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From quantity to sustainable quality Increasing intellectual capital: can this objective guide policy development and can it be measured Paper prepared for the conference “New methods for cohesion policy evaluation: promoting accountability and learning”, Warsaw, Poland, 30.11.2009 - 01.12.2009. Krzysztof Rybinski1 This version: 18 November 2009 1 Krzysztof Rybinski is a professor of economics at Warsaw School of Economics, director of better government programme at Ernst & Young, he served as deputy governor of the National Bank of Poland in 2004-2008. Leif Edvinsson, Grzegorz Gorzelak, Guenter Koch and Andrzej Wodecki kindly provided comments on the earlier draft of the paper, standard disclaimer applies. 1 “Not everything you count counts; not everything that counts is counted” Albert Einstein Prof. Krzysztof Rybinski From quantity to sustainable quality Increasing intellectual capital: can this objective guide policy development and can it be measured Executive summary For decades progress measurement was about quantity. In economic models households sold labor to companies that produced widgets, then consumed by households. The more widgets per capita were produced and consumed the bigger progress was achieved. In recent years we understood that progress should be replaced by sustainable development, and the quantity of widgets should be replaced by the sustainable (i.e. achieved over several generations) improvement of the quality of life. This paper proposes that this transition from quantity to sustainable quality (QSQ process) can be well facilitated by adopting the methodology of intellectual capital for policy planning and evaluation. Four steps are strongly recommended: 1. Connect to the EU citizen. Policy goals and statistical data should be reported in terms which are important to the EU citizen. Playing with data should be fun and easy, the good benchmark is offered by www.gapminder.org 2. Start several projects of measuring intellectual capital of selected regions. Some 10-15 regions should suffice to account for the EU heterogeneity. If launched soon the first results should be ready by the end of 2010. 3. Build EU intellectual capital model, which will offer a strategic framework for the future EU policy evaluation. Cascade this model down to member states. It will ensure that the same policy language – connected to EU citizens – is spoken at all EU governance levels. 4. Take seriously Albert Einstein statement: “Not everything you count counts; not everything that counts is counted”. Stop counting cows and start measuring the quality of intangible assets. 2 1. Why GDP as a measure of country/region development fails to capture the most important aspects of country and regional development in XXI century? A very recent and very comprehensive report of the Commission on the Measurement of Economic Performance and Social Progress established by French President Nicolas Sarkozy and chaired by Joseph Stiglitz presented a broad range of arguments why GDP is a poor measure of national or regional development2. Selected arguments are summarized in the table below: Table 1. Why GDP is a poor measure of country and regional development: selected arguments GDP inferior characteristics Explanation GDP may rise while national In country with large FDI, foreign companies profits may become income falls large share of GDP, as in the case of Ireland, so GDP increase may be of little relevance to citizens, when at the same time their incomes fail to grow GDP is a flow measure, ignores Stock of public debt, stock of external debt, national economy wealth and its dimensions. assets and liabilities, all these balance sheet items may offer a very different context to similar GDP figures. Wealth measures are often as important that flow measures. Wealth has at least five dimensions: material living standards, health, education, personal activities including work, political voice and governance GDP calculation maybe based on For example market prices may be distorted because there is no distorted prices charge imposed on carbon emissions, measures of economic activity that reflected environmental costs might look markedly different from standard measures GDP measure does not take into GDP fails to address the issue of sustainability, present GDP may account depletion of resources be high but if achieved at a price of massive depletion of resources (such as regional biocapacity or may hinder the ability of future generations to enjoy good quality raw materials) life GDP does not capture quality Underestimating quality improvements leads to overestimating of improvements the rate of inflation and consequently to underestimating the real income. At low income levels quantity is crucial (amount of rice parent can feed his child every day), but for medium and high income countries quality gains importance (for example you can accept a lower paid job, if it requires less commuting and is in more friendly environment) 2 An excellent example of factors that are very important for country/region development and are not captured by GDP measure is Human Development Index, published by UNDP. 3 GDP measures production, does Good access to healthcare, education, leisure of government not measure well-being services is increasingly important part of life, GDP is a very poor measure of services availability and quality. GDP measure ignores people satisfaction (happiness), one may make million dollars per year, working 18 hours per day 7 days per week, and may be very dissatisfied with her life GDP ignores income inequality Country GDP per capita may rise, while large income groups may not benefit at all, in some cases rising GDP per capita may be accompanied by rising number of people living in extreme poverty. GDP is available with a significant lag GDP data on a regional level is available with such a lag that it is almost irrelevant from the policy evaluation perspective. In modern societies people demand immediate feedback (especially younger generations). Often fast and roughly correct measure is much more informative than precise measure but delayed two years. GDP emphasizes producer perspective Modern measures of development should emphasize household (citizen) perspective. It is particularly urgent