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Cyprus: Technological Upgrading in the Eastern Mediterranean by Jeffrey Sachs and Theodore Panayotou As an economy develops, the structural bases of economic competitiveness also evolve. At low levels of development, competitiveness is achieved mainly through the effective exploitation of land, primary commodities, and unskilled labor. As economies move from low- to middle-income status, competitiveness is increasingly achieved by harnessing global technologies to local production. Foreign direct investment, joint ventures, and outsourcing arrangements help to integrate the national economy into international production systems, thereby facilitating the improvement of technologies and the inflows of foreign capital that support economic growth. The transition from middleincome to high-income status involves a transition from a technology-importing economy to a technology-generating economy, from technological adoption to innovation. At high levels of income, global competitiveness depends on innovation, high rates of social learning, and rapid adaptability to new technologies. Over the past 20 years, Cyprus has enjoyed strong overall economic performance, averaging approximately 4 percent annual growth in income per person. Much of this growth has come thanks to the strong banking and tourism sectors that have played an important role in the economy’s export structure. But despite its recent success, Cyprus has now reached a point where it must give increased stress to technological innovation in order to continue on the path of rapid growth. The country needs to focus on acquiring and DRAFT: MAY 19, 2002 creating technology in such areas as information and communications to develop globally competitive service sectors. Development Transition Stages The transitions from primary commodities, to increased utilization of imported technologies, and ultimately to innovation require changes in government priorities and spending patterns, as well as in the internal structure and aims of business enterprises. At a low level of development, government’s main job is to provide overall political and macroeconomic stability and sufficiently free markets to permit the effective utilization of primary commodities and unskilled labor. As development proceeds to the next stage, government’s priorities should focus on improvements in physical infrastructure (ports, telecommunications, roads) and regulatory arrangements (customs, taxation, company law) to allow the economy to integrate more fully with global markets. But perhaps the hardest transition is from technology-importing development to innovation-based development. This requires a direct government role in fostering a high rate of innovation, through investments in research and development, higher education, and improved capital markets and regulatory systems that support the startup of high-technology enterprises. Enterprises and indeed whole industries similarly must evolve in the process of development. At low levels of development, competitiveness can be built upon smallscale, family-based enterprises. The division of labor between enterprises is very limited and the specialized knowledge of enterprises is also limited. Peasant farmers, for example, may have little to do with each other, and simply sell their agricultural cash crops to national marketing agencies. Capital-intensive mining industries similarly may require little integration with the rest of the domestic economy. At the middle stages of 2 DRAFT: MAY 19, 2002 development, the interface between domestic production and world production generally takes on much greater significance. Domestic firms are often producers of components for global production networks, or carry out final assembly operations using standardized technologies. Business enterprises grow in size, but can often be managed in a fairly rigid hierarchical form. Enterprises are often co-located into export processing zones or industrial parks, with each mostly focused on its international partners. Also, there is relatively little learning or independent lines of authority within the business enterprises. The transition to the innovation-based economy, on the other hand, requires a radical shift in enterprise and industrial organization. The enterprises become much less hierarchical, with much more delegation of authority to sub-units within the enterprise. These sub-units are often linked together in flexible