The Challenge of the Knowledge Economy for Countries of Eastern and Central Europe and the EC...

The Challenge of the Knowledge Economy for Countries of Eastern

and Central Europe and the EC

©Knowledge for Development, WBI©Knowledge for Development, WBI

Carl DahlmanWorld Bank Institute

Knowledge Economy Forum III: Improving Competitiveness Through a Knowledge Based

EconomyBudapest, March 23, 2004

Structure of Presentation

The Knowledge Revolution

Benchmarking Countries on the Knowledge Economy

Challenges for Eastern and Central European Countries

Moving Forward-The Bigger Picture


New Growth PatternsIn last decade there has been renewed interest in growth because:

Micro level evidence of increasing importance of new technologies

• ICT revolution• Increased share of high tech products in exports• Managerial and organizational changes

Macro level evidence of changes of patterns and nature of growth among OECD countries

• Surprisingly strong growth of US economy 1995-2002• Reversal of trend towards convergence of per capita

income among OECD countries.This has lead to focus on “new economy” to understand what is going on


The Knowledge RevolutionAbility to create, access and use knowledge is becoming fundamental determinant of global competitiveness

Seven key elements of “Knowledge Revolution”

Increased codification of knowledge and development of new technologies

Closer links with science base/increased rate of innovation/shorter product life cycles

Increased importance of education & up-skilling of labor force, and life-long learning

Investment in Intangibles (R&D,education, software) greater than Investments in Fixed Capital in OECD


The Knowledge Revolution -2Greater value added now comes from investment in intangibles such as branding, marketing, distribution, information management

Innovation and productivity increase more important in competitiveness & GDP growth

Increased Globalization and Competition

• Trade/GDP from 38% in 1990 to 57% in 2001

• Value added by TNCs 27% of global GDP

Bottom Line: Constant Change and Competition Implies Need for Constant Restructuring and Upgrading


Implications for Eastern & Central European Countries

As Eastern and Central European countries increasingly integrate with Europe and rest of the world they will be under increased pressure to improve their:

economic incentive and institutional regime, investment climate and

ability to re-deploy resources to the most efficient uses.

They risk falling behind because they also have to strengthen basic infrastructures in:

educationinformation and communications and innovation

They need to develop strategies to use existing and new knowledge to:

improve performance in traditional sectorsexploit opportunities for leapfroggingdevelop competitive new sectors


Framework for Using K4D:

Four Key Functional Areas Economic incentive and institutional regime that provides incentives for the efficient use of existing and new knowledge and the flourishing of entrepreneurship

Educated, creative and skilled people

Dynamic information infrastructure

Effective national innovation system


KAM Methodology

KAM: 76 structural/qualitative variables to benchmark performance on 4 pillars

Variables normalized from 0 (worst) to 10 (best) for 121 countries

www.worldbank.org/kam

Basic scorecard for 14 variables at two points in time, 1995 and 2002

Aggregate knowledge economy index (KEI)


©Knowledge for Development, WBI


Hungary, Czech Republic, Poland (most recent)



Knowledge Economy Index

Global Competitiveness Indicators


CountriesGCI 2002

GCI 2001

MICI 2002

MICI 2001

MICI 2000

MICI 1999

MICI 1998

GDP/capita (2001 PPP-adjusted)

Slovakia 47 40 41 39 36 48 36 11,739Czech Republic 39 37 33 35 34 41 30 14,885Hungary 29 28 28 26 32 33 31 12,941Poland 49 41 45 41 41 37 41 9,327Slovenia 28 31 27 32 - - - 18,233Estonia 26 29 30 27 - - - 10,380Lithuania 35 43 39 49 - - - 7,764Latvia 42 47 44 42 - - - 7,750Romania 61 56 62 61 - - - 7,036Bulgaria 57 59 63 68 55 54 - 6,182Finland 2 1 2 1 1 2 2 25,611Ireland 24 11 20 22 22 17 13 32,133Germany 14 17 4 4 3 6 4 25,715Sources: The Global Competitiveness Report (WEF) 2001-2 and 2002-3