to have proper measures in place ahead of the upcoming demographic/pension system challenge. GDP ignores social capital Research shows that growth depends of human capital in poor economies. However for middle income and rich countries social capital becomes more important. Therefore sustainability of development requires using measures that take into account quality and intensity of relationships, trust, attitudes. Without steady increase of social capital sustainability dimension of development will not be properly addressed3. GDP does not provide any There is a need for a clear indicator of our proximity to dangerous information related to managing levels of environmental damage (such as related to climate change, risks to sustainability water scarcity or depletion of fishing stocks). Source: Stiglitz et al. (2009), own analysis The report advocates a shift of emphasis from a “production-oriented” measurement system to one focused on the well-being of current and future generations, i.e. toward broader measures of social progress. As stated in EC [2] a 2008 Eurobarometer poll showed that more than two thirds of EU citizens feel that social, environmental and economic indicators should be used equally to 3 The presence of social capital in the form of a strong tradition of cooperation in the society in general as well as of a social regulation of the labour market specifically in the Nordic countries adds to the high level of human capital in the work force in a synergistic way (in learning forms of work organisations). This builds on social capital rooted in civicness (bonding), but is further developed through formal organisations at the system level of the society (bridging). (As quoted in Bjorn Ashem presentation From Regional Clusters to Creative Cities). 4 evaluate progress. Only just under one sixth prefer evaluation based mostly on economic indicators. An international poll in 2007 gave similar results. Studies have also revealed that citizens can feel distanced from statistical information. GDP may be growing, but disposable incomes and public services are perceived as shrinking. As societies become more diverse, indicators based on averages or "the typical consumer" are not sufficient to fulfill the information needs from citizens and policy-makers. A stark example is rising average wage in the United States in the past two decades. But when top one-tenth of a percentage point of highest earners (celebrities and CEOs) is removed from the distribution, the average real wage remains stable, despite significant increase in productivity. The same trend has been observed in Canada4. When only the very richest experience the rising share of total wage bill, at the expense of others, it may lead to significant discrepancy between economic situation as measured by GDP, and citizens perception as measured by their income cohort. In the communication5 released on 8 September 2009 the European Commission announced that it undertakes the task of transforming the way we measure well-being. GDP is no longer an appropriate measure as it ignores some key factors, which are important for citizens: clean environment, social cohesion, or the fact whether people are happy or not. As such inferior measure of well-being it can no longer be used as a sole yardstick of country or regional progress. Commission announced that pilot of an environmental index will be proposed in 2010 that will assess progress in the main fields of environmental policy and protection. The index will cover areas such as greenhouse gas emissions, loss of natural landscapes, air pollution, water use and waste generation. The Commission will also work to complement GDP and national accounts with environmental and social accounts. The pilot version of the Sustainable Development Scoreboard should be released in 20096, while the recent environment Council7 meeting held on 21 October 2009 invited the Commission “to complement GDP with additional robust, reliable and widely recognized indicators to measure progress towards an eco-efficient economy and to develop, together with Member States, a sustainable development scoreboard by 2010, which will provide information on the implementation of EU sustainable development objectives in Member States”. It appears that there is a broad consensus that European Union should develop a better measure than GDP to guide it policy. The remaining question is how to do it. And the challenge is enormous when one keeps in mind that such ideas were proposed already in 4 Harrison (2009) European Commission [1] 6 European Commission [2] 7 Council [1] 5 5 1960s8, when Drewnowski and Scott proposed the level of living index, which was defined as the level of satisfaction of the needs of the population as measured by flows of goods and services (basic such as nutrition, but also cultural, educational, leisure, security etc.) enjoyed in the unit of time. Scientists did not come up with anything to successfully challenge GDP in the past 40 years, we should hope that the next decade will be more productive. 2. How to create a policy evaluation metric that can be easily understood by citizens and engages citizens in a lively debate about policy outcomes? Evaluation of Structural and Cohesion Funds programmes has to be conducted at defined points in the programming cycle: ex ante to verify targets; at the mid-point to establish the need for corrective action; and ex post to assess outcomes. These national and regional evaluations are complemented by meso- and meta-evaluation studies and thematic evaluations by the Commission services, and by extensive Commission-sponsored research and debate on evaluation concepts, methods and practices9. Policy evaluation is a daunting task. Data is available with a significant lag, data quality is often inadequate, it is hard to isolate EU policy intervention effects from effects of other nonrelated events or policies (such as domestic interventions). Local context is often so strong that conducting a meta-analysis of evaluations becomes impossible. Finally researches cannot agree even on the answer to the simplest questions: is cohesion policy effective, does it lead to convergence10? Of course part of the problem is a flawed metric of convergence (GDP per capita), but part of the problem is complex and varying evaluation