networking arrangements that facilitate rapid shifts in the division of labor within the organization, and of course innovations within sub-units. Firms invest heavily in the continual training and upgrading of their workforce. Compensation systems are similarly geared to decentralization, with incentive payment schemes linked to productivity of different parts of the enterprise. In the same way, the firms within an industry also become much more interactive, with true industrial clusters characterized by a sophisticated division of labor, increasing flows of workers between enterprises, and a mix of fierce competition and cooperation among enterprises within an industry. In doing so, these firms develop and sustain world-class technologies in their production, marketing, and customer-service models. These are, of course, the key characteristics that have been noted in American high-tech zones such as Silicon Valley, Route 128, and the Research Triangle of North Carolina. 3 DRAFT: MAY 19, 2002 Many of the failures in economic development in recent years involve countries getting stuck at the juncture between development stages. For example, some countries successfully master the initial stage of commodity-based growth, but then fail to make the transition to technology imports and globalized production systems. Similarly, some countries effectively reach the middle stage of development, but then fail to progress to home-grown innovation. These transition points are indeed difficult to manage. They require new ways of organizing government and enterprises, and it is not surprising therefore that many countries fail at making the appropriate transition, or even to recognize within government or industry that such a transition is needed. Table 1 highlights several indicators of science and technology, comparing Argentina, Brazil, and Mexico, all countries stuck at the technology-borrowing stage during the past 20 years, with four countries, Korea, Ireland, Israel, and Singapore, that successfully made the transition from borrowers to innovators over the past 20 years. The table also includes Cyprus. Cyprus continues to remain in the non-innovating, technologyborrowing stage of development, despite its attainment of a per capita income almost comparable to innovating countries such as Israel, Ireland, and Korea. The explanation lies, undoubtedly, in the rapid growth of the tourist and offshore sectors over the past two decades. Since both these sectors are losing steam, the first because of environmental degradation and rising costs and the second because of impending higher taxation due to Cyprus’s expected EU accession, Cyprus cannot expect the future to be a simple projection of the past. Although relatively wealthy, with average annual income of roughly $15,000 per person per year, Cyprus still needs to make the shift to an innovation-based economy. 4 DRAFT: MAY 19, 2002 Table 1 shows that, despite its strong economic performance in the 1990s, Cyprus lacks the technological base of a true innovator. Expenditures on research and development, at 0.2% of GDP, are meager for a country at its stage of development, particularly those in the private sector. Low tertiary enrolment rates and a small percentage of students in science and engineering leave the country with less than one tenth the number of scientists per capita than Ireland. As a result, scientific innovations, as measured by United States utility patents awarded, remain at levels comparable to Brazil and Mexico. In order to continue its recent trend of economic growth, Cyprus needs to start investing heavily in technology. For the overall economy to continue to develop, Cypriot firms also need to become more sophisticated. Despite a relatively sound infrastructure and public sector as well as highly flexible labor markets, the country’s overall competitiveness is being held back by its lack of technological sophistication, particularly at the firm level. When compared to the 59 other countries assessed in the Global Competitiveness Report 1999, Cyprus ranked dead last on a question asking whether companies obtained technology by pioneering their own new products or by importing them from foreign companies. Cyprus also ranked 58th out of 60 countries regarding whether compensation was linked to performance. And, critically, Cyprus was ranked 49th in willingness to delegate responsibility within firms, achieving a similar score to India, Venezuela, and Zimbabwe. Special tasks are required for countries like Cyprus that are attempting to move from technology-using to technology-innovating economies—increased public and private spending on R&D, a fully transparent public sector, and increased sophistication of firm product development and management practices. 