|
|
Achieving Sustainable Growth.
Will New Europe Fly or Crawl in
the 21st Century Global Knowledge Economy?
 |
Krzysztof Rybiński
Deputy Governor of the National Bank of Poland,
Member of the Polish Financial Services Authority
|
|
Co-author: Marek Radzikowski
Economist at the National Bank of Poland
Abstract
The goal of this paper is to identify factors that will be crucially important for maintaining
long-term sustainable growth in three dimensions: economic growth, social
cohesion and environmental sustainability. We document how Central and East European
countries score in all three aspects in comparison with the peer group of
countries. While a sizeable progress has taken place in all three dimensions, the future
prospects will depend crucially on institutional and knowledge infrastructure.
Institutional environment in CEE-4 is generally conducive to sustainable economic
growth, there are independent monetary institutions, economies are as open and
deregulated as in EU-15 member states. However, there is still a substantial gap
with the EU-15 with regard to the legal system and property rights. Both the old
Europe and the new Europe have much bigger governments than NIEs or the U.S.
We argue that old Europe can sustain its standard of living only when it remains on
the world innovation frontier. This can be achieved only when Europe’s intellectual
capital is properly developed. We document that while the old Europe scores well in
many measures of intellectual capital, China and NIEs are rapidly closing the gap,
or even leapfrogged Europe in some aspects. We present a broad range of indicators
showing that the new Europe has very low ability to generate innovations and will
not be able to develop intellectual capital unless a dramatic shift in structural policies
takes place.
Based on our research we formulate policy recommendations. We call on authorities
to abolish the “destructive creation” of the Lisbon agenda, with many contradictory
ideas floated and a lost sense of strategic direction. A new long-term vision, of strong
and prosperous Europe in 2050 has to be developed. There will be no success in the
21st century without courage or luck. Those who do not wish to make their future
prosperity a hostage of pure luck need to show courage to change their policies towards
developing proper innovation capacity. It is high time to act!
Introduction and description of research methodology
Why we decided to write this paper? We would like to use the opportunity
offered by the Club of Rome conference “The Future of Europe” to voice
our deep concern, that present set of policies both at the European level and
at the country level in most EU members is not adequate to meet challenges
and explore opportunities offered by the 21st century global knowledge economy.
As argued in Rybinski (2007b) Europe is facing the risk of becoming
meaningles in the next decades. Numerous global challenges that Europe
has to face have been documented in Kuklinski, Pawlowski (2005b) and the
need for new European strategic choice has already been voiced in Kuklinski,
Pawlowski (2005a).
We argue that if Europe wishes to maintain its standard of living it needs
to remain on the world innovation frontier, while the innovation lead over
emerging markets and new industrialized economies1 (NIEs) that Europe enjoys
today is vanishing at a fast pace. We show that the key factor behind
ability to innovate is intellectual capital.
In this paper we provide evidence of European structural deficiencies in
the area of intellectual capital and we call for a new vision and a new strategy
to put Europe back on robust sustainable growth path. We pay particular
attention to the new Europe, the set of countries that became EU members in
the last three years. In the new Europe structural deficiencies related to the
creation of intellectual capital are even bigger, and there is a significant risk
that after a brief period of high growth fuelled by positive demand shock
related to EU accession (lasting few years) new Europe growth prospects
may be harmed by immensely low ability to innovate and very slow pace
of knowledge transfer related to foreign direct investments. The cost competitive
edge the new Europe enjoys today may also vanish amid high wage
and inflation in many Central European economies.
Our research methodology is based on two main, irreversibly connected,
sources: literature review and basic empirical analysis. With the aim of attaining
a balanced, but robust, view on the subject matter we tried to take
into account as wide and up-to-date literature as possible. Hence, a number
of both: theoretical and empirical papers and books that concentrate on
sustainable growth and its components (particularly growth and knowledge
economy) are cited. The findings from the literature were equated against
our own empirical analysis.
The empirical tier is based on the analysis of a number of various figures
to show how CEE-4 (Czech Republic, Hungary, Poland and Slovakia) score in sustainable development issues as well as in the area of knowledge
economy. Not only do we take into account the changes in the performance
of CEE-4 alone, but we also try to challenge these changes in a comparative
view. Thus various benchmarks are taken into account as useful controls. The
usual set of them includes five countries and regions. Three of them include
developed countries: EU-15, which is close to CEE-4 regionally, culturally
and (after the EU accession) also has close political and economic ties; the
U.S. that competes with EU-15 in many areas though in some (e.g. environment)
is often said to be lagging behind and NIEs that, taken altogether, are
closer (than other benchmarks) to CEE-4 in size of population2 but seem to
follow different policy-mix. Two other benchmarks, China and Latin America
and Caribbean, consist of emerging markets to which CEE-4 countries still
belong.