methodology and different evaluation cultures in different countries. Draft communication from the Commission to the European Parliament and the Council “A Reform Agenda for A Global Europe dated 6 October 2009 and leaked to the media stated (page 11) that: 8 For example Drewnowski, Scott (1966) Bachtler, Wren (2006) 10 I live aside the lively debate about “should cohesion” be understood as convergence. For example Grzegorz Gorzelak argues that cohesion should be understood in functional terms, and not as an effort to reach convergence. Gorzelak proposes an alternative understanding of the individual aspects of cohesion that would involve a policy focus on three elements: economic cohesion, denoting the possibility for effective cooperation between economic agents, lowering transaction costs, and harmonizing relationships between businesses and their institutional environment; social cohesion, eliminating barriers to horizontal and vertical mobility through helping to overcome differences in levels of education, career advancement and material status; and territorial cohesion, removing constraints on spatial development which restrict the achievement of social and economic cohesion, such as eliminating barriers to transport, connecting the major nodes of European and national space, and developing research and business networks. 9 6 “While income disparities among Member States have declined substantially since the early 1980s, they have increased across regions. The reasons for this have been widely discussed: they are partly structural (geographical, political and related to governance) and partly linked to natural forces of territorial agglomeration which are important drivers of overall economic growth within countries. It raises the question how to target EU cohesion spending in order to effectively improve convergence.” The draft Commission budget review paper proposes that Member States with incomes above the convergence threshold should qualify for increased competiveness spending if regional income disparities within the country were particularly large. At the same time Commission proposes that the conditionality based on the achievement of agreed measurable objectives must be strengthened. Cohesion policy should be more performance oriented which will require improved evaluation mechanisms11, also by shifting the emphasis from formal compliance to genuine performance objectives. Credible performance indicators should be agreed between the Commission and the Member State concerned, with part of the envelope set aside to reward particularly successful programmes12. It appears that policy evaluation will become even more important tool of the EU cohesion policy, with higher conditionality and stronger focus of performance objectives. Without radical change to the approach it is easy to predict that the result will be even more complexity and detachment from the EU citizen. As shown in the June-July 2009 issue of the Euro barometer the EU citizens trust in the European Parliament has fallen below 50%, and distrust has risen to levels not seen before. 11 Bold font emphasis by the author This change if implemented could create a very powerful positive incentive structure, but at the same time creates enormous challenge for policy evaluation. 12 7 Figure 1. Do EU citizens trust the European Parliament? Source: Eurobarometer, June-July 2009. Therefore it is of utmost importance that the new methodology used for EU policy planning and EU policy evaluation is well understood by the EU citizens. Imagine the following scenes in one of EU cities in the future: 1) Two ladies comment on front page article in one of the newspapers. Did you know that the air quality in our town has improved much more than elsewhere, it is shown here that two major contributors were EU funded programs of road traffic management and pollution reduction initiative. Yes, I noticed, the other replies. My children used to have frequent asthma problems in the past, it has gone away now. 2) Two senior citizens exchange opinions over coffee. I read on EUnews portal on my Smartphone that the average queue to a hospital shortened massively in recent years. Before for hip replacement you had to wait full year, now it is a matter of five months, and it is fully funded by the state health insurance. Yes, I know, responds his friend. The EU-funded project of optimizing healthcare access across Europe reduced waiting lines almost everywhere, our life got so much better. Thanks God we have our European Union, look at the problems our relatives in States face. The new evaluation metric has to be less abstract and be closer to average citizen. We should stop communicating EU policies’ outcomes in terms of vaguely defined value added, 8 especially when this value added is understood by a handful experts, but instead we should communicate EU policies in terms of concrete gains for the EU citizen. It requires a different metric, but also calls for a massive change of data access and dissemination. Current Eurostat data dissemination practices should be replaced by user friendly interface. Playing with data should be fun and data access should be fast and easy. Best practices are offered by the website www.gapminder.org. 3. Can intellectual capital methodology be a useful policy evaluation metric: brief history and recent applications to countries, regions, cities, universities and companies. If you perform the following search in Google [intellectual capital report filetype:pdf] it will return 944,000 links to pdf files across the world. Intellectual capital concept is popular indeed. The history of intellectual capital methodology dates back to early 1980s13. Late 1980s – early attempts to create intellectual capital statements. Karl Sveiby’s Intellectual Asset monitor was created. Sveiby used the term knowledge based assets14 which were divided into three categories: competence, external structure and internal structure. The model was used by several Scandinavian companies. Early 1990s – Pioneering initiatives to systematically report on intellectual capital to external parties. Skandia’s intellectual report15 dates back to 1994. Mid-1990s – several important books on intellectual capital are published16. Historically intellectual capital methodology was applied in the corporate