5 DRAFT: MAY 19, 2002 TABLE 1: KEY INDICATORS FOR SELECTED COUNTRIES THAT HAVE AND HAVE NOT TRANSITIONED TO BECOME TECHNOLOGY INNOVATORS Tertiary Average Average US enrolment in % growth utility sciences & in GDP patents Tertiary Tertiary engineering, per granted per enrolment enrolment as percent of capita, million R&D as per thousandper thousandtotal tertiary 1980population, % GNP, population, population, enrolment, 2000 1996-1999 1995 1990 1996 1997 Scientists and engineers in R&D (per million people), 1995 Scientific and technical journal articles (per million people), 1995 Hightech exports Exports as % as % GDP, GDP, 19951999 1998 Country Non-innovators Argentina 0.1 1.1 0.4 30.6 31.2 28.3 660 45.47 10 0.1 Brazil 0.2 0.4 0.8 10.4 11.6 26.9 168 17.32 10 0.2 Mexico 0.7 0.6 0.3 15.8 17.4 31.9 214 15.45 31 3.9 Cyprus 4.1 0.7 0.2* 15.0 23.0 19.3 209* N/A 46** 0.1 Ireland 4.8 21.6 1.6 25.8 37.1 30.5 2,319 249.86 80 25.5 Israel 1.8 106.2 2.1 28.9 34.9 49.3 4,828 779.44 36 3.6 Korea 6.2 55.0 2.7 39.5 55.8 32.1 2,235 65.87 42 7.2 Singapore 5.5 28.9 1.1 20.6 30.3 51.4 2,318 298.34 - 63.7 Innovators Sources: GDP growth figures come from the IMF World Economic Outlook, May 2001. Patent data come from the US Patent and Trademark Office, “Patent Counts by Country/State and Year, Utility Patents January 1, 1963 – December 31, 2000,” March 2001. Exports as a percentage of GDP come from the World Bank’s World Development Report 2000/2001. Remaining data comes from the World Bank’s World Development Indicators 2000. * Data for 1992 ** Data for 1996 taken from World Development Indicators, 2001 Competitiveness and Technological Innovation In overall competitiveness, Cyprus ranked 35th out of 60 countries, while in terms of per capita income it ranked 25th. In contrast, Singapore ranked first in competitiveness and only 13th in income per capita. Similarly, Taiwan, Korea, Portugal, Mauritius, New Zealand, and Ireland ranked significantly higher in competitiveness than in income per capita and Israel was at about the same rank in both. Only Greece, Cyprus, and Iceland among the 11 countries in Table 2 ranked significantly higher in terms of income than competitiveness. This is a reflection of the importance of low-technology, high-resource 6 DRAFT: MAY 19, 2002 content of past and current growth in these countries. But the case of Iceland is quite different from that of Cyprus and Greece. Thanks to the combination of a rich resource base and technological innovation, Iceland has a very high per capita income, almost three times as high as that of Cyprus and Greece. The expectation is that Iceland will continue to enjoy strong competitiveness and robust growth rates because of the sustainable management of its resource base and its high level of technological innovation, which is only second to Singapore’s among the selected countries (Table 2). Cyprus and Greece, on the other hand, continue to depend on traditional resource-based sectors such as mass tourism, agriculture, and low-technology manufacturing. They continue to have a level of technological innovation comparable to China, India, and Indonesia, countries with only a tenth of their per capita income. Cyprus has been doing a bit better than Greece in terms of per capita income and annual growth, but only because of a large offshore sector, which has peaked and is expected to shrink as a result of increased taxation as part of the adjustments for EU accession. TABLE 2: COMPETITIVENESS AND TECHNOLOGICAL INNOVATION IN CYPRUS AND OTHER SELECTED COUNTRIES Country Mauritius Korea Portugal Greece Taiwan CYPRUS New Zealand Israel Ireland Singapore Iceland GDP Per Capita (1999, US$, in PPP terms) Real Growth in GDP Per Capita (19901999) Competitiveness Ranking (out of 60) Openness of the Economy Quality of the Financial Sector Quality of Infrastructure Quality of Institutions Quality of Management Quality of Government and Public Sector Technological Innovation 3,411 8,719 11,824 11,873 12,700 13,965 14,597 3.90 4.67 3.15 1.56 5.03 2.47 1.32 32 22 24 37 11 35 14 0.40 -0.26 0.50 0.35 0.59 -0.56 0.45 -0.26 0.48 0.56 -0.38 0.60 -0.03 0.21 -0.47 0.40 0.22 -0.12 0.40 0.34 0.60 -0.51 -0.8 0.30 0.05 0.37 -0.46 0.87 -0.25 0.01 -0.56 -0.42 0.88 -0.61 0.77 0.24 0.66 -0.34 -0.52 0.67 -0.16 0.33 -0.80 0.38 -0.21 -0.55 0.75 -0.45 0.21 15,584 24,529 24,808 33,218 1.50 5.67 4.56 1.77 25 10 1 17 0.20 0.60 0.83 0.04 0.01 0.75 0.81 -0.16 0.62 0.29 1.03 0.75 0.74 0.52 1.28 0.84 0.64 0.86 0.95 0.67 -0.59 0.59 1.59 0.20 0.69 0.44 0.92 0.73 Source: Panayotou, T., J. Sachs and A. Warner, “The International Competitiveness Ranking of Cyprus”, a Joint CDB/CIIM/Harvard study sponsored by the Cyprus Development Bank, Nicosia, 2001. 