Download From quantity to sustainable quality Increasing intellectual capital

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
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