sector, to explain the difference between market value and book value of a company listed on the stock exchange. This difference rose over time and was explained as a price, that investors put on corporate intangible assets, which cannot be precisely measured today but have potential to generate value for investors in the future. The branch of intellectual capital that deals with company intangible assets reporting is most developed and researched. In December 2008 European Financial Reporting Advisory Group (EFFRAG) has invited comments on paper prepared by Australian Accounting Standards Board, which proposed future path of changing accounting standards to better measure corporate intangible assets. So finally, after two decades also the 13 Partly based on Petty and Gouthrie (2000), as reported in Skyrme (2003) Sveiby (1997) 15 Skandia (1994). Leif Edvinsson was appointed the first director of intellectual capital in Scandia in 1991 16 Stewart (1997), Sveiby (1997), Edvinsson (1997), Roos et al. (1997) 14 9 very conservative profession of accountants woke up to reality and plans to change international accounting standards to better account for the value of corporate intangibles. Others branches of intellectual capital profession are still in early stage of development, in particular when applying intellectual capital methodology to countries and regions. In recent years intellectual capital methodology applications can be found in the following five areas (examples of applications in brackets): Measuring intellectual capital of countries17 (Israel, Poland, Sweden, Malaysia, Denmark, Finland, multinational study of 40 countries, benchmarking of Arab countries). Measuring intellectual capital of regions, cities and communities18 (Poland, Spain, Norway) Measuring intellectual capital of cities (Poland, Spain) Measuring and reporting intellectual capital of companies (Germany, Japan, Poland, Brazil) Measuring and reporting intellectual capital of universities19 (Austria, Poland, Sweden) There are regular annual intellectual capital conferences organized by the World Bank in Paris, fifth edition was held in May 2009. European Commission has launched two projects to assess the usefulness of the methodology. First, MERITUM (1998-2001) was focused on four areas: Produce a classification of intangibles; Analyze management control systems to identify best practices within European companies in measuring intangible investments; Assess the relevance of intangibles for the purposes of equity valuation in capital markets; Produce guidelines for the measurement and disclosure of intangibles. 17 Bounfour, Edvinsson (2005) Departing from strict intellectual capital methodology one can point to a long list of cities that brand themselves as knowledge cities: Singapore, Manchester, Barcelona, Copenhagen, Malmoe, Dubai, Melbourne, Shanghai, Sao Paulo, see Bounfour, Edvinsson (2005) 19 From 2004 all Austrian universities have to report their intellectual capital, in Poland methodology of university IC reporting has been developed by Ernst & Young on the request of the Ministry of Science and Higher Education. In Sweden selected institutes report intellectual capital (eg. Karolinska Institute) 18 10 Second project, RICARDIS (2006) was in the area of small and medium size enterprises. The mandate included the following: Guidelines for research-intensive SME’s on how to highlight the business case for R&D investments by reporting on their intellectual capital; Recommendations for investors and private stakeholders on how to interpret and value intellectual capital statements and how to encourage companies to report on their intellectual capital. Recommendations for public policy makers on how to stimulate companies to report on their intellectual capital. The RICARDIS group has used the definition of intellectual capital proposed in MERITUM project: “Intellectual Capital has been defined as the combination of an organization’s Human, Organizational and Relational resources and activities. It includes the knowledge, skills, experiences and abilities of the employees, its R&D activities, organizational routines, procedures, systems, databases and its Intellectual Property rights, as well as all of the resources linked to its external relationships; such as with its customers, suppliers, R&D partners, etc.”. The major weakness of the intellectual capital methodology is the fact that there is no single widely accepted definition or model. For example Skyrme (2003) reports 38 different models of knowledge and intellectual capital measurement at the company level. Some work on unifying methodology has already started, for example European Federation of Financial Analysts Societies (EFFAS) has established a Commission on Intellectual Capital and issued ten recommendations, which should apply to Intellectual Capital statements released by companies, namely: 1) Clear link to value creation 2) Transparency of methodology 3) Standardization 4) Consistency over time 5) Balanced trade-off between disclosure and privacy 6) Alignment of interests between investors and company 7) Prevention of information overflow 8) Reliability and responsibility 9) Risk assessment 10) Effective disclosure placement and timing 11 Other attempts of intellectual capital standardization and unification are WICI, World Intellectual Capital Initiative20, and the New Club of Paris21. But both initiatives are very far from delivering a consistent methodology that could be used for policy planning and evaluation. Although intellectual capital has its roots in measuring company intangible assets it has been applied to countries and regions as well. As in the case of companies, authors adopted different definitions when reporting intellectual capital for entire countries. For example Israel in its 2007 intellectual capital report used the Scandia Navigator model: - Financial capital - Intellectual capital o Structural capital o Organizational capital Renewal and development capital Process capital Market capital Human capital Poland in its 2008 intellectual capital report used different approach, a flat definition structure was adopted and intellectual capital was divided into four categories: human capital, structural capital, social capital and relationship capital. The adopted definitions were as follows: Country intellectual capital is defined as stock of intangible assets held by people, companies, communities, regions and institutions. These assets, if properly used, can be source of present and future well-being of the country. Human capital22 refers to each individual competences, which includes education, experience, attitudes, skills, which can be used to improve present and future well-being of the country. Structural capital refers to existing national education and innovation infrastructure – learning institutions, research entities, ICT infrastructure, intellectual property. 