Knowledge economy, growth and development: a nexus

Text of the speech by Professor A D V de S Indraratna at the seminar on ‘Knowledge economy and urban growth’, organized by the National Academy of Sciences of Sri Lanka held in Colombo on April 6, 2011

Today, knowledge economy has almost become a buzzword among economists, planners and other professionals. First let me explain to you what is meant by knowledge economy. The term knowledge is as old as the term development because entrepreneurship or entrepreneurial knowledge is the kingpin of organization of production, which is basic to development. The concept of knowledge economy, however, is relatively new. It has evolved over the years. Let me first briefly trace its history.

Historical background

With the appearance of the Wealth of Nations of Adam Smith in 1776, economists began to talk of comparative cost of production. This was based on specific endowment of labour and physical capital of countries as a determinant of specialization of production and international trade. Economic growth, in other words, was treated as a function of labour and capital. Human or institutional knowledge and science and technology including R and D, which are all ingredients of knowledge, were not included in this equation, until about the 1930s.

The term Knowledge Economy was used for the first time in 1962 by the Princeton University Economics Professor Machlup, in his book The Production and Distribution of Knowledge in the United States Nevertheless, it was nearly another three decades later, when the economies of the world have become highly integrated or globalized with market economies and liberalized trade, it was begun to refer to knowledge economy in relation to production and international specialisation or generally to economic growth and development. Comparative cost advantage, as a basis of production and trade propounded by Adam Smith, was being replaced by competitive advantage of economies or countries.

Knowledge economy

Although Adam Smith wrote about the Wealth of Nations, he did not refer to people as the real wealth of nations and the role human skills and knowledge, or in sum, human capital would play in growth and development. With increasing globalization and integration of nations of the world international competitiveness has begun to depend on increase in productivity and innovation entailing value addition, branding and differentiation of products, new products as well as new and niche markets.

These depend rather more on human resource development than physical capital, with reforms in tertiary education entailing increasing vocationalisation and professionalisation of it advancement in S and T, enhancement of R and D and Information and Communication Technology (ICT).

The application of knowledge is manifest in all these areas and knowledge has become the key to competitiveness and growth in the global economy. Knowledge, in this context, expands people’s possibilities and thereby help to increase the wealth of nations.

To sum up, knowledge economy is one that creates, disseminates and inputs or uses knowledge to promote growth and development.

While in the Adam Smith’s classical world, it is the manual worker who worked with his/her hands to produce goods or services, in today’s highly integrated world, it is the knowledge worker who works with his head that really matters. It should be clear from what has been stated already, that the knowledge economy should not be interpreted to signify only information society or high technology or ICT but it should encompass appropriate knowledge pertaining to all spheres utilized to promote inclusive growth and thereby increase the welfare and quality of life of the people which, after all, is the ultimate aim of development.

In the context of development, the knowledge economy comprises four major areas or pillars. They are:

*The Environment (enabling environment promoting entrepreneurship and good business),

*ICT,

*Human resource development or investment in human capital and

*Innovation.

Good governance

There is no scope here to dwell upon them in detail but for the completeness of my presentation, I would briefly outline them; Firstly what is meant by environment? It is an enabling environment with good governance, incentives, facilitating rules, regulations and labour laws, etc., where the private sector can be innovative and entrepreneurial in doing and undertaking business and investment.

I need not discuss the ICT, as it is generally known and also as it will be the focus of discussion by you in the remaining time of this seminar.

The third pillar, human resource development requires reforms in education to gear or orient it so as to meet the manpower demand of the economy and this involves primarily, the improvement of quality and relevance of tertiary education and increased equity of access to it for a large bulk of the population to whom it has been hitherto denied.

The last one, innovation is crucial in a highly competitive world for it is able to push outward the boundaries of what is possible. It entails increasing investment in R and D for adaptation of existing technology and adoption of new and appropriate technology such as nano technology to suit our local conditions so as to improve the techniques of production, produce new brands and new products and create more value for existing products etc. so as to improve overall productivity and enhance competitiveness and thereby growth.

Direct nexus

Although there is a direct nexus between the knowledge economy and economic growth and development, there is no proper measure or accurate indicator of the level of the knowledge economy of a country. How about the Human Development Index (HDI) which is the measure we use at present to denote human development?

I looked at seven countries of Asia, arranged in descending order of value of their HDI (of 2010), namely Republic of Korea, Singapore, Malaysia, People’s Republic of China, Sri Lanka, Vietnam and India, in relation to their respective growth rates (of 2007, avoiding the years of recession).

The four countries at the bottom of the scale had higher growth rates of more than 7 percent with China leading with double-digit growth, while Korea, Singapore and Malaysia at the top of the scale had growth rates of 5.1 percent, 8.1 percent and 6 percent respectively. The direct correlation or nexus between knowledge and growth is not established here because of the limitation of the HDI itself and not due to absence of such relationship.

Human resource development

For HDI incorporates into it education only in so far as it is reflected by the level of literacy and school enrolment. It does not bring into it components such as enrolment in higher education, S and T (including ICT) capability and R and D level which are the real drivers of human resource development and knowledge economy and are essential ingredients for rapid growth.

This is clearly vindicated by the fact that Korea, China, Singapore and India have had relatively very high growth rates. The first three of them had their R and D level exceeding 1.5 percent of GDP with India fast catching up that level, compared with Sri Lanka’s less than 0.15 or one tenth of it. They also have been making rapid strides in. ICT and making heavy investment in tertiary education.

For example, the number of telephones and internet users, per 100 people had increased several fold in all these four countries between 2000 and 2008 with the numbers respectively standing in 2008 at 138 and 75.8 in Korea, 170 and 69.6 in Singapore and 74 and 22.5 in China, compared to Sri Lanka’s 72 and 7.0. Korea also is reported to have the highest broadband penetration in the world.

In regard to tertiary education of these countries, it is noteworthy that more than 50 percent of the people of the age cohort in Korea attend a tertiary level institute, while in China more than 50 percent of the students at university follow an S and T related subject, and Singapore’s second biggest item of government expenditure is education, whereas in Sri Lanka enrolment in tertiary education (in both private and public sector institutions) is estimated to be less than 15 percent of the age cohort.

There is no doubt that the knowledge economy is responsible for making China and Singapore the fastest growing countries in Asia, and for that matter in the whole world, in the last decade.

They can be taken as good examples of emerging knowledge economies at a global level with India following closely behind while a place like Silicon Valley in the United States may be taken as a pocket knowledge economy at a country level, where knowledge is created, disseminated and used, as stated earlier, to promote growth and development. So much for the nexus or synergy between knowledge economy and growth. Let me now briefly examine, in this context, the Sri Lankan scenario.

The case of Sri Lanka

The transformation of the economy

There has been a marked transformation of the Sri Lankan Economy in the last six decades. We inherited from the British Raj in the late 1940s a primary producing export economy. that was exporting tea, rubber and coconut in primary form without much processing or value addition and meeting our import needs of foods and other consumer goods with the income received from those exports. The primary sector accounted for nearly 50 percent of the GDP and nearly two thirds of the total employment at that time i.e. in the 1950s of the 20th century. This can be termed the first phase. As development proceeded, agriculture sector was relatively shrinking and was giving way to manufacturing largely for import substitution. This was the second phase, in the 60s and the early 70s.

With the opening of the economy in the late seventies (end of 1977), while the manufacturing sector continued to grow relatively to agricultural sector, the services sector began expanding much faster than either of them, and by the end of the first decade of the next 21st century, the sectoral composition of the economy has so much changed as to transform the economy from an agriculture based economy to a services dominated one.

To be continued