7 DRAFT: MAY 19, 2002 Competitiveness is determined by more than just technological innovation. The openness of the economy, the quality of infrastructure and institutions, the depth of the financial sector, and the quality of management and governance affect a country’s competitiveness, both directly, through their effects on cost and productivity, and indirectly, through their effects on foreign investment, technological transfer, and, ultimately, technological innovation. As seen in Table 2, Cyprus has been among the most closed economies, in contrast to countries like Singapore and Ireland, which have been wide open, welcoming free trade and foreign investment. Indeed, an “island mentality” has prevailed in Cyprus, perhaps as a defensive mechanism against a long history of colonialism and outside interventions. This “island mentality” is now beginning to gradually change as part of the effort to gain access to the EU. Indeed, with the exception of infrastructure, in which Cyprus ranks 24th among the sixty countries, in all other determinants of competitiveness (i.e. the quality of financial institutions, management, and governance) Cyprus is more comparable to Mauritius, with one-quarter of Cyprus’s per capita income, than to Israel, Taiwan, and Portugal, which are at the same level of income as Cyprus. The low ranking of Cyprus is terms of management (40th) and quality of institutions (41st) is of particular concern. Economic Creativity and Information Technology The Global Competitiveness Report for 2000 developed an index of economic creativity that “captures the ability of countries to continuously renovate and improve their productive activities. This process requires renovating technologies as well as firms themselves” (Warner 2000). A technology index captures renovating technologies either 8 DRAFT: MAY 19, 2002 by innovating or by adoption (technological transfer), whichever component is largest. A start-up index consists of the availability of venture capital and the degree of difficulty of starting a new business. The economic creativity index is an average of the technology and the start-up indices. Figure 1 shows that the economic creativity index and GDP per capita are positively correlated, but there is also a significant spread with some low-income countries being economically creative while some high-income countries are not. Cyprus is one of the middle- to high-income countries that has a low index of economic creativity. Figure 2 shows how three groups of countries fare in terms of economic creativity and its components. As one would expect, developed countries and East Asia performed better in terms of economic creativity than Latin America. Figure 3 shows that economic creativity is correlated closely with the use of information technology. This is no surprise, since the use of the internet and the new information technology is a reflection of willingness and ability to employ new technologies to raise productivity and develop new markets—in other words, the ability to innovate and adapt. As seen in Figure 5, even after controlling for the importance of telephone infrastructure in internet use (Figure 4), there is a close relationship between innovation and information technology (as measured by internet depth). Below we will use these ideas and relationships to better understand why Cyprus ranks so low in terms of technological innovation and international competitiveness. 