20 http://www.worldici.com/index.php http://the-new-club-of-paris.org/index.html. The New Club of Paris has also initiated a series of Round Tables with governments about building national intellectual capital as important factor of the nation success. So far four round tables were held: with governments of Finland, Morocco, Austria and Malaysia. 22 Author is aware of the fact that there are numerous definitions of human capital and reaching consensus about the proper measurement metric is a difficult task 21 12 Social capital is defined by existing social norms, trust and social engagement, which through high quality relationships contributes to national well-being Relationship capital comprises country perception abroad, level of integration with global economy, country attractiveness for external clients – investors, trade partners, tourists. Poland’s intellectual capital report used a new approach and presented country intellectual capital from the perspective of generations: child, pupil, student, working person, senior citizen. This perspective becomes increasingly important in the context of upcoming demographic challenge that will put enormous pressures on pension and healthcare systems because of aging. In the comparative study of intellectual capital of 40 countries by Edvinsson and Yeh-Yuh Lin, authors used definitions similar to those used in the Israel intellectual capital Report, dividing national intellectual capital into human capital, market capital, process capital and renewal capital. They also added financial capital as the fifth category, represented by one indicator – logarithm of GDP in PPP terms. The selection of variables was based on a verification, which ones appeared in previous studies (among them studies by World Bank and OECD) and then data was matched with OECD and IMD databases. It is worth noticing that despite using similar definitions, the Israel intellectual capital report makes use of a very different set of indicators than the comparative study of 40 countries. There are also very few intellectual capital reports of regions or cities23.The sample of studies is way too small to make any general conclusions about usefulness of intellectual capital methodology for regional policy planning and evaluation. This brief review of intellectual capital methodology shows that there is no standard of measurement. Each country or scientist uses different definition, different set of indicators, basing on his/her subjective judgment. Therefore at this stage the intellectual capital methodology cannot be easily used for policy planning and evaluation as such. There are no commonly accepted standards and empirical evidence is scarce. However, as shown below, the intellectual capital methodology and framework can be used to improve the EU evaluation and policy planning in the new financial perspective. To put it in the simplest possible way. If you give money to farmers, you need excellent measurement system of number of cows and number of cultivated acres of land, to make sure that right people get the right amount of money. In order to succeed in the global knowledge economy the EU will have put a lot of resources into knowledge-based assets. Therefore it will be more important to be able to properly measure the number and quality of innovations 23 Pomeda et al. (2002), Wodecki (2004), Rybinski, Wodecki (2008), 13 or number of cooperation initiatives between university and business, than to measure the number and quality of land farms or livestock. So we need to develop simple and efficient measurement system to quantify intangibles, to make sure that significant funds are given to right people and to proper initiatives. Measurement of intangibles is precisely the area of research covered by the intellectual capital. An brief summary of methodology developed to measure the intellectual capital of cities is presented in the next section, it is summarized on one chart. It was developed by Ernst & Young on the request of the Polish Ministry of Regional Development. One of recommendations of this paper is to launch a pilot project of measuring regional or metropolitan intellectual capital, based on already developed methodology, which can be easily modified if need be. 4. Can evaluation methodology be transformed/expanded to include intellectual capital of countries/regions? It is too early to determine what will be the rules guiding new Cohesion policy or post-Lisbon strategy. These rules will be determined by a political compromise among 27 member states in the coming 2-3 years, to be implemented in New Financial Perspective 2014-2020. However several strategic directions can be already be indentified24: European Union vision 2020, with strong focus on climate, energy security and innovation Fewer priorities, consistent with the EU vision and with the desired global role of the EU More flexibility Simplification Performance determined funds allocation and stronger conditionality These preliminary strategic directions imply that a proper strategic planning process should take place. It should include the following steps: Creating EU2020 vision statement and strategic goals, which should be in a SMART form (Specific, Measurable, Achievable, Relevant, Timely) Create proper metric to measure progress (e.g. green GDP, national/regional intellectual capital, etc.) Cascade strategic goals to countries and regions, the new measurement metric should be used to determine what will be country region contribution to achieving the EU strategic goals, and accordingly what resources will needed 24 On the basis of Barca report and draft EC budget review dated 6th October leaked to the media 14 Create and implement new conditionality rule, country