The Challenge of the Knowledge Economy for El Salvador: Preliminary Assessment

Robert WhyteWorld Bank Institute

San Salvador, El Salvador

November 24, 2003

Why focus on Knowledge Economy?

• A “knowledge revolution”! Reflected in the speed-up in creation and dissemination of knowledge.

• Opening up opportunities for leapfrogging, but also raising risks that developing countries may fall behind

• All countries need to develop explicit strategies to take advantage of this new knowledge to avoid being left behind.

• There are many definitions of the “Knowledge Economy”, many of which focus only on information technology and high technology sectors

A broader definition:

“An economy that creates, acquires, adapts, and uses knowledge effectively for its economic and social development.”

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2

4

6

8

10

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14

1965 1970 1975 1980 1985 1990 1995 2000

Knowledge Explains Differences in economic performance

Argentina

GNP/headThousands of Dollars (1955 constant value)

Difference attributed to knowledge

Difference associated to physical and human capital

© Knowledge for Development, WBI© Knowledge for Development, WBI

Rep of Korea

GNP per capita: Korea v. Argentina

The Four Pillars of the Knowledge Economy

• Economic incentive and institutional regime

• Educated, creative and skilled people

• Dynamic information infrastructure

• Effective national innovation system

Knowledge Assessment methodology (KAM)

• Based on the four Knowledge economy pillars• 76 structural/qualitative variables• 121 countries • Benchmarks performance for two points in time: 1995 and

2002• Each variable is normalized from 0 (weakest) to 10

(strongest)• www1.worldbank.org/gdln/kam.htm

• Basic (simplified) scorecard for 14 key variables

• Aggregate knowledge economy index (KEI): - Ranging from 0 (weakest) to 10 (strongest)

Benchmarking El Salvador

Latin America

Latin America AverageChile

Costa RicaNicaraguaGuatemala

Rest of World

Republic of KoreaThailandLatvia

Bulgaria

Costa Rica

Latvia

Thailand

Bulgaria

Korea

Chile

Guatemala

Latin America

El Salvador

Knowledge Economy Index 2002

Strong Correlation: GDP/Capita & KEI

R2 = 0.67

• El Salvador is below middle ranking globally on the Knowledge Economy Index (3.94), having improved its position slightly since 1995 (3.29)

• Ahead of most countries in the immediate region but falling some way behind the average for Latin America (4.34) and well behind regional leaders such as Chile (6.32) and Costa Rica (5.47)

• Falling behind a number of countries with similar income levels: For example:

> Bulgaria 5.93 > Latvia 6.77 > Thailand 5.83

El Salvador’s Position on Overall KEI

Econ. Incentive Regime

Innovation

Education

Information Infrastructure

most recent 1995

ECON. INCENTIVE REGIME:-Tariff & Non-tariff barriers-Rule of Law-Regulatory Quality

INFORMATION INFR.:- Tel. Lines per 1,000 people- Computers per 1,000 people- Internet users per 10,000 people

EDUCATION:- Adult literacy rate- Secondary Enrollment- Tertiary Enrollment

INNOVATION:-Researchers in R&D / mil pop- Patents granted by USPTO / mil- Scient. & Tech. Publications / mil pop.

Aggregate Changes Basic Scorecards(Four Pillars)

El Salvador – Basic Knowledge Scorecard

Basic Scorecard: El Salvador comparedwith Nicaragua and Guatemala

Latin America2002

Basic Scorecard: El Salvador compared with Costa Rica and Chile

2002

El Salvador: Economic Regime

Latin America

El Salvador: Governance Variables

Latin America

Based on the benchmarking:• El Salvador scores very well on tariff and no-tariff

barriers, regulation and the soundness of its banks• It is at the 50th percentile for the protection of intellectual

property rights and for government budget balance• In terms of governance variables, political stability,

corruption and government effectiveness score very highly for El Salvador

• However, the rule of law remains a weaker area, and there needs to be more focus on strengthening levels of gross capital formation

Benchmarking the EIR for El Salvador

El Salvador : Education Variables

Latin America

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

100%

80%

60%

40%

20%

0

Secondary (gross) Enrolment rates 1990 - 2000

Chile

Nicaragua

Latvia

Guatemala

Costa Rica

El Salvador

Thailand

Bulgaria

Literacy Rates 2002: Adult Total (% of people 15 and older)

