The Challenges in Education and

Innovation for the ECA Countries in

an Increasingly Competitive World
Carl Dahlman
Georgetown University
Knowledge Economy Forum IV
Istanbul
March 2224, 2005
Knowledge for Development, WBI

STRUCTURE OF PRESENTATION
An Increasingly Globalized and Competitive World
Overview of Position of ECA countries in Global Knowledge Economy
EU 8, EU Candidates,
Russia and Neighbors,
Western Balkans, Central Asian

Education and Innovation as Key Elements for Increased Competitiveness

and Growth
Key Issues in Innovation
Key Issues in Education

Challenges and Opportunities in Education and Innovation for Different

Groups of ECA Countries
EU-8,
EU Candidates
Other ECA countries
Russia
Small, less developed economy

Conclusion

An Increasingly Globalized and

Competitive World Economy
Increasing Globalization
Rapid reduction of transportation and communications
costs.
Increasing global information (political, cultural, socio
economic)
Strong trends towards regional integration (NAFTA, EU,
ASEAN+3)

Increasing Competition
Significant trade liberalization is creating larger global
market and increased competition
Share of exports and imports to GDP has increased from
38% in 1990 to 52% in 2002
Value added directly controlled by MNCs is 27% of
global GDP in 2002
[Underestimate: doesnt include backward supply linkages
or forward linkages to marketing, distribution, service, etc.]

Trillions of 1995
international $

Real GDP (PPP): Projections 2004-2015 (Using 1991-2003 Average Growth Rates)

16

India
Canada
Italy
Russian Federation

14

China
France
Japan
United Kingdom

Brazil
Germany
Mexico
United States

China

United States

12

10

India
France

Italy

Germany

Japan

Brazil

United
Kingdom

Russian
Federation

Mexico

Canada

0
2003

2005

2007

2009

2011

2013

2015

Changing Nature of Competitiveness

Competitiveness traditionally based on
Capital and labor costs
Costs of inputs and infrastructure services
General business environment and ease of doing business (including macro
stability, taxes, x rate, etc)
Superiority in technology or management

But it is increasingly being based on

Ability to redeploy resources to take advantage of those changing
opportunities
Quality, skills and flexibility of labor force (and management)
Ability to constantly keep up with rapidly changing technological and
organizational advances
Ability to make effective use of information technologies to reduce
transactions costs and improve capacity to respond quickly to changing
opportunities and threats

As a result there is increased attention across countries on

Improving their overall business environment and the flexibility and speed
of their economies to respond to rapidly changing circumstances
Improving education and skills systems
Improving their innovation systems
Improving their information infrastructure

The Four Pillars of the Knowledge Economy

EIR provides
incentives for the
efficient creation,
dissemination, and
use of existing
knowledge

Economic and
Institutional
Regime IInnte

To facilitate the
effective
communication,
dissemination,
and processing
of information.

Education

terc
rcon
IIn
onne
nte
terd
rdep neccte
ted
epen
d
ende
dent
nt

Information
Infrastructure

An educated and
skilled
population that
can use
knowledge
effectively

Innovation
consisting of
organizations
that can tap
into the stock
of global
knowledge,
assimilate
and adapt it and
create local knowledge

Innovation

Knowledge Assessment Methodology

KAM: 80 structural/qualitative variables to benchmark performance
on 4 pillars
Variables normalized from 0 (worst) to 10 (best) for 128 countries
and 9 regions
www.worldbank.org/kam
Basic scorecard for 14 variables for two points in time, 1995 and
most recent
Knowledge economy index (KEI) which includes 3 variables for each
of the four pillars:
Economic and institutional regime: tariff and non-tariff barriers, rule of
law, regulatory quality
Education: literacy, secondary and tertiary enrollment rates
Innovation: researchers in R&D, scientific and technical scientific
publications, and patents in the US
ICTs: fixed and mobile phone lines per 1000 people, computer per 1000,
internet users per 10,000