that contributes more to achieving EU goals receives more funds, countries/regions that fail to perform receive less funds Initially allocate only small part of the envelope to particular countries or regions based on ex-ante evaluation of projects that lead to fulfillment of cascaded strategic goals Further disbursements of EU funds should be based on ex post evaluation of completed projects, successful activities should be strengthened, failing activities should be terminated. Local national or regional policies that do not contribute to EU strategic goals should be funded locally. This is of course the theoretical strategic setup that does not take into account political pathdependence, as it would imply that large part of CAP is shifted to the national domain, which would be desirable but politically next to impossible. In such ideal strategic setup intellectual capital methodology comes handy. One can imagine that EU strategic goals will include some indicators relating EU to external world, some indicators that measure the well-being of citizens, some indicators that measure the efficiency of the EU regulatory framework (is the EU single market working efficiently), or the quality and efficiency of the pan-European transportation networks, and finally some indicators that measure EU climate change policy progress and EU innovation policy progress. As explained above these indicators cannot be too many, should be very simple and easy to understand by an average citizen. For example when someone sets a target that within 10 years 5,000 km of pan-European highways will be built, it matters very little for the average citizen. However, when the goal states that the transportation time on a 1000 km distance will drop by X percent and the travel cost will drop by Y percent, it is both easy to verify and it matters for the EU citizens, as it saves them both time and money. It is an example of the applications of intellectual capital methodology to measuring policy outcomes. Instead of measuring the physical objects (bricks, kilometers of asphalt) we should measure intangible outcomes such as changes in the quality of life ( ie. shorter travel time in this case). Another example if flexibility in assessing the progress towards the EU strategic goals. Each country or region progress should be assessed jointly within the context of the new conditionality rule. For example one country may perform less than satisfactory along the climate change strategic axis, but could contribute a lot to other EU strategic axes. Proper 15 weight system25 should be adopted to determine overall contribution of each country/region to EU strategic goals, and then the new conditionality rule should be applied. As recommended earlier it is important to provide information to EU citizen in an easy to use and attractive way. It applies to raw data analysis, but even more to presenting the results of policy evaluation. A good example of such visualization is a model of measuring intellectual capital of cities proposed by Rybinski and Wodecki presented below. Figure 2. Methodology of measuring intellectual capital of Polish cities. 25 Proposing such multidimensional weight system will not be easy as member states think in terms of one dimension only – allocation of money. 16 The model measures the potential of all important internal stakeholders in the city: its government, companies, citizens, culture institutions, media, other local governments, higher education and science institutions. The size of the circle corresponds to the measured potential according to adopted set of normalized indicators. The connections between circles measure quality of the city internal relationships between key internal stakeholders. Thick connections refer to good quality relationships, thin ones refer to poor cooperation of service provision. External boxes refer to important external stakeholders in Poland and abroad, the thickness of connecting lines describes the quality of relationship. For example non-existing connection between city and foreign diaspora means that city does organize or is not aware of a foreign diaspora of its (former) citizens. The bottom part defines outcomes, divided into five groups: attractive city, reach and financially stable city, knowledge and innovation rich city, sustainable city (eg. green) with high cohesion (eg. lack of social exclusion), good city brand and well known culture offering. Again size of hexagrams depends on the value of the outcome indicators. By clicking a mouse you can very quickly compare various cities, find their strengths and weaknesses. Policy monitoring becomes fast and efficient, without reading hundreds of pages of complicated evaluation reports. Source: Rybinski, Wodecki (2009) This model is useful to think about not only because it offers attractive evaluation visualization methodology. It can be used to build a consistent evaluation methodology that takes into account all important factors that will determine future EU success, or failure. The figure 3 below explains how it can be achieved. The new approach proposed here significantly broadens the scope of policy evaluation, but simplifies it measurement and reporting at the same time. The traditional policy evaluation approach focused outputs and outcomes. This is presented in the lower part of the chart, where outputs and outcomes are grouped into five categories: global Europe, growth and jobs, knowledge and innovation (post-Lisbon), sustainable development (climate change and energy security), cohesion and stability (territorial cohesion, financial and fiscal stability, demographic challenge). But setting SMART goals in terms of outcomes is not enough, as these goals will not be met if the level of intellectual capital of the European Union does not improve significantly. In this model we would define intellectual capital as the internal potential of major stakeholders (circles in the centre), quality of internal relationships between major stakeholders, exhibited as lines connecting the circles. But in order to achieve some goals EU needs high quality relationships with external world, some key stakeholders are listed in boxes on the left and right side of the graph: other countries, global media, global business etc. Quality of relationships will be measured by the width