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KNOWLEDGE PERSPECTIVE ON ECONOMIC POLICY IN EU ACCESSION COUNTRIES Knowledge Economy Forum February 2002 World Bank Paris INGREDIENTS OF A KNOWLEDGE ECONOMY Economic policy conducive to the establishment of a knowledge based economy Building an efficient ICT infrastructure Education system which trains knowledge workers Fostering innovation systems serving private and public institutions ECONOMIC POLICY FUNDEMENTALS Price and trade liberalization Hard budget constraint on banks and enterprises Enabling environment for private sector, particularly new enterprises Tax system and public expenditure program which promotes enterprise and government efficiency and fiscal balance Stable macro-economic policy Adequate financial market regulation Source: de Melo, Denizer, and Gelb 1996; EBRD 2000. Turkmenistan Belarus Tajikistan Uzbekistan Azerbaijan Ukraine 1995 Russian Federation Albania Armenia Romania Moldova Georgia FYR Macedonia 1998 Bulgaria Kazakhstan Kyrgyz Republic Croatia Lithuania Latvia Slovenia Slovak Republic Estonia Czech Republic Poland Hungary Liberalization Index EU ACCESSION COUNTRY ECONOMIC POLICY PERFORMANCE Progress in policy reform, 1990s 1990 1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 ECONOMIC GROWTH HAS RESPONDED TO POLICY Regression of annual output growth on policies and initial conditions allowing for differential effects early in transition, 1990–99 Exogenous variable Endogenous variable: Annual rate of growth 1990–99 Coefficient t-value –11.01** –4.08 8.92** 2.60 3.32 1.60 8.26** 2.02 –4.03 –0.71 –2.18 –0.60 –11.52** –5.45 0.09 0.38 1.82** 4.50 0.60 (200) 6.89 Liberalization (t) Liberalization (t – 1) Liberalization (t – 2) Liberalization (t), 1995–99a Liberalization (t – 1), 1995–99a Liberalization (t – 2), 1995–99a WAR Initial conditions Initial conditions, 1990–94b R-squared (number of observations) Standard error of estimate ** Significant at 95 percent. a The coefficient for these variables measure the additional effect of liberalization during 1995–99. b The coefficient for this variable measures the additional effect of initial conditions during 1990–94. Source: Martin 2000. NEW ENTERPRISES ARE MORE PRODUCTIVE THAN OLD Share of employment in small enterprises, 1989–98 60 Hungary 50 Czech Rep. Poland Percent 40 Lithuania Latvia 30 Russian Fed. 20 Ukraine Belarus 10 Kazakhstan 0 1989 1990 1991 1992 1993 1994 1995 1996 1997 Source: World Bank database on small and medium-size enterprises 1998 Performance of old and new enterprises, 1996–99 Sales 15 10 5 Debt 0 Investment -5 New enterprises Old enterprises Export Source: Hellman, Jones and Kaufmann(2000). Employment Changes in real output, 1990–2001 120 Index (1990 = 100) 110 100 CSB 90 80 Europe and Central Asia 70 CIS 60 50 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Note: Europe and Central Asia is the average of Central and Southeastern Europe and the Baltics (CSB) and the Commonwealth of Independent States (CIS). All aggregates are population-weighted. Values for 2001 are projected. Source: World Bank country offices. WHAT MORE SHOULD ECONOMIC POLICY DO TO CREATE A KNOWLEDGE ECONOMY? Is there more to it than good innovation policy, investment in higher education, and investment in ICT? Will these additional policy measures, whatever they are, stimulate faster economic growth? BALLYHOURA, IRELAND Community consultative group Audit of skills by University of Dublin EU Leader funds Vocational training for adults Rural tourism Small scale enterprises Agricultural innovation Information technology and knowledge sharing BALLYHOURA WAS TRANSFORMED New agricultural technologies Cooperative marketing Training in Information technology Telemarketing Rural tourism Knowledge was critical; but so was local initiative BROADER LESSON: IRELAND PUT IN PLACE SOUND ECONOMIC FUNDEMENTALS Fiscal soundness Good exchange rate management Tax policy and regulatory framework which encouraged new business start-up and profitability Market discipline imposed on public enterprises Corporate oversight Efforts to attract foreign investment Government investment in R & D THE ECONOMIC BOOST IN EU ACCESSION COUNTRIES CAN COME FROM TECHNOLOGICAL ADVANCE Advanced countries have economic policies which encourage innovation EU