No abstract

In this paper, we analyze the relationship between economic complexity and environmental performance using annual data on 88 developed and developing countries for the period of 2002–2012. We use the Economic Complexity Index, which links a country’s productive structure with the amount of knowledge and know-how embodied in the goods it produces, and the Environmental Performance Index as a measure of environmental performance. We show that moving to higher levels of economic complexity leads to better overall environmental performance, which means that sophistication of exported products does not induce environmental degradation. Nevertheless, we find that the effect of economic complexity on air quality is negative, i.e., exposure to PM2.5, CO$$_2$$ 2 , methane and nitrous oxide emissions increases, and these findings are robust across alternative econometric specifications.

Backed by strong empirical results, obtained from several different specification and sensitivity analyses, this paper contends that countries with high-intellectual quotient populations produce and export more sophisticated/complex products. This result is further reinforced by the quality of democracy.

Taxation policies can explain the differences in countries’ capacity to produce and export more sophisticated products. We develop a theoretical model considering elements from standard models of economic growth to highlight that a country’s productive structure is implied by the appropriate fiscal policy that is necessary for the development of sophisticated products. We show that economies that rely less on capital relative to labor taxation tend to produce more complex products, while countries that rely more heavily on capital relative to labor taxation produce simple products. These relationships remain robust across alternative econometric specifications. Furthermore, we demonstrate the differential effect of a country’s level of economic development on the nexus between the structure of taxation and economic sophistication. We show that the negative impact of capital taxes on economic sophistication becomes stronger for countries that are more developed.