Understanding the impact of economic complexity on balance of payments across countries

This study examines the long-term effects of the economic complexity index (ECI) on the current account balance in 66 countries from 1995 to 2021.Economic complexity, reflecting a country's knowledge, technological capabilities, and skill sets in production and exports, influences the current account balance differently based on its economic structure and development stage.The empirical approach includes tests for homogeneity, cross-sectional dependence, unit roots, and cointegration, with long-term coefficients estimated using the augmented mean group (AMG) estimator.The findings reveal that while higher economic complexity generally exerts a negative effect on the current account balance, this relationship varies significantly across economies.In advanced economies like the United States and the United Kingdom, increased economic complexity positively influences the current account balance, likely due to their advanced industrial structures and robust technological infrastructures.In contrast, in middle-income economies such as Turkey, Poland, and Sweden, the relationship is negative, highlighting challenges related to competitiveness in sophisticated product markets.These divergent outcomes emphasize the need for country-specific policies that account for economic structures and development levels when leveraging economic complexity for external balance improvements.The study contributes to the existing literature by addressing a relatively underexplored relationship between economic complexity and the current account balance, offering both theoretical insights and actionable policy recommendations.