The role of productive capacities and financial development in enhancing economic complexity: An econometric study on the MENA region

Productive capacities (PCI) and financial development (FD) are essential for building economic complexity (ECI) and promoting diversification. Countries that strengthen their productive capacities can use resources more efficiently and enhance competitiveness, while financial development provides funds for investment and the growth of high-value sectors. The MENA region illustrates how these elements interact, given its diverse resources and efforts to diversify economic activity. This study empirically examines the effects of PCI and FD on ECI in MENA countries during 2000–2022. ECI is a key indicator of development, reflecting the shift toward knowledge-intensive and sophisticated production. The relationship between productive capacities, economic diversification, and the role of financial development was analyzed using panel data through four models. The first model found that FD positively contributes to productive capacities. The second showed that PCI support diversification. The third revealed that sub-components such as ICT, energy, transport, human capital, and the private sector significantly affect complexity. The fourth highlighted that financial institutions increase complexity, while natural resource dependence weakens it. Overall, results demonstrate that strengthening productive capacities is critical to raising economic complexity in MENA countries, but lasting progress requires financial infrastructure, institutional reforms, and macroeconomic stability. Resource dependence negatively influences complexity, confirming the resource curse hypothesis. The findings suggest that transition to a diversified production structure in the region depends on comprehensive strategies. Policymakers should prioritize long-term investments in productive capacities and support financial development by focusing on infrastructure, education, technology, and governance. Keywords: Economic Complexity, Productive Capacities, Financial Development, MENA, Panel Data Analysis, Economic Diversification.