Situation of Transition EconomiesIn spite of significant progress, still need to improve economic and institutional regime to reach EC levelsICT infrastructure and applications still low relative to EC levelsEducational attainment gap narrower in accession countries, but education and training still suffer from

rigidity, too specialized and fragmentedchallenge of life-long learning, brain drain

Innovation system is weakestin terms of R&D inputs and outputs, also in terms of drawing on global knowledge, and the interaction among key troika:

• R&D institutes• Universities• Productive enterprises


Competitiveness ChallengesLow productivity and low investment rateMost of productive sector outmoded if not obsolete, except for pockets of modernity, based largely on recent FDI Competitiveness based primarily on

low wages or natural resources

Skills levels not always up to new needsFew links to global value chains except for autos and electronicsPoor links between

productive sector, domestic research institutes, and universities ©Knowledge for Development, WBI


Strategies of Using Knowledge for Development

Have to be tailored to specific realities of each country

Involve different trade-offs

Are not just about ICT or high technology,but about broader economic strategies

Require coordination across functional areas (hence our 4 pillars of KE) and among government, business and civil society


Key Elements of Economic Incentive & Institutional Regime

Competitive environment as stimulus for improved performanceFinancial system that mobilizes and allocates capital to its most productive usesFlexible labor markets including support for up-skilling and re-skillingAppropriate legal, tax, regulatory system and strong rule of law that support entrepreneurshipEffective safety nets to facilitate adjustment to constant restructuringEffective, transparent and accountable government




Economic Incentive Regime



Hungary: Economic Regime Variables

Key Elements in Information Infrastructure

Communications infrastructure (from radio to internet)

Telecom issues (competition, pricing, regulation)

Digital Divide (access, content, language)

Use

E-govt, E-business, E-education, E-health

Legal and regulatory regime for E-economy

Software

Skills to use




ICT



Hungary: ICT Variables

Key Elements in Human Resources

Access to different levels of education

Gender balance

Quality of educational content (core technical & social skills, relevance, creativity)

Balance among different levels of education

Financing & public and private roles

Life-long learning opportunities

Role of the ministry of education and its relations with labor, market, and economy




Education



Hungary: Education Variables

Key Elements in National Innovation SystemTapping into Global Knowledge

Trade, foreign investment, tech transfer,Technical journals, travel, internet, conferences

Creating and adapting knowledgePubic vs private R&D; Basic vs applied R&D From specialized research institutions to production

Disseminating KnowledgeGrowth of more efficient enterprisesSuppliers of equipment, technical services and infoExtension services: agricultural

Using knowledgeDepends on cost and benefitsDepends on education, skills, complementary inputsDepends on economic and institutional regime




Innovation



Innovation (absolute version)



Hungary: Innovation Systems Variables

European Innovation Scoreboard 2002- Candidate Countries

European Innovation Scoreboard 2002 - Candidate CountriesEU Mean CC Mean Slovakia

S&E Graduates/20-29 years 10.26 6.60Population with Tertiary Education 21.22 17.50 10.66Participation in Life-long Learning 8.50 5.40Employment in med/hi-tech manuf. 7.57 5.40 6.75Employment in hi-tech services 3.61 2.60 3.03Public R&D/GDP 0.67 0.41 0.24Business R&D/GDP 1.28 0.32 0.45EPO Patents/Population 152.70 7.10 5.90USPTO hi-tech Patents/Population 12.40 0.50 0.19Home Internet Access/Population 31.40 14.80 16.70ICT expenditures/GDP 8.00 6.00 7.50Inward FDI/GDP 30.30 31.30 24.20Source: European Innovation Scoreboard 2002


R&D Expenditures as % of GDP


Scientists & Engineers in R&D


Scientific and Technical Journals


Conceptual Framework for Innovation in Developing Countries

Innovation in developing countries should be understood broadly as something new to the local environment