K4D,
K4D,WBI
WBI

ECA Country Groupings

New EU 8 (Recent Accession Countries-2004)
Czech Republic, Estonia, Hungary, Latvia, Lithuania,
Poland, Slovakia, Slovenia

EU Candidates
Bulgaria, Croatia, Romania, [Turkey]

Russia, Armenia, Belarus, Georgia,

Moldova,Ukraine
The Western Balkans
Albania, Bosnia and Herzegovina, Serbia and
Montenegro

Central Asian Countries

Azerbaijan, Kazakhstan, Kyrgyzstan, Tajikistan,
Uzbekistan

Overall KE Index
ECA Countries and the World: Knowledge Economy Index

10

New EU 8 Blue
9

Western Europe

EU Candidates Green
Russia and Neighbors Red

Central Asian Countries - Brown

Lithuania Hungary

Latvia

Most Recent

Middle East and North

Africa

Bosnia and Herzegovina

Albania

Armenia

Romania
Ukraine
Turkey

Moldova

Europe and Central

Asia

Georgia

Kazakhstan
Kyrgyz Rep.

World

South Asia

Africa

Czech Republic

Latin America

Tajikistan
Uzbekistan

USA
Germany
Japan

Slovakia
Croatia
Russia
Bulgaria

Belarus

East Asia

Canada

Poland

Serbia and Montenegro

UK

France
Estonia
Slovenia
Italy

The Western Balkans Black

Developed Oceania
G7

KAM 2005
0
0

1995

Knowledge for Development, WBI

10

Education
ECA Countries and the World: Education

10

New
NewEU
EU88Blue
Blue
EU
EUCandidates
CandidatesGreen
Green

Russia
Russiaand
andNeighbors
NeighborsRed
Red
The
TheWestern
WesternBalkans
BalkansBlack
Black

World
Serbia and Montenegro

East Asia
Central
CentralAsian
AsianCountries
Countries- -Brown
Brown
Latin America

7
Most Recent

Ukraine
Developed
Russia
Japan
UK
Lithuania
Estonia
Slovenia
Slovakia
Poland

Europe and Central AsiaBulgaria

Oceania

Latvia

Canada
France
USA

Kyrgyz Rep.

Armenia

Romania
Tajikistan

Albania

Turkey

4
Middle East and North
Africa

Italy
Bosnia and Herzegovina
Uzbekistan Georgia

South Asia

Hungary

Moldova

Croatia

Germany

Czech Republic Western

Kazakhstan

G7
Europe

Belarus

Africa
1

KAM 2005

0
0

1995

Knowledge for Development, WBI

10

Innovation (Unscaled)
ECA Countries and the World: Innovation (Unweighted)

10

Developed
Oceania
Western Europe

New EU 8 Blue

EU Candidates Green

East Asia

Russia and Neighbors Red

Europe and Central Asia

The Western Balkans Black

7

Poland

Central Asian Countries - Brown

Czech Republic

World

Hungary
Romania
Belarus

Bulgaria

Most Recent

6
Slovakia

Slovenia

Estonia

5
Middle East and North
Africa

Georgia

Tajikistan

Kyrgyz Rep.

Croatia

Japan

Canada
UK

Germany

France

South Asia

Lithuania

Moldova

Africa

USA

Serbia and Montenegro

3
2

Russia
Italy

Kazakhstan

Latvia

Ukraine

Turkey

G7

Uzbekistan

Armenia

Latin America

Albania

KAM 2005

Bosnia and Herzegovina

0
0

1995

Knowledge for Development, WBI

10

Education and Innovation as Key

Elements for Competitiveness and Growth
Education and Innovation are becoming more important
because of the increase in speed of the creation and
dissemination of new knowledge
Education is the fundamental enabler of the knowledge
economy and a key to long term competitiveness and growth
What is critical no longer basic or even secondary education, but higher
education and the constant upgrading of skills
This is a challenge for all countries of the world
There is also increasing competition for people with high level skills

Innovation is becoming a more important element of

competitiveness and growth as there is greater mobility of
factors, products, services and knowledge .

