INCOME INEQUALITY AS A MODERATOR IN THE ECONOMIC COMPLEXITY–INSTITUTIONAL PERFORMANCE NEXUS: INSIGHTS FROM PAKISTAN

Abstract

Economic complexity, institutional performance, and income inequality are key factors influencing sustainable development; however, their relationships remain underexplored, particularly in developing countries. While economic complexity is linked to enhanced growth and institutional effectiveness, the moderating role of income inequality in this dynamic remains poorly understood. This study fills this gap by examining the relationship between economic complexity and institutional performance, with a focus on how income inequality moderates this relationship in Pakistan. Utilizing secondary data from 2000 to 2025, the study employs a quantitative approach with panel data regression models to assess the interaction between economic complexity (EC), institutional performance (IP), and income inequality, measured by the Gini coefficient. The findings reveal that while economic complexity has a positive impact on institutional performance, the current high level of income inequality weakens this relationship. The interaction term between EC and income inequality is found to be positively significant, suggesting that inequality may enhance the effectiveness of economic complexity under specific conditions. This highlights the importance of addressing inequality to maximize the benefits of economic complexity for institutional development. The study contributes to the existing literature by providing empirical evidence on the mediating role of income inequality in the economic complexity–institutional performance nexus, particularly in the context of Pakistan, where institutional quality and inequality present unique challenges. This research provides policymakers in developing countries with actionable insights, emphasizing the need for policies that reduce inequality while promoting complex economic activities to foster institutional improvement and long-term growth.

Keywords: Economic Complexity, Institutional Performance, Income Inequality, Moderating Effect, Pakistan, Sustainable Development, Gini Coefficient, Panel Data Regression