Therefore distinguish two broad types of innovation

Local improvements through adoption of existing foreign technology

Development of technologies new to world


Innovation in Developing Countries

In developing countries the first type is the most relevant, the second is rarer, except for the more advanced developing countries

Developing countries will get a bigger economic impact from raising average local practice to best world practice than from creation of their own new knowledgeThey will also get a bigger impact from raising average local practice to best local practice, therefore the critical importance of domestic diffusion


Sources of Domestic Innovation

Imports of capital goods, components, products or services

Products and services brought to and produced in country by foreign investors

Copying or reverse engineering of foreign products and services

Technological efforts of domestic or foreign firms, not all of which are based on formal R&D


Bias Towards Formal R&D Efforts

Policy makers in developing countries tend to focus on formal R&D and on publicly funded research effortsThey tend to focus on glamorous high technology sectorsThey tend to focus on industry, to a lesser extent on agriculture, and very little on servicesThey also tend to focus on R&D inputs and outputs, not so much on entrepreneurship and management, or links to broader economic and institutional regime


ChallengesBut, as noted earlier, focus of policymakers is not the most important elements of the innovation system in developing countries

R&D not the main source of innovationHigh tech sectors are tiny part of developing economiesService sector is largest share of economic activitySuccessfully applying knowledge requires entrepreneurship, management, organizations,and also depends on economic and institutional regime

Need a better conceptual framework and policy tool kit that

Differentiates across countriesProvides made to measure policy advice and specific project design


Differentiated StrategiesAcquiring Creating Disseminating

Catch-Up Most critical:

-lots of knowledge in pubic domain

-also large stock to be purchased

Therefore need good global scanning and acquisition ability

Less relevant or feasible, but still need R&D capability to acquire and adapt.

Critical to focus limited R&D efforts on most critical needs

Very important:

-extension services

-technical information

-metrology, standards, testing and quality control

-specialized suppliers

-growth of most efficient firms

Countries Nearer Frontier or with Large

Critical R&D Mass

Continue tapping global knowledge

-FDI/licensing

-Strategic alliances

-foreign R&D as antennas to tap knowledge

Refocus public efforts on commercially relevant research

Strengthen IPRS

Increase private R&D efforts

Dissemination efforts continue to be critical

But also need to

commercialize knowledge

-technology transfer offices

-tech parks/spin-offs

-cluster development


National Innovation SystemNeeds to include not just R&D institutions and universities, but most critically firms and other knowledge institutions

Technical information & extension servicesMetrology, standards, testing, quality controlTechnical and management consultingSpecialized suppliers, networks, Clusters and inter-firm interactionsSeed and venture capital

Needs to include attention to the broader economic incentive and institutional regime, education and skills, and ICT-hence our K4D framework


Challenges for Eastern and Central European Countries

Finding advantageous ways to plug into and compete successfully in the global system

Tapping global knowledgeGetting into global value chainsMoving up these value chains

Taking advantage of global knowledge to improve welfarePreventive healthAgriculture

Developing differentiated advantagesBuilding on local resourcesBuilding on culture and other intangiblesStrengthening non-traded services


Moving Forward-The Bigger Picture

Progress and Challenges to the EC

Challenges to the Enlarged EC

Challenges for Non-Candidate Countries


Progress and Challenges to EC

ProgressSignificant integration in product marketSignificant integration to single currencyIncrease in regional stability

ChallengesLow productivity growth, low economic growth and lack of convergenceChallenges compounded by aging population/increasing dependency ratiosLosing global market share


Philippines 0.08b

Turkey 0.07bPakistan 0.14b

Nigeria0.13b

Mexico 0.10b

Brazil 0.17b

Indonesia 0.21b

Bangladesh 0.14b

India 1.05b

Vietnam 0.08b

Japan 0.13b

Germany0.08b

Russia 0.14b

United States0.29b

China1.28b

-2.5

-1.5

-0.5

0.5

1.5

2.5

3.5

4.5

5.5

6.5

7.5

8.5

0 5,000 10,000 15,000 20,000 25,000 30,000 35,000

GDP per capita (international $) 2002

Ave RGDP per capita growth 1990-2002 (%)