9 DRAFT: MAY 19, 2002 10 DRAFT: MAY 19, 2002 Level of Technology, Innovativeness and their Determinants The level of technology and the ability of a country to innovate depend on many factors, most importantly: (1) the level and quality of education, (2) R&D spending by both government and firms, (3) the quality of research institutions, (4) the importance of research to firms and their collaboration with universities, (5) intellectual property rights protection, and (6) licensing of foreign technology (Global Competitiveness Report, various issues). Cyprus, with a level of technology about half that of Israel and a negative score on technological innovation (Tables 2 & 3) has ranked 37th in the former and 43rd in the latter among sixty countries. One strong explanation is to be found in the very low percentage of GNP spent on R&D, which at 0.18% is one of the lowest in the world (Table 3). Company spending is also among the lowest, as is collaboration with universities. This persists even though firms claim that research is important to them. Protection for intellectual property rights continues to be weak (Table 3) and application for patents rare. The quality of research institutions is low, and Cyprus seems content to be licensing foreign technology rather than producing at home. Cyprus has been granted only 0.7 US patents per million of population (Table 1) and high-technology exports account for only 0.1% of GDP. The educational system may have a lot to do with the state of affairs, since the tertiary education enrolment is relatively low (one third of Korea’s, Taiwan’s, or New Zealand’s) and under 20% enroll in sciences and engineering compared to 51% in Singapore, 49% in Israel, and 31% in Ireland (Table 1). Only 200 scientists and engineers per million people are involved in R&D in Cyprus compared to almost 9,000 in Israel or 11 DRAFT: MAY 19, 2002 2,300 in Ireland, Korea, or Singapore. Cyprus has one of the world’s lowest retention rates of its engineers and scientists (Table 4). TABLE 3: TECHNOLOGY INDICATORS FOR CYPRUS AND COMPARABLE COUNTRIES, 2000 Country Mauritius Korea Portugal Greece Taiwan CYPRUS New Zealand Israel Ireland Singapore Iceland Level of Technolog y R&D Spending as % of GNP Quality of Research Institution s Intellectua l Protection Importanc e of Research Firms Company Spending on R&D Collaboratio n with Universities Licensing of Foreign Technologie s 3.5 4.9 3.6 3.2 5.4 3.7 5.2 6.5 5.6 5.9 6.0 0.17 2.82 0.62 0.47 1.92 0.18 1.04 2.35 1.61 1.13 1.55 3.2 4.0 3.5 3.4 4.6 3.1 4.8 6.5 4.6 5.1 4.9 4.0 3.9 5.0 4.1 5.0 3.6 5.9 5.0 5.0 5.9 5.0 4.1 3.0 3.6 3.7 3.0 3.4 3.6 3.7 3.6 3.3 3.5 2.7 4.1 2.5 2.6 4.0 2.6 2.9 5.0 3.5 4.1 3.6 2.8 3.4 4.5 3.4 4.2 2.2 3.4 3.9 3.8 4.2 3.2 4.3 5.2 5.4 4.8 5.4 5.1 5.0 5.1 4.8 5.5 4.6 Source: Panayotou, T., J. Sachs and A. Warner, “The International Competitiveness Ranking of Cyprus”, a Joint CDB/CIIM/Harvard study sponsored by the Cyprus Development Bank, Nicosia, 2001. TABLE 4: EDUCATION INDICATORS FOR CYPRUS AND COMPARABLE COUNTRIES, 2000 Average Years of Schooling (age 25 and up) Country Mauritius Korea Portugal Greece Taiwan CYPRUS New Zealand Israel Ireland Singapore Iceland 6 10 5 8 9 9 12 9 9 8 9 Quality of Public Schools Math & Basic Science in Schools Tertiary Education Enrolment 4.4 4.8 3.5 4.4 5.7 4.8 4.1 5.6 5.0 6.5 4.6 7 60 39 47 67 23 63 41 41 39 37 4.2 4.8 4.1 2.9 5.8 4.9 5.6 5.7 6.3 6.2 5.7 Talent Remains in the Country 3.5 4.1 4.1 3.5 5.0 2.9 3.1 4.8 4.8 5.0 5.1 Source: Panayotou, T., J. Sachs and A. Warner, “The International Competitiveness Ranking of Cyprus”, a Joint CDB/CIIM/Harvard study sponsored by the Cyprus Development Bank, Nicosia, 2001. Telecommunications and Information Technology As discussed in an earlier section, there is a strong relationship between telephone lines and information hosts and hence between the telecommunications infrastructure and the use of information technology, and, in turn, a strong relationship between IT and the 12 DRAFT: MAY 19, 2002 innovation index. As seen in Table 5, Cyprus ranks relatively high in terms of telephone lines (58.5 per 100 persons) and the reliability of the telephones (a score of 6.2 out of 7), comparing favorably with Israel, Ireland, and even Iceland. Cellular telephone use was relatively low until 1999 but has accelerated since, and international phone has also improved in reliability, access, and cost over the past two years. Access to the internet is also high, with a score of 5.9 out of 7.0, which is comparable to Israel, Ireland, Singapore, and New Zealand. TABLE 5: TELECOMMUNICATIONS AND INFORMATION TECHNOLOGY IN USE, 2000 Country Mauritius Korea Portugal Greece Taiwan CYPRUS New Zealand Israel Ireland Singapore Iceland Telephone Lines per 100 persons Reliability of Telephones Cellular Telephones per 100 persons Cellular Telephones widely used International Phone Access to the Internet Use of Email Internet for Commerce Internet for Customer Service Internet for Supplier Relations Internet for Information Number of Internet Hosts per 1,000 persons 21.36 