Congruence between Factor Endowments and Production: Introducing the Endogenous Structural Index

Abstract

This paper introduces the Endogenous Structural Index (ESI), a novel metric for economic complexity that assesses a country's capacity to produce complex products. The ESI enhances existing models by integrating the alignment of industrial structure with factor endowments structure, a critical aspect often overlooked due to the traditional assumption that no distortions exist in production so that Revealed Comparative Advantage (RCA) faithfully represents a country's actual production capabilities for a product. We demonstrate that, in the absence of economic distortions, a country's industrial structure shall be congruent with the optimal structure determined by its factor endowments and the varying factor intensities across industries, allowing the ESI to approximate wellknown complexity indices such as the Economic Complexity Index and the Fitness Index. Through Monte Carlo simulations, we illustrate how the ESI captures the decline in an economy's overall capacity due to mismatches between factor endowments and industrial structure. Finally, with regression analysis, we show that the ESI consistently outperforms other indices in predicting economic growth, especially in non-OECD countries.

Keywords: factor endowment, comparative advantage, specialization pattern, economic growth, ecnomic complexity