15 Most Populous Economies: Population 2002 (billions)


15 Largest Economies: GDP 2002 (Trillions of international $)

United States$10.14t

China$5.73t

South Korea$0.78t

India $2.69t

Indonesia$0.66t

Mexico $0.88t

Brazil $1.31t

Spain $0.85t

United Kingdom$1.51t

Italy $1.48t

France$1.55t

Germany $2.17t

Canada$0.90t

Japan 3.26

-3

-1

1

3

5

7

9

0 5,000 10,000 15,000 20,000 25,000 30,000 35,000

GDP per capita (international $) 2002

Ave RGDP per capita growth 1990-2002 (%)

Russia $1.41t




GDP (US$ Current) 1990-2002



Shares of Global GDP (US$ Current In/nal PPP)

Prospects for Enlarged EC

Increased market integration and specialization, stability, and prosperity

Strong restructuring pressure on accession countries, but also pressure on current 15

Need for still greater integration in services (network industries and financial), labor legislation and labor mobility, and tax regimes

Challenge of coordination across enlarged set of national systems

Need to increase productivity and growth.This will requireContinue improvements in economic and institutional regime

Strengthening education, research and innovation


Challenges to Non-Candidate Countries

European countries not part of EC 25 are going to face greater challenges as world moves toward three large economic blocks

Do not benefit from as much pressure to reform economic incentive and institutional regimeDo not receive structural funds or technical support

Will have to undertake more of necessary reforms and restructuring on their own

Will be more difficult, Greater risks of falling further behind

Will have to be more proactive in seeking alliances with EC and other blocks


Challenges AheadVery dynamic situation with moving goalposts & risk of increasing knowledge divide between advanced and developing countries and with-in countriesNeed to raise awareness among policy makers, private sector and civil society in developing countriesNeed to develop coherent strategies to take advantage of opportunities and reduce adverse impact


The Way Forward-Conclusion

Critical to go from analysis of problems to concrete initiatives to improve KE performance Successful further reform requires creating stakeholder awarenessConsultation and discussion necessary to create stakeholder ownershipMonitorable goals and constant evaluation key to improving performanceRapid adjustment needed in light of experience and changing circumstances


Annex


Examples of World Bank Work on KE

Detailed Knowledge Economy AssessmentsCompleted: Korea (2000), China (2002), Chile(2003), Lithuania (2003)

In process: Latvia, Poland, Turkey, Mexico, Tunisia

World Bank goes beyond knowledge assessments to help countries develop concrete strategies and actual investments in specific knowledge economy areas such as:

Updating economic incentive and institutional regime

Research and development and innovation projects

Education and life-long learning

ICT


Innovation Indicators


Researchers in R&D*

Total expenditure for R&D as % of GDP (2000)

**

Total expenditure for R&D PPP (current

international US$ in billion) (2000)

High-Technology

exports as % of manufactured

exports (2001)***

Scientific and

technical journal articles

(1999) ****

EU 15 954,158 1.9 171 19.1 174,245EU Accession 114,325 0.8 7 9.1 10,630EU 25 1,050,208 1.8 178 15.4 184,875EAP 1,600,659 1.1 116 36.6 70,936BIG 6 1,495,946 0.8 83 14.5 44,123USA 1,114,100 2.7 258 32.0 163,526

* Source : UNESCO Dec 2003 - Most recent available data** Source : Statistical Information Management & Analysis (SIMA), World Bank *** Source : 2003 World Development Indicators, World Bank**** Source : Statistical Information Management & Analysis (SIMA), World BankNote : EU Accession group does not include Malta



Cyprus



Czech Republic



Estonia



Hungary



Latvia



Lithuania



Poland



Slovakia



Slovenia



Hungary: Performance Variables



Hungary: Governance Variables



Hungary: Gender Variables



Shares of Global GDP (US$ current)



GDP PPP Current International (US$)

The Challenge of the Knowledge Economy for Countries of Eastern and Central Europe and the EC...

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