Is Financial Development Having an Impact on Economic Complexity? Empirical study of Iraq

Abstract

In recent years, the significance of economic complexity in raising a country's development level has been widely acknowledged. It is imperative for economies to enhance their level of product sophistication. The prevailing consensus posits that the pursuit of increased economic complexity is a fundamental strategy for achieving economic advancement. The imperative for all nations at present is to augment the degree of economic complexity. Several previous studies have conducted empirical analyses to estimate the factors that positively influence economic complexity. However, there is a lack of research studies that specifically examine the impact of financial development on economic complexity. Hence, the primary objective of this study is to empirically assess the relationship between financial development and economic complexity in Iraq during the period from 2000 to 2022. This study utilized Dynamic OLS (DOLS), Fully Modified OLS (FMOLS), and Canonical Cointegration Regression (CCR) methodologies to examine the empirical implications of financial development and several control variables, such as income, foreign direct investment, urbanization, and natural resources, on economic complexity. The study's findings suggest that the development of the financial sector plays a positive role in enhancing the economic complexity of Iraq. Likewise, economic growth, foreign direct investment, and urbanisation make positive contributions to the enhancement of economic complexity. However, the impact of natural resources on economic complexity is predominantly negative. Hence, it is imperative for the Iraqi government to undertake policy measures aimed at the development and enhancement of its financial system, with the goal of bolstering its industrial structure and augmenting product sophistication.