Carl Dahlman World Bank Institute The Challenge of the Knowledge Economy for Countries of Eastern and Central Europe and the EC Carl Dahlman World Bank Institute Knowledge Economy Forum III: Improving Competitiveness Through a Knowledge Based Economy Budapest, March 23, 2004 ©Knowledge for Development, WBI

Structure of Presentation The Knowledge Revolution Benchmarking Countries on the Knowledge Economy Challenges for Eastern and Central European Countries Moving Forward-The Bigger Picture ©Knowledge for Development, WBI

New Growth Patterns In 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 ©Knowledge for Development, WBI

The Knowledge Revolution Ability 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 ©Knowledge for Development, WBI

The Knowledge Revolution -2 Greater 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 ©Knowledge for Development, WBI

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: education information and communications and innovation They need to develop strategies to use existing and new knowledge to: improve performance in traditional sectors exploit opportunities for leapfrogging develop competitive new sectors ©Knowledge for Development, WBI

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 ©Knowledge for Development, WBI

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 for Development, WBI

Knowledge Economy Index ©Knowledge for Development, WBI

Global Competitiveness Indicators ©Knowledge for Development, WBI

Situation of Transition Economies In spite of significant progress, still need to improve economic and institutional regime to reach EC levels ICT infrastructure and applications still low relative to EC levels Educational attainment gap narrower in accession countries, but education and training still suffer from rigidity, too specialized and fragmented challenge of life-long learning, brain drain Innovation system is weakest in 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 ©Knowledge for Development, WBI

Competitiveness Challenges Low productivity and low investment rate Most 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 needs Few links to global value chains except for autos and electronics Poor 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 ©Knowledge for Development, WBI

Key Elements of Economic Incentive & Institutional Regime Competitive environment as stimulus for improved performance Financial system that mobilizes and allocates capital to its most productive uses Flexible labor markets including support for up-skilling and re-skilling Appropriate legal, tax, regulatory system and strong rule of law that support entrepreneurship Effective safety nets to facilitate adjustment to constant restructuring Effective, transparent and accountable government ©Knowledge for Development, WBI

Economic Incentive Regime ©Knowledge for Development, WBI

Hungary: Economic Regime Variables ©Knowledge for Development, WBI

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 ©Knowledge for Development, WBI

ICT ©Knowledge for Development, WBI

Hungary: ICT Variables ©Knowledge for Development, WBI

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 ©Knowledge for Development, WBI

Education ©Knowledge for Development, WBI

Hungary: Education Variables ©Knowledge for Development, WBI

Key Elements in National Innovation System Tapping into Global Knowledge Trade, foreign investment, tech transfer, Technical journals, travel, internet, conferences Creating and adapting knowledge Pubic vs private R&D; Basic vs applied R&D From specialized research institutions to production Disseminating Knowledge Growth of more efficient enterprises Suppliers of equipment, technical services and info Extension services: agricultural Using knowledge Depends on cost and benefits Depends on education, skills, complementary inputs Depends on economic and institutional regime ©Knowledge for Development, WBI

Innovation ©Knowledge for Development, WBI

Innovation (absolute version) ©Knowledge for Development, WBI

Hungary: Innovation Systems Variables ©Knowledge for Development, WBI

European Innovation Scoreboard 2002- Candidate Countries ©Knowledge for Development, WBI

R&D Expenditures as % of GDP ©Knowledge for Development, WBI

Scientists & Engineers in R&D ©Knowledge for Development, WBI

Scientific and Technical Journals ©Knowledge for Development, WBI

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 ©Knowledge for Development, WBI

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 knowledge They will also get a bigger impact from raising average local practice to best local practice, therefore the critical importance of domestic diffusion ©Knowledge for Development, WBI

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 ©Knowledge for Development, WBI

Bias Towards Formal R&D Efforts Policy makers in developing countries tend to focus on formal R&D and on publicly funded research efforts They tend to focus on glamorous high technology sectors They tend to focus on industry, to a lesser extent on agriculture, and very little on services They 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 ©Knowledge for Development, WBI

Challenges But, 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 innovation High tech sectors are tiny part of developing economies Service sector is largest share of economic activity Successfully 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 countries Provides made to measure policy advice and specific project design ©Knowledge for Development, WBI

Differentiated Strategies Acquiring 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 ©Knowledge for Development, WBI