accession countries must move from investment driven to innovation driven (Global Competitiveness Study) THE MOST ADVANCED ECONOMIES ARE INNOVATIVE World Economic Forum Global Competitiveness Report 2001/2002 (Jeffrey Sachs, Michael Porter, et al) Global Competitiveness Index – GCI / Current Competitiveness Index – CCI T e c h n o l o g i c a l C o r e E c o n o m i e s Finland United States Canada Singapore Australia GCI 1 2 3 4 5 CCI 1 2 11 10 9 Norway Taiwan Netherlands Sweden New Zealand 6 7 8 9 10 19 21 3 6 20 Ireland United Kingdom Hong Kong SAR Denmark Switzerland 11 12 13 14 15 22 7 18 8 5 Iceland Germany Austria Belgium France 16 17 18 19 20 16 4 13 14 12 Japan South Korea Israel Italy 21 23 24 26 15 28 17 24 GCI 28 29 31 CCI 26 27 32 Greece 36 43 Czech Republic Slovak Republic Poland Lithuania Latvia Romania Bulgaria 37 40 41 43 47 56 59 35 39 41 49 42 61 68 Hungary Estonia Slovenia THE INGREDIENTS OF MOVING TO AN INNOVATION BASED ECONOMY ARE MANY World Econmic Forum Global Competitiveness Report 2001 / 2002 (Jeffry Sach, Michael Porter, et al) Global Competitiveness Index & Subindex GCI Total Hungary Estonia Slovenia Czech Republic Slovak Republic Poland Lithuania Latvia Romania Bulgaria 28 29 31 37 40 41 43 47 56 59 Technology Estonia Czech Republic Hungary Slovak Republic Slovenia Latvia Poland Lithuania Romania Bulgaria Public Institutions 8 20 21 29 30 34 35 41 47 50 Hungary Estonia Slovenia Lithuania Slovak Republic Poland Latvia Bulgaria Romania Czech Republic 26 29 30 34 38 41 48 51 52 53 Current Competitiveness Index & Subindex CCI Total Hungary Estonia Slovenia Czech Republic Slovak Republic Poland Lithuania Latvia Romania Bulgaria 26 27 32 35 39 41 49 42 61 68 Company Operations & Strategy Rankings Slovenia Estonia Hungary Latvia Czech Republic Lithuania Poland Slovak Republic Romania Bulgaria 28 32 33 35 41 47 55 57 63 70 Quality of the National Business Environment Hungary Estonia Czech Republic Slovenia Slovak Republic Poland Latvia Lithuania Romania Bulgaria 25 26 33 35 36 40 43 48 61 65 Macroeconomic Environment Hungary Slovenia Estonia Czech Republic Poland Lithuania Latvia Slovak Republic Romania Bulgaria 38 39 43 49 50 56 59 64 67 69 INVESTMENT DRIVEN ECONOMIES: THE CURRENT PHASE OF EU ACCESSION POLICY Harness technology from elsewhere Foreign investment is key High rates of investment Enhance legal systems to support business efficiency Attract new investors Discipline old less innovative companies EU ACCESSION COUNTRIES: COMPLETE BASIC ECONOMIC REFORM; AND ADD POLICY CONSISTENT WITH CREATING A KNOWLEDGE BASED ECONOMY Eliminate subsidies to non-innovating old enterprises (mostly in agriculture, coal, mining, railways, shipbuilding, and steel) Regulatory development for the financial system and creation of sophisticated capital markets, including a regulatory environment that encourages venture capital Better protection of intellectual property rights Policies to increase labor market flexibility (reduced mobility restrictions, low minimum wages, reduced termination restrictions) Effective social safety net (coordinated pension, unemployment and social assistance schemes) Continued building of legal and judicial institutions, with accountability of government Improved allocation of public expenditure, including more funding of R & D, and of higher education, while maintaining fiscal stability Policy to continue to reduce cost of start up by small and medium enterprises Quality of judiciary in transition economies (Percentage of enterprises that complain that courts sometimes, seldomly, or never exhibit positive qualities when resolving business disputes) 100 90 80 60 50 40 30 20 10 ov e n Bu ia l U ga Sl zbe ria ov ki ak sta Re n pu bl Es ic to Ro nia m an i Be a la r Hu us ng a Ar ry m Az enia er ba i Lit jan hu an ia Po la n Cz G d ec eor h gia Re pu bl i Cr c oa t Uk ia ra i M ne ol K do Ky aza va r k Ru gyz hsta ss R n ia ep n Fe ubli de c ra tio n La tvi Al a ba nia 0 Sl Percent 70 Unfair (a) High Cost (b) Weak Enforcement (c) (COMPANIES NEED TO CHANGE (DRUCKER) Corporate governance needs reform; companies to focus on innovation, reduce hierarchy Buyers, suppliers, producers are linked in network arrangements Firms invest in training and skills upgrade (knowledge workers dominate) Firms become global players