Less than 60%60 – 80%80 – 91%91 – 97%97% and aboveNo data available

Latvia 99.8%

Bulgaria 98.6%

Chile 96.0%

Thailand 95.8%

Korea 98.0%Costa Rica 95.8%

El Salvador 79.7%

Nicaragua 67.1%

Based on the benchmarking:• El Salvador has improved its literacy rate and is

maintaining its lead over most other countries in the immediate region

• But has not yet caught up with countries such as Costa Rica and Chile

• Similarly, El Salvador is lower than the average for Latin America for school enrolment, average years of schooling, and adult literacy levels

• Public spending on education is 2.3% of GDP in El Salvador, compared with 3.8% on average for the whole of Latin America

Benchmarking Education for El Salvador

El Salvador: ICT Variables

Latin America

1200

1000

800

600

400

200

0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Telephone Penetration

Telephone (fixed mainlines plus mobile lines) per 1,000 people 1990 - 2001

Chile

Nicaragua

Latvia

Guatemala

Costa RicaEl Salvador

Korea

Mexico

Computer Penetration

Personal Computers (Per 1,000 people), 1990 - 2001

300

250

200

150

100

50

0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Chile

Nicaragua

Latvia

Guatemala

Costa Rica

El Salvador

Korea

Mexico

120

100

80

60

40

20

0

Internet Penetration

Internet Hosts (per 10,000 people), 1994 - 2000

Chile

Nicaragua

Latvia

Guatemala

Costa Rica

El Salvador

Korea

Mexico

1994 1995 1996 1997 1998 1999 2000

Based on the benchmarking:• El Salvador needs to do more to strengthen its

information infrastructure• It does relatively well on radios (per 1000)

persons• But it has relatively low telephone connectivity

(fixed and mobile), computer penetration, and Internet hosts

Benchmarking ICTs for El Salvador

El Salvador : Innovation Variables

Latin America

• El Salvador is strong in terms of R & D expenditure as a % of GNP, and the % of engineering enrollments in tertiary education.

• However, it is weak in a broad range of areas of innovation:– Private sector expenditure on R and D– Entrepreneurship amongst managers– Publications in scientific journals– Royalties paid and received for technology– University–business collaboration

• El Salvador needs to increase its focus on innovation: For example:– Dedicating more funding for R&D– Encouraging patenting– Attract more and diversified sources of FDI– Disseminate lessons of local innovation efforts– Strengthen public-private partnerships

Benchmarking Innovation for El Salvador

El Salvador: Summary of Strengths & Weaknesses

STRENGTHS WEAKNESSES

Economic & institutional Regime

• Macroeconomic stability• Reform oriented govt. • Trade as a % of GDP• Tariff & non-Tariff barriers• Soundness of banks

• Gross capital formation• Rule of law – crime rates, legal system, courts

Innovation

System

• Total expenditure on R&D• Science and engineering enrolment rates in tertiary education

• FDI as % of GDP• Private sector spending on R&D• Entrepreneurship• Public-private partnerships• Researchers in R&D, royalties for technology

Education & Human resources

• Significant improvements over 1990s - enrolment rates, literacy, average years at school

• Public expenditure on education• Literacy rates still relatively low• Average years of schooling• Secondary and tertiary enrolment

Information & communication

Infrastructure

• Rate of adoption increasing• Build on growing consumer demands

• Low ICT penetration ratios – individual; and business• Low levels of application and use

OPPORTUNITIES THREATS

Economic & institutional

Regime

• Opportunities of CAFTA• Attract FDI by improving investment climate

• Regional and global competition is heating up

Innovation

System

• Tapping into global knowledge more effectively• Harness S&T base in tertiary education

• Falling behind global advances in knowledge• Loss of scientific talent• Enterprises lose competitiveness

Education &

Human resources

• Launch major re-skilling program• Institute LL learning • Reform higher education to market needs

• Continued brain drain• Resistance from established institutions• Unresponsive universities

Information & communication

Infrastructure

• Expand penetration ratios• Especially in enterprise sector• Focus on applications

• Risk of digital divide• Difficulty of changing processes to use ICT

El Salvador: Summary of Opportunities and Threats

Very dynamic global situation - risk of some countries falling further behind

Performance depends on coherent strategies focusing on how to use knowledge effectively for development

Finding advantageous ways of participating in globalization

Now critical to engage and and move up in global value chains

This requires strengthening ability to acquire, adapt, disseminate, and even to create knowledge

Raising awareness among policy makers, private sector and civil society on challenge/opportunities of the knowledge revolution

Adopting an integrated approach to policy is critical

Setting monitorable goals and constant evaluation is key to improving performance

The Way Ahead …..