A larger percentage of a countrys economic growth can be attributed to

more effective use of knowledge, even in developed countries
Countries behind the global frontier can dramatically increase their
performance by improving their ability to innovate
Expenditures on R&D globally have been increasing, particularly the share
contributed by the productive sector

Some Basic Concepts about Innovation

Innovation is not just about R&D
Some comes from insight and experience
Lots come from copying or imitation or buying what has been done by
others

Distinguish between innovation as

First in world development and application of new technology or
organization
First use in local context, which may not require R&D, although
generally does require some technological capability

As stock of knowledge and global frontier are expanding very

rapidly
For countries or sectors not yet at global frontier it is most critical to
access, acquire adapt and make effective use of already existing
knowledge
As countries or firms get close to global frontier, then first in world
type of leading innovation becomes more important

Differentiated Strategies for Innovation

Acquiring

Creating

Disseminating

Catch-Up

Most critical:
-lots of knowledge
in pubic domain
-also large stock to
be purchased
Therefore need
good global
scanning and
acquisition ability

Less relevant or
feasible, but still
need R&D
capability to acquire
and adapt.
Critical to focus
limited R&D efforts
on most critical
needs

Very important:
-extension services
-technical information
-metrology, standards,
testing and quality control
-specialized suppliers
-growth of most efficient
firms

Countries Nearer
Frontier or with
Large
Critical R&D Mass

Continue tapping
global knowledge
-FDI/licensing
-Strategic alliances
-foreign R&D as
antennas to tap
knowledge

Refocus public
efforts on
commercially
relevant research
Strengthen IPRs
Increase private
R&D efforts

Dissemination efforts
continue to be critical
But also need to
commercialize
knowledge
-technology transfer
offices
-tech parks/spin-offs
-cluster development
Knowledge for Development, WBI

Key Actors in an Innovation System

Multinationals are the main generators and disseminators
of technology
In most developed countries private sector accounts for the bulk of
the R&D effort
Within private sector, most is done by multinational companies
They not only produce or buy the knowledge, but they area also the
greatest disseminator through their global activities

In the national system, main players are

Government research centers
Universities
Productive enterprises

Need to get greater interaction among these three

players through mechanism such as
Joint research grants
Rotating scientists or researcher programs

But also Need

To get more effective output from the key actors
Competitive pressure to get firms to have to improve or develop technology
Incentive schemes for government research labs to respond to needs of productive
sector including for example a Bayh Dole Act to commercialize technology
Competitive bidding mechanisms in allocation of public R&D funding
Effective monitoring mechanisms for use of public R&D.

As well as to create specialized institutions such as

Technology transfer centers for universities and research labs
Technology parks and incubators
Venture capital for high tech spin-offs

And also to strengthen

Tapping into global knowledge
Technical journals, travel, internet, conferences
Trade, foreign investment, tech transfer,
Disseminating Knowledge
Growth of more efficient enterprises
Suppliers of equipment, technical services and information
Extension services: agricultural, industrial, service

And in Particular to Making More

Strategic
Use
of
FDI
Multinationals not just generators and disseminators
of knowledge but also

Source of capital and management

Key vehicle for access to foreign markets

Therefore need more proactive strategy towards

attracting foreign investment expected to make more
effective contribution to economy, for example:
Irish Development Board
Singaporean Economic Development Board

Developing greater linkages with foreign enterprises

Supply chains
Service and distribution centers

Key Global Trends in Education & Training

Increasing levels of educational attainment
Increasing importance of higher education and specialized
training
Increasing importance of new core skills
Math, writing, reading and computer literacy
Communication skills, ability to work in groups
Ability to learn to learn