of the connecting arrow line. This chart could be analyzed also from the national perspectives, when 17 policy outcomes and external relationships will be measured only for a given country. One of the measures that could be adopted to describe the relationship between national central government and EU bodies could be periodical strategic assessment of how country strategy relates to the EU vision and EU strategic goals. Figure 3. Proposed EU policy evaluation model – intellectual capital framework Source: own analysis based on Rybinski, Wodecki (2009) This model allows every EU citizen with just few mouse clicks to see on few computer screens which countries contribute above or below average to which elements of EU intellectual capital and policy outcomes. In this model EU policies are evaluated by measuring policy outcomes, stakeholders potential, quality of relationships between internal stakeholders and quality of relationships with the external world. The current evaluation practices can be easily embedded in the new model. For example cohesion policy outcomes as measured by the GDP per capita, now can be measured by a broader set of outcomes: growth and jobs (here GDP measure can be combined 18 with employment measures), knowledge and innovation (here a link to post-Lisbon strategy can by created), sustainable development (Sustainable Development Scoreboard can be used here), cohesion and stability (fiscal deficit and public debt measures, financial sector stability measure, income variation, pre-school education variation etc.). Barca report recommendations can also be easily embedded in this framework26. This way many weaknesses of the GDP measure presented earlier can be eliminated by adopting a proper set of outcome indicators. Policy outcomes will be achieved only if intellectual capital of the EU structures (human capital, organizational efficiency, knowledge infrastructure) is significantly increased. Specific goals can be set and monitored during the evaluation process. Similarly the quality of internal (EU) and external relationships will be of utmost importance for the success of EU policies, proper goals for the relationship quality should be set and evaluation processes should be designed. 5. Can Europe gain competitive edge in the global knowledge economy by adopting intellectual capital framework in policy planning and evaluation Intangible assets are recognized as the key drivers of growth in the global knowledge economy of the 21st century. This applies to all levels of human activity: corporate, regional, national or supranational. Therefore regions and nations that put in place proper measurement and evaluation systems that help to manage and develop important intangible assets will gain competitive edge. It is hard to understand why we have precise knowledge about the number of cows in Europe, but we have very weak information about the number and quality of relationships between universities and businesses. Why we spend sizeable resources to compute regional GDP data with a two-year lag, which becomes almost irrelevant from the policy monitoring viewpoint, and at the same time we do not implement cheap and simple technologies that will give easy-to-use access to collected data to every EU citizen. Before voting in local elections citizen would like to know whether average travel time to work has gone up or down, waiting line to the doctor has increased or decreased, pupils in schools are doing better or worse. And informed citizen should be able to compare this outcomes over time and between various countries, cities or regions. Intellectual capital has to be well balanced. If company workers have large human capital (all Ph.Ds from best universities) but cannot cooperate and fight all the time (i.e. internal relationship capital is low) such company will not succeed. The same applies to the EU, we 26 We do not discuss here whether Barca report recommendations should be implemented or not, but simply point to a fact that presented here intellectual capital framework would easily facilitate such changes. 19 need to monitor closely both internal and external relationship capital, to be able to use it effectively to achieve policy goals. One of the basic management sciences statements is “can’t measure, can’t manage”. It applies with a particular strength to stakeholders potential, internal and external relationship capital, which are crucial elements of EU intellectual capital. Sometimes the fact the given activity is measured changes people behavior in a positive way. The same should happen in the EU when we adopt intellectual capital methodology. An obese man came to a doctor asking for help. What should I change, he asked. Should I stop eating some meals? Do not change anything, doctor replied. Simply every time you eat something take down a note in a special notebook, and then read it every evening. This men lost 10 kg within one month without any forceful change of his eating habits. 6. Can future Cohesion policy be based on intellectual capital? Will it help to integrate new Cohesion policy with post-Lisbon agenda? Future of Europe will depend on our ability to remain one of the most innovative regions in the world. Therefore cohesion policy should be closely linked to post-Lisbon strategy, ideally both should use the same language and speak about achieving similar policy outcomes. Already in 2006 EU innovation strategy rightly stated that Europe’s ability to compete internationally will not materialize unless “it becomes more inventive, react better to consumer needs and preferences, and innovates more”. On the other hand the impact of the Lisbon strategy on some countries was close to nil, DemosEuropa (2009) rightly reminds that: “The other important feature of the European situation is that there is a growing gap between the best and the worst performing countries. The impact of the Lisbon Strategy has arguably been less pronounced in the larger countries. “For the UK, it is tempting to claim that Lisbon may as well not have existed”, claims one comprehensive study27. The French labour market and pension reforms have been driven by domestic concerns rather than reference to the Lisbon strategy. National Reform Programmes have received more attention in the smaller member states and have been debated in some