National Innovation System Needs to include not just R&D institutions and universities, but most critically firms and other knowledge institutions Technical information & extension services Metrology, standards, testing, quality control Technical and management consulting Specialized suppliers, networks, Clusters and inter-firm interactions Seed and venture capital Needs to include attention to the broader economic incentive and institutional regime, education and skills, and ICT-hence our K4D framework ©Knowledge for Development, WBI

Challenges for Eastern and Central European Countries Finding advantageous ways to plug into and compete successfully in the global system Tapping global knowledge Getting into global value chains Moving up these value chains Taking advantage of global knowledge to improve welfare Preventive health Agriculture Developing differentiated advantages Building on local resources Building on culture and other intangibles Strengthening non-traded services ©Knowledge for Development, WBI

Moving Forward-The Bigger Picture Progress and Challenges to the EC Challenges to the Enlarged EC Challenges for Non-Candidate Countries ©Knowledge for Development, WBI

Progress and Challenges to EC Significant integration in product market Significant integration to single currency Increase in regional stability Challenges Low productivity growth, low economic growth and lack of convergence Challenges compounded by aging population/increasing dependency ratios Losing global market share ©Knowledge for Development, WBI

15 Most Populous Economies: Population 2002 (billions) Philippines 0.08b Turkey 0.07b Pakistan 0.14b Nigeria 0.13b Mexico 0.10b Brazil 0.17b Indonesia 0.21b Bangladesh 0.14b India 1.05b Vietnam 0.08b Japan 0.13b Germany 0.08b Russia 0.14b United States 0.29b China 1.28b -2.5 -1.5 -0.5 0.5 1.5 2.5 3.5 4.5 5.5 6.5 7.5 8.5 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 (%) ©Knowledge for Development, WBI

15 Largest Economies: GDP 2002 (Trillions of international $) Ave RGDP per capita growth 1990-2002 (%) 9 China $5.73t 7 South Korea France 5 $0.78t India $2.69t $1.55t Canada United Kingdom $0.90t $1.51t 3 Spain $0.85t Mexico $0.88t United States Indonesia Italy $1.48t $10.14t $0.66t 1 Brazil $1.31t Germany $2.17t Japan 3.26 5,000 10,000 15,000 20,000 25,000 30,000 35,000 -1 Russia $1.41t -3 GDP per capita (international $) 2002 ©Knowledge for Development, WBI

GDP (US$ Current) 1990-2002 ©Knowledge for Development, WBI

Shares of Global GDP (US$ Current In/nal PPP) ©Knowledge for Development, WBI

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 require Continue improvements in economic and institutional regime Strengthening education, research and innovation ©Knowledge for Development, WBI

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 regime Do 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 ©Knowledge for Development, WBI

Challenges Ahead Very dynamic situation with moving goalposts & risk of increasing knowledge divide between advanced and developing countries and with-in countries Need to raise awareness among policy makers, private sector and civil society in developing countries Need to develop coherent strategies to take advantage of opportunities and reduce adverse impact ©Knowledge for Development, WBI

The Way Forward-Conclusion Critical to go from analysis of problems to concrete initiatives to improve KE performance Successful further reform requires creating stakeholder awareness Consultation and discussion necessary to create stakeholder ownership Monitorable goals and constant evaluation key to improving performance Rapid adjustment needed in light of experience and changing circumstances ©Knowledge for Development, WBI

Annex ©Knowledge for Development, WBI

Examples of World Bank Work on KE Detailed Knowledge Economy Assessments Completed: 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 ©Knowledge for Development, WBI

Innovation Indicators ©Knowledge for Development, WBI

Cyprus ©Knowledge for Development, WBI

Czech Republic ©Knowledge for Development, WBI

Estonia ©Knowledge for Development, WBI

Hungary ©Knowledge for Development, WBI

Latvia ©Knowledge for Development, WBI

Lithuania ©Knowledge for Development, WBI

Poland ©Knowledge for Development, WBI

Slovakia ©Knowledge for Development, WBI

Slovenia ©Knowledge for Development, WBI

Hungary: Performance Variables ©Knowledge for Development, WBI

Hungary: Governance Variables ©Knowledge for Development, WBI

Hungary: Gender Variables ©Knowledge for Development, WBI

Shares of Global GDP (US$ current) ©Knowledge for Development, WBI

GDP PPP Current International (US$) ©Knowledge for Development, WBI