Growing through knowledge: examining the knowledge–complexity relationship in Africa

Abstract

The limited diversification and sophistication of productive structures across African countries are often cited as fundamental reasons the continent remains in a ‘poverty trap.’ Our study examines the extent to which African countries can leverage the knowledge economy to diversify production structures and propel the continent out of this ‘poverty trap.’ Using principal component analysis, we create four indexed measures of the knowledge economy, capturing the four pillars defined by the World Bank, to investigate the knowledge-complexity relationship for 36 African countries between 2000 and 2021. Our empirical analysis, based on generalized methods of moments (GMM) and panel threshold regression – generalized methods of moments (PTR-GMM) estimators, reveals three key findings. Firstly, the institutional (technology) indexes have a linear and positive (insignificant) impact on economic complexity for all African countries. Secondly, the educational index has a linear and positive (nonlinear and U-shaped) relationship with economic sophistication for lower (higher) income countries. Lastly, the innovation index has an insignificant (nonlinear and U-shaped) relationship with economic complexity for lower (higher) income countries. Overall, our study shows that most African countries are not positioned to effectively use all four pillars of the knowledge economy to improve their levels of economic complexity.