A New Indicator of Economic Complexity to Guide Industrial Policies Open Access
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The Economic Complexity Index (ECI) is an indicator that can be used by countries with undiversified economies to measure the success of their efforts to grow and diversify their exports, in order to sustain their economic development. However, the index is distorted for countries with undiversified economies that are heavily dominated by a few sectors, such as the case of Saudi Arabia with its oil sector. This study leverages lessons from the economic development literature, and focuses on the export-oriented growth in East Asia, and investigates the role of industrial policies that guide and coordinate the government interventions and initiatives. The study applies lessons from the Economic Complexity framework to overcome the limitation in the Economic Complexity Index. The study then utilizes data analysis techniques to develop a modified ECI utilizing a population-adjusted version of the Revealed Comparative Advantage to normalize countries’ exports by their significance, and uses PageRank to capture the product space network information instead of the method of reflection used by ECI which is incompatible with the population-adjusted Revealed Comparative Advantage. The modified ECI can serve as a leading indicator that would allow tracking the success of the economic diversification efforts in countries whose economies are dominated by a few products or sectors, and thereby influence the development of their industrial policies.