Pandemics and Economic Complexity: A Cross-Country Analysis

Abstract

This paper is the first attempt to empirically examine the impact of pandemics on economic complexity in a cross-country setting. We employ a unique and recently developed measure of pandemic intensity, which is the World Pandemic Discussion Index. Using panel-corrected standard error regressions on a panel dataset of 90 countries from 1996 to 2019, we find that an increase in pandemic discussion could reduce economic complexity. Further heterogeneity tests show that this detrimental effect of pandemics only occurs in emerging and low-income countries, or in countries with low levels of institutional quality. By using mechanism analysis, we also find that pandemics reduce economic complexity via deteriorating the quality of human capital. These findings are robust to a comprehensive battery of robustness and sensitivity checks. Overall, our paper could provide valuable implications for policy makers in devising measures to support the economic recovery process post-pandemics.

KEYWORDS:

• Economic complexity
• pandemics
• institutional quality
• human capital

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 Prior literature produces mixed results depending on a particular pandemic or sample period studied, or a particular region or research method conducted. For example, Epstein (2000) and Clark (2007) show that Bubonic plague have a positive effect on knowledge and innovation in Europe and Far East. Similarly, Levenson-Keohane (2016) find that the Ebola pandemic could spur innovation in West Africa from 1997 to 2015. Wallace and Rafols (2018) document a positive association between Avian influenza and knowledge creation in a worldwide sample from 2003 to 2016. Bresalier (2012) explains how the Spanish influenza pandemic of 1918–1919 brought changes in the modernization of British medicine.

2 https://atlas.cid.harvard.edu/

3 As a comparison, the MIT’s Observatory of Economic Complexity only covers 44 countries while Tacchella et al. (2013) has data for about 50 countries

4 The human capital index obtained from Penn World Tables (the latest version 10.01) is only available from 1950 to 2019.

5 One may concern that epidemics/pandemics only occur in emerging or low-income countries, thus leading to potential biases in our estimates. However, the data also documents a number of epidemic episodes in advanced economies, such as SARS in France, Singapore, Japan, South Korea, the United States, among others during the 2002–2005 period, or the 2015 MERS outbreak in South Korea, the H1N1 and influenza A outbreaks in Japan (2009), the autochthonous dengue fever outbreak in Japan (2014), etc.

6 Indeed, due to the COVID-19 outbreak, the global WPDI surges to the highest score of 416 in Q2/2020, which is about 16 times higher than the second-highest level of 25.07 in Q4/2014.

7 We also estimated the baseline model with winsorized variables at 5% on both tails and the results are still consistent with our main findings. The estimation results are not presented to save space.

8 All the results in this sub-section are robust to the same set of robustness and sensitivity checks as described in sub-section 3.3. Results of the tests are presented in Table A2 in the Appendix.

9 All the results in this sub-section are robust to a similar set of robustness and sensitivity checks as described in sub-section 3.3. Results of the tests are presented in Table A3 in the Appendix.

Additional information

Notes on contributors

Dinh Trung Nguyen

Dr. Dinh Trung Nguyen is currently a senior lecturer at the Faculty of Finance and Banking – VNU University of Economics and Business, Hanoi, Vietnam. His research interests are risk management in financial institutions, corporate governance, financial markets, and macroeconomics modelling. He has published papers in high-quality economics and finance journals such as Journal of Environmental Management and Finance Research Letters.

Kim Thanh Duong

Kim Thanh Duong (MSc) is a lecturer at the East Asia University of Technology, Hanoi, Vietnam. Her research interests include economic development, social economics.

Huong Thi Thu Phung

Huong Thi Thu Phung (MSc) is a lecturer at VNU University of Economics and Business, Hanoi, Vietnam. Her research interests include commercial bank management, corporate finance, and financial markets.

Mai Quynh Ha

Mai Quynh Ha (MSc) is a lecturer at VNU University of Economics and Business, Hanoi, Vietnam. Her research interests include financial markets and corporate governance.