1. The evolution of sustainable development
Sustainable development is defined as balancing the fulfillment of human
needs with the protection of the natural environment so that these needs can
be met not only in the present, but also in the indefinite future. When discussing
sustainable development we should not forget that this idea is more
than a two-dimensional issue. It is conceptually broken into three factors:
economic development, environmental protection and social development
(United Nations General Assembly 2005, p. 2).
1.1. Economic development and institutional framework
Although it is the last 18 years that are the most significant from the point
of CEE-4 it is always useful to look at growth from a longer perspective.
Figure 1 shows growth performance of CEE-4 and some benchmark countries
and regions since the 50’s. When compared to the U.S. the communist
economies of CEE-4 stagnated already in the 60’s. After an initial decline in
the beginning of the 90’s, when the transition commenced, they started their
convergence actually from scratch. Similar process was present for a long
time in Latin America, where many countries manipulated with the so called
“third way”. Until the middle of the 70’s Western European economies grew
at a very high pace. From that time on, however, there has not been much
convergence towards the U.S. Their performance slightly improved in the
beginning of the 90’s, which may have been a result of the enforcement of
the single market and its four freedoms. NIEs recorded a stable economic growth
Figure 1. GDP per capita in 1990 US$ (converted at Geary Khamis PPPs, US=100).
Source: Groningen Growth and Development Centre and the Conference Board,
Total Economy Database, January 2007, http://www.ggdc.net
Figure 2. GDP per capita in 1990 US$ (converted at Geary Khamis PPPs, 1989=100).
Source: Groningen Growth and Development Centre and the Conference Board,
Total Economy Database, January 2007, http://www.ggdc.net
from the 50's and enormous acceleration from the end of the 60's. China woke up
after a long time of communist dominance over economz and started catching up in the
80's.
From the beginning of the 90’s CEE-4 commenced their path of transition.
Though they constitute the most successful group of the post-communist
countries3 altogether they reached the initial level of GDP per capita only
in 1998. In 2006 they were richer by 38% – the performance close to the EU and Latin America.
Figure 3. Index of economic freedom in 1990. Source: Fraser Institute.
Figure 4. Index of economic freedom in 2004. Source: Fraser Institute.
In the same short period of time NIEs grew by more than
80% and China more than tripled its GDP per capita. The level of GDP per
capita in CEE-4 in 2006 accounted for 33% of the U.S.’s which constituted almost
half of the EU-15’s and NIEs levels. These outcomes do suggest that
although CEE-4 have performed well in their transition period, the implicit
forces of convergence might not have been used to the full.4
Successful transition was subject to implementing reliable and firm market
institutions as well as undertaking appropriate economic policies. Fraser
Institute’s Index of Economic Freedom is one of the few complex indicators
that embrace such a long period in the attempt to make a comprehensive assessment of some institutional and policy factors.5 One of the institutional
factor assessed is legal system & property rights. In this area CEE-4 were in
1990 in the mid-way (index value: 6.9) between Latin America & Caribean
(4.6) and China (5.8) and EU-15 (8.0) and the U.S. (8.3). Although methodological
changes do not fully allow to announce a regress, benchmark comparisons
are quite meaningful. The last assessment shows that in 2004 CEE-4
(6.1) were lagging not only behind developed Western countries, but also
NIEs (7.1).6 The low estimate of CEE-4 comes from the very low assessment
of the impartiality of courts (index value: 4.2 which was less than China: 4.3),
insuffiecient protection of intellectual property (4.7 – i.e. far better than in
Latin America and Caribbean and China but substantially worse than developed
countries) and judiciary independence (4.8 – similar to the protection
of intellectual property). Interestingly, CEE-4 scored less than China (respectively
7.1 and 7.5) also in the sub area: law and order.