Need for constant up-skilling and re-skilling of persons who

have already left the formal educational system
Increasing role of the private sector in the provision and
finance of education & training
Increasing use of information based technologies
Increasing internationalization of education
Increasing competition for high level human capital

Key Challenges for Education & Training

Knowledge Revolution Means that
Need higher level education to keep up with and make effective use of
rapidly changing knowledge
Also need high level scientific and technical manpower to create new
knowledge
But also need system of continuous training in order to constantly up-skill
or re-skill people who have already passed through the formal educational
system

Therefore need to move to system of life long learning

Needs to cover all levels of formal education as well as
Enterprise based training
Plus all kinds of specialized training to re-skill people
As well as education and training for persons who have already left labor
force

This system will need to have

Multiple public and private providers of education and training
Multiple pathways to different levels of competence
Coordination among many suppliers/accreditors/regulators

Key Issues that Need to be Addressed for An

Effective System of Life Long Learning
Assessment of peoples education and skills
Not just years of education or raw ability scores
Also functional ability such as measures by OECD adult literacy tests, PISA
As well as specific job related skills

Certification and accreditation

Not just in countries but
Also across countries
And not just for physically present universities, but also for distance learning programs

Financing educations and training

Government, vs firm, vs. individual
Full market vs. grants and loans

Effective use of information technologies in general and distance education in

particular
In classrooms: computer based instruction, internet materials, video, etc
For distance education including not just radio and TV but interactive video, internet
based courseware and simulations, etc.

Information on
Needs of market,
Quality of different providers,
Quality and skills of students/workers

Implications for Role of Government and

Structure of Education and Training System
Implies rethinking role of government
What does the government need to provide? What can be provided
by the private and non-government sector
Who can best set the standards and do the accreditation? What
should be compulsory and what voluntary
What should be the financing role of government versus that of
parents or corporations
What role does government have in ensuring equity as there is a
growing private system?
How can government promote development of an education loan
market?

Implies rethinking and improving structure and content of

education and training systems
Major challenges in what content and skills should be given at
different levels of formal education ?
How to do this in the most cost effective way?
Essentially are moving to system of just in time learning for
whatever is the relevant need

Specific Policy Challenges and

Possible Initiatives Vary by Grouping
Groups above were largely geographic
While there was some coherence to say EU 8, there
was considerable dispersion among the others on
different policy and structural parameters
Need to tailor policies to
Human and institutional infrastructure of each country
Structural elements such as size and resource endowments

At a general level can distinguish three groups

EU 8
EU Candidates
Other ECA Countries

Within last will illustrate for

Russia
Smaller, less developed ECA country

New EU 8
Challenges
To get up to EU standards in acquis communitaire
To be competitive not only in EU context but also globally

Opportunities
Access to enlarged EU market
Access to EU technical assistance and structural funds
Benefit from participating in the EU framework programs for
Science and Technology
Benefit also from the EU compatabilization of education
accreditation and life long learning initiatives

Attract FDI by combining advantage of lower labor costs

with putting in place a more favorable business
environment in general, and for foreign firms particular

EU Candidates
Challenges
Competition from EC countries, US, Asia, without benefits
of open access to EC markets or EC assistance
Need to upgrade both the economic and institutional
regime as well upgrade infrastructure and policy in
education, innovation and information and communication

Opportunities
Speed up accession process to get political and economic
benefit of EU membership
Develop some alliances with countries outside the group,
especially East Asia and US
Take advantage of growing stock of knowledge to improve
productivity of traditional industries and to leapfrog in
some new sectors

Other ECA Countries

Challenges
Similar to those of the candidate
However, do not have prospect of quick entry to EC so will
have to do more on their own

Opportunities
Are going to vary by
Specific human, institutional, and policy strengths and weaknesses,
Economic size
Natural resource base

Will discuss two opposites country cases and limit

discussion to education and innovation aspects
Large human resource, science, and natural resource rich economy
Russia as prime example
Smaller economy with much less education or scientific strength