43.26 41.34 52.44 52.44 58.50 47.90 5.3 6.2 6.0 5.3 5.8 6.2 6.3 5.18 30.25 33.15 19.53 21.50 18.01 21.59 6.2 6.6 6.6 6.2 6.3 6.8 6.8 3.8 4.9 4.8 4.5 4.4 4.4 5.7 4.2 5.5 5.2 4.6 5.4 5.9 6.1 6.4 6.5 6.5 6.3 6.5 1.0 6.8 20.8 49.4 32.1 24.4 56.1 31.2 46.5 52.2 60.6 75.0 63.0 90.2 47.9 79.5 65.2 60.6 55.8 54.9 71.4 53.7 56.3 100 98.2 97.9 98.2 95.3 82.3 96.0 493 4023 6008 4737 14,040 8,788 37,507 47.10 43.46 56.20 64.64 6.3 5.8 6.7 6.6 35.99 25.62 32.40 33.26 6.9 6.6 6.8 6.8 6.3 4.8 5.6 5.8 6.1 5.7 6.2 6.6 6.7 6.8 6.9 6.9 44.4 59.6 61.5 73.2 82.8 73.5 76.5 87.8 69.0 53.3 64.6 90.5 100 100 98.8 100 19.208 15.127 19,846 90,151 Source: Panayotou, T., J. Sachs and A. Warner, “The International Competitiveness Ranking of Cyprus”, a Joint CDB/CIIM/Harvard study sponsored by the Cyprus Development Bank, Nicosia, 2001. Where Cyprus is off the charts, however, is in the actual use of the internet. For example, with a score of 1.0, Cyprus is one of the lowest users of e-mail in the world. Cyprus ranks low in all uses of the internet, including e-commerce, customer service, supplier relations, information, and e-government. And here lies much of Cyprus’s difficulty in joining the information age and building a knowledge-based economy and society: Cyprus invests heavily in infrastructure and the hardware of IT— telephone lines, ISDN lines, personal computers, etc.(Figures 6-11)—but underinvests in the software and 13 DRAFT: MAY 19, 2002 content of information technology (Figures 12-13 and Table 6). While connections to the internet are ubiquitous, the use of the internet is generally limited, especially for business and government. Certainly, Cyprus has not succeeded in developing a culture for the use of IT as a standard operating procedure, and to the extent that IT use is correlated with innovativeness, Cyprus is not prepared to make the transition from a technology-importing economy to a technology-generating economy. This does not bode well for Cyprus catching up with the core of Europe. TABLE 6: NUMBER AND STRUCTURE OF IDENTIFIED WEB SITES Primary and secondary schools High schools and universities National ministries Regional and local authorities (regions, municipalities), Hospitals/clinics Total number of “population” Total number of Web sites % of web sites / total number of population 428 20 4.7 53 16 30.2 11 11 100 n.a. 24 n.a. 131 6 4.6 37 4 11 124 0 0 817 81 - Source Internet / PIO Internet / PIO Internet / PIO Internet / PIO Internet / PIO Museums Internet / PIO Libraries Internet / PIO TOTAL = - Notes : n.a. = Not available PIO = Press and Information Office (State organization) 14 DRAFT: MAY 19, 2002 Total telephone lines per 100 inhabitants in Med. Breakdown by country, 1996- 1999 100,0 90,0 1996 80,0 1997 70,0 1998 60,0 1999 50,0 40,0 30,0 20,0 10,0 rke y a Tu ria ni s i Tu Sy co tin e les Pa lt a ro c Ma Mo n no rd a ba Le 99 n ) Jo t 19 I sr ae l (J ul y s Eg yp p ru Cy Al g eri a 0,0 Figure 7 Mobile subscriptions per 100 inhabitants in Med. Breakdown by country, 1996- 1999 50,0 45,0 40,0 1996 35,0 1997 30,0 1998 25,0 1999 20,0 15,0 10,0 5,0 rke y Tu nis ia Tu Sy ria Pa les tin e roc co Mo n Ma lta an Le ba no Jo rd 199 9) yp t Isr ael (Ju ly rus Eg Cy p Alg eri a 0,0 Figure 8 Source, Figures 7 to 13: S. Orphanoudakis, “Information Technology as an Instrument of Change and Growth”, unpublished manuscript, CDB, 2002. 15 DRAFT: MAY 19, 2002 Number of ISDN subscriptions per 100 inh. in Med countries - End 1999 2,4 2,3 2,5 1,5 2,0 1,4 1,5 1998 1999 1,0 0,5 - Israel Cyprus Figure 9 Growth rate of the number of personal computers per 100 inh. in Med countries - 1998/1999 4% Tunisia 9% Lebanon 16% Malte 20% Syria Egypt 32% Turkey 32% 41% Cyprus 46% Morroco 0% 10% 20% 30% 40% 50% Figure 10 Source, Figures 7-13: S. Orphanoudakis, “Information Technology as an Instrument of Change and Growth”, unpublished manuscript, CDB, 2002. 16 DRAFT: MAY 19, 2002 Pe rsona l com pute rs pe r 100 inha bita nts in Me d. Bre a kdow n by country, 1996- 1999 25 20 1996 15 1997 10 1998 1999 5 Alg e ri a Cy p ru s Eg yp t Is r ae l J or da n Le ba no n Ma l te Mo rro co Pa le s tin e Sy ria Tu ni s ia Tu rk e y 0 Figure 11 Number of access providers in Med. Breakdown by country, 1997 - 1999 120 100 80 1997 60 1998 40 1999 20 ey y isia Tu rk Tu n orit Pa les tinia nA uth Mo roc co n Ma lt a dan el ano Leb Jo r Isra Cy pru s 0 Figure 12 Figure 13 Source, Figures 7-13: S. Orphanoudakis, “Information Technology as an Instrument of Change and Growth”, unpublished manuscript, CDB, 2002. 