1. 0 Carlos Alberto Primo Braga Senior Adviser, International Trade Department The World Bank Turin, 17-18 November 2003 Knowledge in the Network: Economic and Social Effects

2. 1 Outline Knowledge and Development The Expansion of Networks The Economics of “Information Goods” IPRs Protection and Networks Implications for Developing Countries

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4. 3 0 2 4 6 8 10 12 14 196019651970197519801985199019952000 Rep. of Korea Ghana Thousands of constant 1995 US dollars Difference attributed to knowledge Difference due to physical and human capital Knowledge Makes the Difference Between Poverty and Wealth Source: World Development Report, 98/99

5. 4 Average Years of Schooling of the Total Population Aged 15 and Over Low Income Middle Income High Income World 3.94.75.4 5.56.87.3 9.39.610.2 5.96.77.2 Countries 198019902000 (Projection)

6. 5 Global Distribution of R&D Expenditures (1997) Source: Calculated based on data from the World Bank SIMA Database, 2002 Low income 0.8 % Lower middle income 2.4 % Upper middle income 4.1 % High income 92.7 %

7. 6 Distribution of Patents Registered in the U.S. (2001) Source: Calculated based on data from the US Patent & Trademark Office (USPTO), 2001 High income 99.2 % Low income 0.1 % Lower middle income 0.4 % Upper middle income 0.4 %

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9. 8 Income Divide The Expansion of Networks Source: ITU World Telecommunication Indicators Database User distribution, by income group, 2001 High Income Upper-mid Income Lower-mid Income Low Income 6.1 billion 986 million 741 million 361 million Population Telephone lines Mobile users Internet users 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

10. 9 2001125,888,000+ 35 % 2002162,128,000+ 29 % Worldwide Growth of Internet Hosts 1995-2002 Source: Network Wisard, 2002

11. 10 How Many People Online? Online population – January 2000 vs. September 2002 Source: Nua Internet Surveys January-00September-02 Africa2.1 Million6.31 Million Asia/Pacific40 Million187.24 Million Europe70 Million190.91 Million Middle East1.9 Million5.12 Million Canada & USA120 Million182.67 Million Central and South America8 Million33.35 Million World Total242 Million 605.6 Million

12. 11 Telecoms and Internet: the cost of being connected 278% 191% 80% 60% 1.20%0.135% 0% 50% 100% 150% 200% 250% 300% Sri Lanka Monthly internet access charge as a percent of monthly average income Sri Lanka Nepal Bangladesh Bhutan United States Denmark Source: Human Development Report Office calculations based on data ITU 2000 and World Bank 2001

13. 12 The “Knowledge” Society Communication networks and digital devices are becoming ever more pervasive in day-to-day activities, as their costs continue to decline and their quality improves. In a networked environment, the incentives for specialization and outsourcing are multiplied. This puts a premium on flexibility and responsiveness as business cycles shorten and interactions with clients multiply. Electronic commerce – that is, the use of electronic networks to support business transactions – expands rapidly. This process, in turn, further contributes to the internationalization of service activities as the feasibility and competitiveness of cross-border provision increases.

14. 13 Knowledge and Networks  IT (and related communication networks) is changing the terms under which knowledge can be created and disseminated: - IT facilitates the process of codification and transmission of knowledge about technology; - IT enhances the positive learning externalities of knowledge generation by magnifying the possibilities for recombination of ideas and information; - IT dilutes the “tyranny” of geography by providing new ways for researchers to escape national boundaries. The rate of international co-authorship of scientific and technical papers, for example, has increased significantly over the last decade; - IT increases the “distribution power” of innovation systems, diminishing the time to market of new products and services, while enhancing the dissemination, application, and use of “mature” technologies.

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16. 15 The Economics of “Information Goods” Data: anything that can be digitized… Information: data with a purpose (data embedded in a context of relevance to the recipient…) Knowledge: information acted upon by human beings (what we know…) Characteristics of “information goods”: costly to produce, but cheap to reproduce (high fixed costs/low marginal costs); non-rival; value can be significantly influenced by network effects.

17. 16 Some Common Questions How to balance incentives for production (via intellectual property rights) and the social costs of non-competitive provision? How to minimize anti-competitive lock-in effects (associated, for example, with branding and interoperability issues)? How to explore network effects in a socially productive manner?

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19. 18 The Case of Software Background: Networks and digital technology dramatically reduce the costs of reproduction and distribution of software. At the same time, they facilitate decentralized cooperation. Polar views: –IPRs laws can be used to “organize” the economics of software production and consumption without any major adjustment. Problems currently faced by the industry can be dealt with by enforcement, technology (encryption…) and change in consumer culture. –To apply conventional IPRs laws to “information goods” is doomed to fail, given the high costs of enforcement and the dynamics of network effects.

20. 19 Software: The Orthodox View There is nothing new in the challenge posed by technology/networks. Copyright law, for example, can accommodate fair use without hampering the prospects for information dissemination. Transaction costs can be addressed via new technological “fixes.” The basic issues are: –to promote a change in culture among consumers about the negative effects of piracy; –to allocate resources to enforcement; –to foster convergence toward minimum levels of protection at international level, relying on international treaties negotiated under the WIPO and the WTO.

21. 20 Software: The “Heterodox” View IPRs are being extended well beyond their original scope, increasingly becoming instruments to protect/leverage market power rather than instruments to promote innovation; There are alternative models to operate in a networked environment as illustrated by the Internet and the Open Source Software movement.

22. 21 Variables Influencing Software Choice (proprietary, open source, illegal) Affordability (total cost of ownership); Reliability, performance, scalability, security; Support services; Switching costs; Availability of regular upgrades; Consistency with local needs (language, metaphors, easy-of-use); Social beliefs (respect for property rights).

23. 22 The Expansion of Open Source Software Background: OSS and Free Software The expansion of the Internet and the Web (TCP/IP network protocol, GNU/Linux, Berkeley Internet Name Daemon, Apache web server, scripting languages (e.g., Perl, Tcl)). Growing opportunities for cooperation in a networked environment; Growing competitiveness/technical maturity of OSS solutions

24. 23 OSS Limitations OSS offerings concentrate on infrastructure/ back- end software (reasons: origins of OSS, focusing on the needs of programmers rather than end-user applications; easy-of-use not a key concern; historical roots: networking code and operating system software); Limited OSS offerings in the desktop application space; Interoperability problems; Concerns about accountability/commercial support.

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26. 25 Opportunities OSS can promote competition in the software industry, contributing to lower costs and greater choice (reducing vendor lock-in); OSS can help minimize security risks; OSS can foster local ownership; OSS can contribute to capacity building.

27. 26 Challenges Depth of programmer community: translating into problems with respect to skills and support availability; Public sector procurement guidelines that create ambiguity concerning the choice of OSS solutions; Low levels of “digital literacy”; Misconceptions about the legal implications of OS/FS licenses.

28. 27 Concluding Remarks  Creation and effective use of knowledge is key to rapid economic growth; The continued expansion of networks will further promote interest and use of OSS; OSS communities can foster knowledge creation and dissemination; Proprietary solutions can co-exist with OSS. “Maximalist” solutions in the protection of IPRs in networked environments can be counterproductive; Governments should avoid blanket preferential policies in favor of OSS. The key is to pursue procurement policies that allow for fair competition between proprietary and OSS solutions; Mythology (the “bazaar” metaphor) vs. reality (the hierarchical status-based structure of successful communities).

29. 28 More information The World Bank www.worldbank.org Development Gateway Portal www.developmentgateway.org