Russia: Summary of Strengths

&Weaknesses
STRENGTHS

WEAKNESSES

INNOVATION
SYSTEM

High S&T manpower

Strong basic research
High S&T capability

Poor linkages with

productive sector
Insufficient use of global
knowledge
Weak diffusion systems

EDUCATION &
HUMAN
RESOURCES

High average
educational levels
High number of S&T
and technical workers

Poor link to labor market

Weak Life Long Learning
Lack of flexibility of
educational system

Russia: Summary of Opportunities &

Threats
OPPORTUNITIES

THREATS

INNOVATION
SYSTEM

Tap global knowledge

more effectively
Harness potential of
strong S&T base

Falling behind global

advances in knowledge
Continued loss of
scientific talent

EDUCATION &
HUMAN
RESOURCES

Launch major re-skilling

program
Institute LLL learning
Reform higher education
to market needs

Continued brain drain

Resistance from
established institutions
Rigid university curriculums

Russia: Tentative Recommendations

Innovation
System

Tap global knowledge more effectively through

capital goods imports, technology licensing,
strategic FDI
Link S&T base to economys needs through better
S&T policy, technology forecasting, matching
grants, stronger intellectual property rights
Support technology parks, incubators, university
spin-offs, venture capital; promote technology
dissemination

Education &
Human
Resources

Launch major program to re-skill working

population to needs of labor market and
restructuring economy
Improve teaching methods in secondary schools
to nurture critical thinking and problem solving
Move towards establishment of Life Long
Learning

Smaller Less Developed

Economies-Weaknesses

Small size is big challenge because do not have economies of scale

in
Market size
Education and human resources
Innovation system

Low productivity
Competitiveness based mostly on low wages and natural resources
Most of productive sector is outmoded if not obsolete
Education and skills generally not up to new needs
Because of small size will have to seek most advantageous way of
participating in global economy
Risk of losing focus by trying to cover too many areas
Need to find most appropriate market niches building on
natural vocation
location
linkages

Smaller Economies- Opportunities in

Innovation
Tremendous potential for increasing competitiveness by making
effective use of already existing knowledge
Need to develop strong capability to scan global knowledge frontier,
identify what is relevant, acquire, and adapt it to domestic needs
(Fundacion Chile example)
Develop proactive strategy to attract direct foreign investment that can
contribute to countries grow and can have strong positive externalities
through demonstration effects as well as backward and forward linkages
Promote technological upgrading by strengthening the technological
infrastructure of metrology, standards, quality control, and key
dissemination agents
Improve efficiency in allocation of public R&D funds, focusing on
developing linkages with productive sector
Strengthen mechanisms for commercializing
R&D outputs
Get into international R&D programs to benefit from scale economies

Smaller EconomiesOpportunities
in Education and Training
Identify what are critical education and training needs of economy
given its human and natural resource endowments, vocation, and
future vision
Leverage training already being done by private providers and by
productive enterprises
Reform and restructure formal education system to prepare need kind
of graduates required
Permit rise of tuition payment and private education formal education
providers to expand supply
Join international systems of accreditation and standards to have
better quality assurance
Provide information on market needs and quality of different providers
Use ICT and international exchange agreement to expand range of
education and training opportunities
Turn brain drain into brain gain by offering attractive opportunities for
then to return or at least to have productive links with home country

Conclusion
World is becoming increasingly competitive
Education, training, and innovation are becoming
increasingly important elements of competitiveness
ECA countries face many challenges and
opportunities
Strategies have to be tailored to specifics of each
country
The workshops aims to help countries begin to
develop strategies appropriate to their conditions.
It is hoped that it will help to develop concrete
projects than can help address some of the most
binding constraints in education and innovation

End
Carl Dahlman
Georgetown University
Luce Professor of International Affairs
and Information Age Technologies

cjd42@georgetown.edu
(202) 687 8045