As we can see from the figure below in the beginning of the transition in
the area of “sound money” CEE-4 scored very low (5.7), which was slightly
better than Latin America & Caribbean, but worse than China. All developed
economies were far ahead at that time. This situation was mainly caused
by a relatively high difference between the long term dynamics of money
and real GDP. Another reason was limited freedom of citizens to own foreign
currency bank accounts. Even taking into account the outcome-driven nature
of this index we can clearly claim that in 1990 the monetary institutions were
yet fledgling. In 15 years CEE-4 built credible and independent monetary
institutions that brought about sound money – in 2004 in this area CEE-4
scored 9.1, i.e. close to the U.S. (9.7), EU-15 (9.6) and NIEs (9.5).
Freedom to trade internationally was very limited in CEE-4 in 1990. The
overall score in this area was slightly higher than in China (5.2 and 4.9 respectively).
It was mainly due to severe restrictions in foreign capital market
exchange estimated according to the index of capital controls in 13 IMF’s categories.
In this sub area CEE-4 scored the lowest possible value (i.e. 0). Other
troublesome area were: low share of trade sector (5.6% of the economy) and
high difference between official and black market exchange rates. Already in
the beginning of the transition CEE-4 opened their economies. That is why in
2004 CEE-4 scored 8.0 in this area – the result lower only than NIEs (8.5) and
equal to EU-15. In 2004 the only one area that was significantly worse than in other regions and countries was the highest standard deviation of tariff rates
(11.3) among the whole group.
In the beginning of the transition CEE-4 were heavily regulated. In 1990
regulation was higher only in China (3.8 and 3.3 respectively) while all other
benchmark countries and regions were far ahead. It was mainly due to
high price controls (index value: 0), high state ownership of the banks (index
value: 0.7, with only China scoring lower: 0), low extension of credit
(score 3.3) and high interest rate regulations (3.0) and rigid labor market regulations
(3.6) especially within collective bargaining practices and the use of
conscripts. After 15 years of transition CEE-4 have substantially improved
in this area. They scored slightly less than EU-15 and NIEs (6.6, 6.7 and 6.9
respectively) with the U.S. being substantially ahead (8.0). The most vulnerable
areas in 2004 were: the extension of credit (the lowest index value: 6.9)
and unemployment insurance (second lowest index value: 4.7), burden of
regulations (second lowest index value: 3.0) and irregular payments (second
lowest, ex aequo with China, index value: 6.4).
Size of government constituted the worst area in CEE-4 compared to
benchmarks. It resulted from pervasive state ownership of the companies,
high government consumption expenditure and high share of transfers and
subsidies in GDP as well as distortionary taxation. Most of these factors were
the legacy of the centrally planned economy. Due to mushrooming small and
medium enterprises and widespread process of privatization there has been
much progress in the area of state ownership of companies. In spite of the
positive changes in this area in 2004 CEE-4 scored much worse than benchmarks
(index value: 5.1). It was better than China (3.8) and close to EU-15
(5.2) but far away from the U.S. (7.6), NIEs (7.5) and even Latin America (7.0).
The main reason for that was high general government consumption as a
share of total consumption (23.4%), high transfers and subsidies as a share
of GDP (21.0%), and distortionary taxation (with top marginal income and
payroll tax rate equal 55.5%, the highest in this group).
As it can be easily seen from the above analysis CEE-4 have done much
progress in building stable and independent monetary institutions. In the
first step it stabilized their economies and in the second step, it helped to
protect from inflation that for a long time was very persistent in Latin American
countries. CEE-4 succeeded also in opening their economies to the world.
Apart from that they managed to deregulate their economies. Although there
are still some worrying dilemmas in this area it can be generally claimed that
they are close to the leaders at this point as well. Thus using corporate language
we can sum up by saying that in these three area CEE-4 followed best practices and finally reached them. In the two others, however, the progress
has not been as substantial. Especially worrying situation concerns the area
of legal system and property rights, where there is still a substantial gap with
the leaders. This is especially troublesome when we take into account that
they want to be seen as the countries based on law and order. Another worrying
fact is low score in the scope of government suggesting that there is too
much government in the economy. In this regard CEE-4 are seemingly converging
to EU-15 rather than to the U.S. and NIEs. The problem is that the
European welfare model may not be a good pattern to follow.
There are many doubts as to the use of the indicators. The problems include
not only the assessment criteria but the indicators itselves, their comparability,
and the weights used. We should not forget that apart from the
policies and institutions there is also a wide array of other factors to be considered.
1.2. Social development
Social development is one of the three areas of sustainable development
though very often it is only growth and environment that are highlighted.
