ECONOMIC CONVERGENCE IN AFRICA PUT TO THE TEST OF PRODUCTIVE COMPLEXITY: AN EMPIRICAL ANALYSIS USING SYSTEM GMM PANEL DATA AND MARKOV CHAINS

Abstract To assess the phenomena of structural transformation in economies and the phenomenon of the middle-income trap, we have used Hausmann and Hidalgo’s conceptualization of economic complexity, a process based on 36 African countries over the period 1995-2023. To eliminate endogeneity errors and the bias caused by the lagged dependent variable as an explanatory factor, we employ the panel data system GMM estimations method. The empirical findings confirm the existence of conditional convergence as well, and the Economic Complexity Index appears to be an important accelerator, especially for countries at intermediate complexity levels. The analysis further uncovers a synergistic effect of institutional quality and economic complexity, whereby strong governance magnifies growth returns (through increased productive capabilities). The Markov chain analysis shows very high levels of structural inertia, most countries in the sample remain stuck in low or intermediate complexity classes over the long term and find it difficult to migrate to the next complexity class. The results agree with the hypothesis that every economy will progress toward a per capita income that captures its unique complexity level. Put simply, the capacity of an economy based on knowledge, expertise and know-how will dictate its processes of structural change. Therefore, sustainable convergence in Africa is not necessarily automatic, but is contingent on the strategic integration of institutional reform and strategic industrial policies targeted toward promoting productive diversification and capability accumulation.