17 DRAFT: MAY 19, 2002 What is Needed Cyprus shares with Israel (and to some extent with Ireland) many of the push factors that led these two countries to embark 20 years ago on a determined effort to shift to a knowledge-based economy: (1) absence of significant natural resources, (2) dependence on imported energy, (3) a small population, (4) high wages , and (5) chronic political conflict and fragile peace. Cyprus further shares with the Ireland of 20 years ago impending entry into the European Union. But, unlike Ireland, Cyprus’s accession has a regional significance, as it becomes the easternmost and southernmost outpost of the Union to the Middle East and beyond. While Cyprus shares all these common push factors with Israel, Ireland, and other countries that have succeeded in making the transition to a knowledge-based economy, the pull factors have been largely absent in Cyprus. The limited openness of the economy, the weak link between pay and productivity, the strong labor unions, the dependence of government policies on interest groups, the tight restrictions on capital flows, the lowrelevance educational system, and the absence of a first-rate research university are a few among many factors that keep Cyprus from making the transition to a technological innovator. Such a transition is needed if Cyprus is to continue to enjoy rapid growth and convergence with the core of Europe, and to tap the opportunities that, given its location, are opened up by EU accession. A number of policy changes and new initiatives are needed if Cyprus is to realize its full potential. First, the government should continue to liberalize the economy (capital flows, exchange rate, openness, public sector reforms, etc.) at a faster pace and to the 18 DRAFT: MAY 19, 2002 greater extent and depth that are required in order to prepare the economy for accession to the EU. Second, it is necessary to reform the educational system to make it more flexible and relevant to the information age and to the effort to build a knowledge-based society. Third, the government should increase the national R&D expenditure from the current meager 0.2% to the EU average of 2.5%, by both increasing its own share and providing incentives to the private sector to increase theirs through R&D investments in private companies and tax-deductible donations to educational and research institutions. Fourth, the government should establish a National Science and Technology Foundation along the lines of the National Science Foundation in the US, to provide competitive grants for research. Fifth, the government or the private sector (or jointly) could establish a worldclass research university or research center that would focus on cutting-edge basic and applied research with funds from the EU, NSTF of Cyprus, private donations, and contract research for the private sector. In doing so, Cyprus could invite other world-class universities or research centers to collaborate in establishing graduate education in science and technology in Cyprus and act as a catalyst of the “culture change” that the emergence of the knowledge-based economy entails. Areas that offer the most opportunities include informatics, computer networks, telecommunications, e-commerce, biotechnology, diagnostics, and molecular therapy. Furthermore, incentives must be introduced to promote the entrepreneurial spirit by recognizing and rewarding those who risk and succeed. The deregulation of the telecommunications sector should accelerate and a fair and free competitive environment should be established to encourage additional actors to invest in more rapid deployment of a modern and accessible infrastructure. At the same time, a regulatory framework and an independent regulatory authority should be 19 DRAFT: MAY 19, 2002 monitoring and enforcing the rules of free and fair competition. It would also be necessary to speed up the installation of an efficient and cost-effective information infrastructure including high-speed universal access of citizens and businesses, as well as an equally efficient and cost-effective network of applications such as on-line government, regional ecommerce, healthcare, shipping, and wireless on-line services, etc. Finally, incentives could be provided for small- and medium-size enterprises to connect to the internet and to trade on-line, and a venture capital fund could be created to encourage the private sector to invest in high-risk technology products and services. 20