Download Technological upgrading in the Eastern Mediterranean

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
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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.
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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.
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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.
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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
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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.
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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
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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.
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DRAFT: MAY 19, 2002
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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
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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
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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
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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)
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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