness, rule of law, and corruption control, respectively, and 5.59, 3.14, and 3.32 for general, institutional, and economic governance, respectively. Consequently, economic complexity and governance are necessary and sufficient to improve well-being below these thresholds. Complementary policies are, however, necessary to sustain the overall positive impact beyond these thresholds. The findings of this study provide insights into complementary policies for leveraging economic development to improve the well-being of developing countries.