KNOWLEDGE PERSPECTIVE ON ECONOMIC POLICY IN EU ACCESSION COUNTRIES Knowledge Economy Forum February 2002 World Bank Paris

INGREDIENTS OF A KNOWLEDGE ECONOMY Economic policy conducive to the establishment of a knowledge based economy Building an efficient ICT infrastructure Education system which trains knowledge workers Fostering innovation systems serving private and public institutions

ECONOMIC POLICY FUNDEMENTALS Price and trade liberalization Hard budget constraint on banks and enterprises Enabling environment for private sector, particularly new enterprises Tax system and public expenditure program which promotes enterprise and government efficiency and fiscal balance Stable macro-economic policy Adequate financial market regulation

EU ACCESSION COUNTRY ECONOMIC POLICY PERFORMANCE

ECONOMIC GROWTH HAS RESPONDED TO POLICY

NEW ENTERPRISES ARE MORE PRODUCTIVE THAN OLD

WHAT MORE SHOULD ECONOMIC POLICY DO TO CREATE A KNOWLEDGE ECONOMY? Is there more to it than good innovation policy, investment in higher education, and investment in ICT? Will these additional policy measures, whatever they are, stimulate faster economic growth?

BALLYHOURA, IRELAND Community consultative group Audit of skills by University of Dublin EU Leader funds Vocational training for adults Rural tourism Small scale enterprises Agricultural innovation Information technology and knowledge sharing

BALLYHOURA WAS TRANSFORMED New agricultural technologies Cooperative marketing Training in Information technology Telemarketing Rural tourism Knowledge was critical; but so was local initiative

BROADER LESSON: IRELAND PUT IN PLACE SOUND ECONOMIC FUNDEMENTALS Fiscal soundness Good exchange rate management Tax policy and regulatory framework which encouraged new business start-up and profitability Market discipline imposed on public enterprises Corporate oversight Efforts to attract foreign investment Government investment in R & D

THE ECONOMIC BOOST IN EU ACCESSION COUNTRIES CAN COME FROM TECHNOLOGICAL ADVANCE Advanced countries have economic policies which encourage innovation EU accession countries must move from investment driven to innovation driven (Global Competitiveness Study)

THE MOST ADVANCED ECONOMIES ARE INNOVATIVE World Economic Forum Global Competitiveness Report 2001/2002 (Jeffrey Sachs, Michael Porter, et al) Global Competitiveness Index – GCI / Current Competitiveness Index – CCI

THE INGREDIENTS OF MOVING TO AN INNOVATION BASED ECONOMY ARE MANY

INVESTMENT DRIVEN ECONOMIES: THE CURRENT PHASE OF EU ACCESSION POLICY Harness technology from elsewhere Foreign investment is key High rates of investment Enhance legal systems to support business efficiency Attract new investors Discipline old less innovative companies

EU ACCESSION COUNTRIES: COMPLETE BASIC ECONOMIC REFORM; AND ADD POLICY CONSISTENT WITH CREATING A KNOWLEDGE BASED ECONOMY Eliminate subsidies to non-innovating old enterprises (mostly in agriculture, coal, mining, railways, shipbuilding, and steel) Regulatory development for the financial system and creation of sophisticated capital markets, including a regulatory environment that encourages venture capital Better protection of intellectual property rights Policies to increase labor market flexibility (reduced mobility restrictions, low minimum wages, reduced termination restrictions) Effective social safety net (coordinated pension, unemployment and social assistance schemes) Continued building of legal and judicial institutions, with accountability of government Improved allocation of public expenditure, including more funding of R & D, and of higher education, while maintaining fiscal stability Policy to continue to reduce cost of start up by small and medium enterprises

(COMPANIES NEED TO CHANGE (DRUCKER) Corporate governance needs reform; companies to focus on innovation, reduce hierarchy Buyers, suppliers, producers are linked in network arrangements Firms invest in training and skills upgrade (knowledge workers dominate) Firms become global players