Analyzing the Effect of Economic Complexity on Income Inequality in Iran

Document Type : Research Paper

Authors

1 Assistant Professor of Economics Razi University, Kermanshah, Iran

2 M.A. of Economics, University of Mazandaran, Sari, Iran.

3 M.A. of Economics, University of Tehran, Tehran, Iran.

4 M.A. of Economics, University of Shahid Beheshti, Tehran, Iran.

10.22103/jdc.2022.18973.1203

Abstract

Objective: In recent decades, rapid economic growth and increasing inequality have become two of the most pioneer phenomena in the world. Although better economic conditions lead to a significant reduction in poverty and a significant increase in social welfare, increasing income disparity has been raised as a concern. The evidences suggests that rising inequality can reduce investment, consumption, and growth by fueling economic, financial, and political instability. One of the concepts that has received much attention in recent years and justifies the difference between rich and poor countries is the issue of economic complexity. Economic complexity reflects the knowledge and skills of a country's manpower in the production process, in order to produce more advanced and complex products in the international competition, the need to achieve higher economic growth and consequently to be on the path of progress and development; Economic growth that, by employing skilled and knowledgeable people, can increase their level of well-being and reduce income inequality.
Method: the present study investigates the effect of economic complexity on income inequality in Iran during 1995- 2020 period by using ARDL model. So dependent variable is income inequality and we use gini coefficient for it and independent variables are economic complexity, government expenditure growth, real income per capita growth, inflation and poverty rate. Therefore, the main hypothesis of this study is that: economic complexity has a positive effect on income inequality. Government expenditure, per capita income, inflation and poverty are other variables used in this research. According to the dependent variable, the Gini coefficient data from Central Bank of Iran website has been used to measure income inequality. Economic complexity data are collected from the MIT Media Lab's Observatory of Economic Complexity and are based on international trade data linking countries to exported products. The variable data of government expenditures, including the aggregation of construction and current government expenditures, were collected from the website of the Central Bank of Iran. The variable data of per capita income was also extracted from the World Bank, in order not to have problems with the variable of inflation, these data were collected in real terms. Inflation variable data, including Iran's inflation rate, was collected from Staticta website. The variable poverty data also includes the poverty rate of Iran for the years 1995 to 2020, which was collected from the study of Salehi Esfahani (2020) who worked on this field. Based on this study, poverty rate reports in developed countries indicate that the poverty rate is determined based on the income threshold of households in rural and urban areas; The World Bank suggests $5.50 as the poverty line (income threshold) for middle-income countries. Based on this, if the average household income for a country is higher than the specified income threshold, the said country is considered rich, and if the average household income is lower than the specified income threshold, the country in question is considered poor.
The poverty rate is usually reported annually. But in Iran, this statistic is not officially published, because Iran's social protection system is not based on income data, therefore, in this article, similar to the study of Salehi Esfahani (2017), a set of lines based on the proposed method and implementation It is used for rural and urban areas in the province and then the entire country to estimate the poverty rate.
 Results: Theoretical results indicate that as Iran improves in terms of economic complexity index, it can achieve a higher level of expertise by using diverse and unique production knowledge and produce more advanced and sophisticated products. This higher specialization, which is achieved by economic complexity, will increase the income of the poor in society and thus reduce income inequality by increasing productivity. The results of the estimates also indicate that the index of economic complexity in Iran has had a negative and significant effect on income inequality.
Conclusion: Corruption and poverty can be curbed by diversifying exports and improving quality and ensuring the competitiveness of domestic goods and creating a competitive foreign exchange market in the economy. And also, by improving and diversifying exports, the instability and fluctuation of key prices and inflationary expectations can be curbed and stabilized so that peace and trust reign in the economy and make the prospect of high-quality productive activities.Finally, the results of this study do not imply that economic complexity as an independent and unique indicator affects income distribution; rather, economic complexity should be seen as a reflection of the productive, institutional, educational and capital capabilities of an economy.Economic complexity reflects the platforms of cooperation, distribution of knowledge, the ability to create a network of productive skills and knowledge, and as a result, the expansion of investments and acceptance of new technologies and new job opportunities, which increases the country's ability to it promotes production and reduction of inequality.

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References

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History

  • Receive Date: 15 February 2022
  • Revise Date: 01 July 2022
  • Accept Date: 06 July 2022

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