of their national parliaments”. When European strategy is ignored in largest member states, it will never fly. Therefore the new policy strategic setup should be strongly inclusive, national government, national media and citizens in all countries should feel engaged. Moving from passive benchmarks (with 27 Tilford, Whyte (2009) 20 infamous and ill-designed 3% of GDP in R&D spending as a stark example) which characterized failed Lisbon agenda to measuring policy outcomes and measuring intellectual capital should provide for such a shift of attention. If new policy design and evaluation is combined with strong conditionality (both in form of a carrot and a stick) policy visibility will become even stronger. For example the proposed policy evaluation model will immediately show what is UK or France contribution to EU vision, and below average performance will immediately spark question and policy debate at home. It is also straightforward to see that the proposed framework combines new cohesion policy and new post-Lisbon strategy into one. Of course devil is in the details. For example if effective conditionality is imposed on countries based on their contribution to achieving EU vision, then a proper flexible system of measures needs to be developed if country excels in one area (eg. innovation improvement), but lags in another (eg. climate change). Intellectual capital framework offers feasible path forward to integrate new cohesion policy and new knowledge and innovation strategy. 7. Intellectual capital as a tool to generate new strategic momentum for policies in the new financial perspective after 2013. Strategic momentum in the EU has been lost. Cohesion policy and Lisbon strategy have largely failed to deliver expected outcomes. European Commission is perceived as weak, focusing more on procedures than on strategic activities. Member states prefer to have weak first European President, to make sure that his or her vision does not dominate over local agenda. At times when innovation is key to prosperity, EU innovation support system is plagued by unnecessary bureaucracy, which kills innovation. Continuing along this path means weak Europe, unable to compete with United States, with rising China, Asian tigers or BRICs. It is high time to deliver positive change across many dimensions. As Barca Report rightly suggests there should few priorities, and resources should be concentrated on these priorities. “The choice of the core priorities should result from a high-level political debate, but six possible candidates, discussed in some detail in the Report, are: innovation and climate change, with a largely economic (“efficiency”) objective; migration and children, with a predominantly social (“social inclusion”) objective and skills and ageing, where the two objectives are of similar importance”. It is also high time to improve the process of policymaking in Europe. More time and resources should be devoted to strategic goals, and less to other activities. Key strategic steps are described in this paper in section 4. 21 This paper proposes the policy evaluation structure based on the intellectual capital methodology. It shows that in the knowledge and innovation era we should start setting goals and start measuring important intangible assets. Trust, quality of relationship, perception, good brand, engagement, clarity of communication, inter-generational policy fairness. These are important intangible assets that are often unmeasured and their improvement is not explicitly targeted by European policies. And often policy failures take place because various form of intellectual capital are too low. Intellectual capital framework presented in this paper allows to overcome the weaknesses of existing policy evaluation framework. We should take Albert Einstein statement very seriously and implement it. “Not everything you count counts; not everything that counts is counted” Finally, when the EU intellectual capital model is created, it can be easily cascaded down to member states. It will ensure that the same policy objectives are shared and the same “EU policy language” is spoken at all levels of governance in the EU. On the basis of the above discussion author proposes four recommendations: 1. Connect to the EU citizen. Policy goals and statistical data should be reported in terms which are important to the EU citizen. Playing with data should be fun and easy, the good benchmark is offered by www.gapminder.org 2. Start several projects of measuring intellectual capital of selected regions. Some 10-15 regions should suffice to account for the EU heterogeneity. If launched soon the first results should be ready by the end of 2010. 3. Build EU intellectual capital model, which will offer a strategic framework for the future EU policy evaluation. Cascade this model down to member states. It will ensure that the same policy language – connected to EU citizens – is spoken at all EU governance levels. 4. Take seriously Albert Einstein statement: “Not everything you count counts; not everything that counts is counted”. Stop counting cows and start measuring the quality of intangible assets. One economist asked to review proposals presented in this paper said “a number of interesting ideas, worth discussing. But I doubt whether it will change the Commission way of thinking. Ideas are is too innovative”. The proposal outlined in this paper and above recommendations, if implemented, will ensure that innovative, 21st century thinking will matter, and ideas which are not innovative enough will be filtered away. 22 References: Australian Accounting Standards Board (2008) “Initial Accounting for Internally Generated Intangible Assets”, Discussion Paper, Commonwealth of Australia, 2008. Bachtler J., Wren C. (2006) “The Evaluation of EU Cohesion Policy: Research Questions and Policy Challenges, Journal Regional Studies, Volume 40, Issue 2 April 2006. Barca F. (2009) “AN AGENDA FOR A REFORMED COHESION POLICY. A place-based approach to meeting European Union challenges and expectations”, Independent Report prepared at the request of Danuta Hübner, Commissioner for Regional Policy, April 2009. Bounfour A., Edvinsson L. (2005) “Intellectual Capital for Communities, Nations, Regions and Cities”, Elsevier, 2005. 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