Aims and Introduction:

An economy that is based on simple production is under threat every moment. Therefore, one of the central strategies in the realization of economic growth and development is to rely on the production and export of complex and knowledge-based products. In complex societies, people with different knowledge must be able to communicate and combine their knowledge to produce a product. Economic complexity in relation to the composition of a country's products expresses a set of abilities to combine knowledge and skills. Therefore, societies lacking this set of abilities fail to produce complex products. Accordingly, the main goal of this article is to investigate the effect of economic complexity index on Iran's GDP.

Methodology:

In this research, seasonal data over the period 1995-2019 have been used in Iran, and Bayesian vector auto-regression (BVAR) model with Minnesota prior distribution has been used to investigate the effect of economic complexity on the level of GDP. The Bayesian vector auto-regression model provides more reliable predictions on the relationship between economic complexity and the level of GDP, due to the reduction of model parameters and the consideration of prior functions.

Results and Discussion:

The results of the instantaneous reaction function of the level of gross domestic product (GDP) to the shock of the economic complexity index (ECI) show that this shock has a negative reaction on the level of GDP. Therefore, the impact of the economic complexity index shock on the level of GDP is negative in the long term. In addition, the results show that the financial freedom index (FIS) shock increases the level of GDP in the long term. The response of GDP to the shock of the Investment Freedom Index (INV) is also very weak and almost neutral during 10 periods. The reaction of the GDP level to the shock of the business freedom index (BUS) is negative. The effect of the corruption index shock (COR) on the GDP level is negative, and the reaction of the GDP level to the bank credits to the private sector (CRDT) shock indicates the negative effect of this shock on the GDP level. The reaction of the GDP level to the inflation shock (INF) is negative during the period under review. The effect of the shock of trade openness (OPN) on the level of GDP is positive and low during 10 periods. This means that the trade openness shock increases the level of GDP in the long run. In addition, the reaction of the GDP level to the domestic direct investment (FDI) shock is positive. The results of the variance analysis also show that the shock variables of the economic Freedom Index (ECON), Foreign Direct Investment (FDI) and Inflation (INF), have the greatest impact on the GDP level, respectively. The variable shock of investment freedom index (INV) also has the least effect on the dependent variable.

Conclusion:

The results show that the economic complexity index shock has a negative effect on the GDP level. According to Kremer's O-ring theory, greater complexity with increased specialized tasks and responsibilities leads to reduced production. In other words, when the production of goods is followed in a specialized manner, there is a possibility that in some stages of production, human capital and labor will not have the necessary ability to produce goods with high complexity due to lack of knowledge and skills. As a result, it causes a decrease in the production level. Therefore, the diversity of knowledge and skills in the production of products must be accompanied by the production of complex products. Iran's low rank in the economic complexity index shows the simplicity of the economy and the existence of structural weaknesses as well as vulnerability in the production and export structure. Therefore, in order to achieve economic complexity in the export portfolio and increase the level of production of products, the process of converting theoretical and scientific knowledge into complex and knowledge -based products should be followed with appropriate foundation.