Institutional Quality and Human Capital as Drivers of Non-Linear Export Complexity: Global Evidence

Abstract: This study investigates the dynamic synergy between human capital, institutional quality and trade openness, and the impact of this synergy on export complexity across a global panel of 143 countries from 1998 to 2024. Utilising a two-step GMM estimator, the research identifies a substitution effect between labour quality and governance. Initial level estimations revealed an explosive path-dependency in trade structures (autoregressive coefficient of 1.14), necessitating a pivot to a first-difference estimation. The preferred model indicates that while human capital and institutions independently drive complexity growth, their interaction is negative and significant, suggesting that education initially acts a a bypass mechanism for industrial sophistication in weak-institution economies. Furthermore, while long-term debt levels may signal structural stagnation, the level of capital access is found to be a significant catalyst for complexity expansion. These findings offer a new framework for improving economic complexity efficiently in developing economies | DOI: 10.2139/ssrn.6678498