Varieties of Democracy and Economic Complexity in Developing and Developed Countries; A Comparative Study

Aim and Introduction Economic complexity means a country's ability to produce and export more diverse products with less inclusiveness. Societies with efficient institutions internalize externalities and direct investment in productive activities lead to increased economic complexity. Democracy, by ensuring a stable political environment, stable economic framework, and social efficiency, promotes the accumulation of human capital, investment, and sustainable economic growth. One of the main contributions in this study is using multidimensional aspect of democracy (electoral democracy, liberal democracy, participatory democracy, consultative democracy, egalitarian democracy) to investigate the effect of democracy on economic complexity. Methodology The purpose of this study is to investigate the effect of democracy on economic complexity. The data of 109 developing and developed countries during the period of 1995-2021 and a systemic generalized moments approach (SYS-GMM) have been used. The estimation also has also been done and the results compared separately for developing and developed countries. Research model based on studies (Njangang & Nvuh-Njoya, 2023) has been specified. In the present study, the 5 indicators of democracy by V-DEM database have been used including electoral democracy, liberal democracy, participatory democracy, consultative democracy, egalitarian democracy. This measure of democracy ranges from zero, which is poor quality to one which is considered to be the best quality democracy. Any increase from zero to one, indicates the improvement of democracy. The variables of economic growth, government size and population size were used as control variables in the model. The two indicators of political rights and civil liberties used to check robustness. The data is extracted from the database of Freedom House and measured from 1 to 7 in which 1 indicates the highest degree of freedom and political rights and 7 indicates the lowest level. These two indicators used to show the stability of the estimated coefficients of the research model. In order to check the robustness of the estimated coefficients, the results of the SYS-GMM estimator have been compared with the results of the two-stage generalized moments (GMM) and Feasible Generalized Least Squares (FGLS) estimators. Results and Discussion In this research, we investigate the effect of democracy on economic complexity using the systemic generalized moments approach (SYS-GMM). Democracy affects economic complexity through three paths of "innovation", "human capital" and "financial development" The results of this research show the positive and significant effect of all democracy indices on economic complexity. Moreover, the positive effect of economic growth, government size and population on economic complexity is confirmed. The stability of the estimated coefficients of the model as well as the consistency of the estimation results have been checked by the SYS-GMM estimator as a sensitivity analysis. Political rights and civil right variables were used to compare the results with democracy index. The results of the SYS-GMM estimator have also been compared with the results of the two-stage Generalized Method of Moments (GMM) and Feasible Generalized Least Squares (FGLS) estimators. The stability of the estimated coefficients has been observed in all methods. Conclusion The purpose of this study was to investigate the impact of democracy on economic complexity during the period of 1995-2021 using the systemic generalized moments approach (SYS-GMM) for 190 countries. For this purpose, from the 5 indicators of democracy (electoral democracy, liberal democracy, participatory democracy, consultative democracy, egalitarian democracy) V-DEM database was used. The research results show the effect of democracy on economic complexity can be heterogeneous compared to the initial level of economic complexity, so that democracy is associated with greater economic complexity in countries with higher economic complexity. The positive effect of democracy on economic complexity was confirmed in all models. Based on the results of the research, the coefficient of the types of democracy in developed countries is higher than the value of this coefficient in developing countries. In addition, economic growth, government size and population had a positive effect on economic complexity. To check the robustness of the model estimation we have estimated the model again using the Generalized Method of Moments (GMM) and Feasible Generalized Least Squares (FGLS). The two variables of political rights and civil rights were used instead of democracy and estimated with the Generalized Method of Moments (GMM) for all countries, as well as developing countries and developed countries. The coefficients and results have shown the stability of the estimated coefficients in all research models