The key objectives of the EU within this area are to: “promote a democratic,
socially inclusive, cohesive, healthy, safe and just society with respect for fundamental
rights and cultural diversity that creates equal opportunities and
combats discrimination in all its forms” (Commission of the European Communities
2005). According to TheWorld Bank (2005, p. 2):
- Inclusive institutions promote equal access to opportunities, enabling everyone
to contribute to social and economic progress and share in its rewards.
- Cohesive societies enable women and men to work together to address
common needs, overcome constraints and consider diverse interests.
- Accountable institutions are transparent and respond to the public interest
in an effective, efficient and fair way.
As it can be seen social development is itself a multi-factor phenomenon
that received much attention in a broad range of literature and that forms a
subject of interest for many disciplines. The aim of this paper therefore is
not to perform a thorough research on these factors but instead to shed some
light on empirical evidence of CEE-4 within these topics as well as on mutual
relations between these factors and other dimensions of sustainable growth.
Social development is especially committed to reducing poverty (The
World Bank 2005). The economic transition in CEE-4 elicited this problem. In the first years of the transition the official share of people leaving in poverty
increased.7 It is however important to note that the poverty was not necessary
the consequence of the transition. It did exist before, but very often
was not officially recognized due to widespread political propaganda: under
communism much data were kept secret (e.g. periodic family budget
surveys), biased due to national scale of the studies that omitted regional
differences (Górniak 2001, p. 147) or disguised by regulative norms (such as
controlled prices and hidden unemployment). Hence the profound change in
economic structure uncovered many problems latent in the centrally planned
economy. For instance, hidden unemployment transformed into an evident
phenomenon when labor market was deregulated and monetary overhang
resulted in high inflation when price controls were removed. The fall in output
and simultaneous inflation made the real wages go down (United Nations
2004).
It was especially high inflation that hit the most vulnerable groups triggering
high inequalities (Bulir 1998). The situation of large social groups like
peasants and families with children worsened.8
In CEE-4, as in all post-communist countries, the main reason for the
increase in poverty was the initial drop in the output. It explained 50 to
90 per cent of the poverty that emerged in the first years of the transition
(ABI/INFORM Global 1996). Other causes of the poverty included the restructuring
of state owned enterprises and, as a consequence, the removal of
social services previously provided by them. The decline in the economy resulted
in a surge in unemployment. Until 1993 most of the poor in Poland (95
per cent) were poor because they were unemployed or because their wages
were too low (ABI/INFORM Global 1996). Similar situation was present in
other CEE-4. Long time of absence from the labor market resulted in passivity
and the so-called welfare dependency syndrome. Throughout the transition
process the unemployment has remained one of the strongest risk factor for
falling into poverty (Forster 2005).9
Figure 5. Inflation, consumer prices (annual percent change). Source: IMF WEO.
*)In 1989 inflation in Poland amounted to 251.1% and in 1990 585.8%
Figure 6. Unemployment rate (registered, in %). Source: ILO and EcoWin Economic
from national.
Thus appropriate labour policies seemed to be the most important
weapon to combat the poverty. Unfortunately many policies undertaken in
CEE-4, instead of helping, worsened the situation. One of them was the leakage
of social assistance to people who were not poor in fact. For instance in
Poland it was estimated that in 1993 between 50 to 80 per cent of the recipients
of social transfers (excluding pensioners) were not poor. For social assistance
benefits which should be especially targeted on the poor, the leakage
accounted for 40 per cent (ABI/INFORM Global 1996). Another impediment
was the minimum wage that squeezed out of the labour market the weakest part of it – the young, people with low level of education and the least skilful.
10. A different approach was taken by NIEs where social transfers have always been very
limited and, if granted, were carefully targeted.11
Figure 7. Poverty headcount ratio at $2 a day (PPP)
(% of population).
Source: World Development Indicators 2007.
This seems to be in line with what Górniak notes that "the key to solving
the problem of crisis-induced poverty lies in guaranteeing stable economic growth
and creating new jobs."It seems to be true when we analyse the track of CEE-4
since the beginning of the transition. When we take a broader picture into
account the UN’s goal of halving the world’s poverty by 2015 from its 1990
level is likely to be reached mainly due to a spectacular and sustained growth
recorded by East Asia and the Pacific and South Asia. Sub-Saharan Africa
seems to be way off track, the Middle East and North Africa is heading to
narrowly reach the goal and Europe together with Central Asia and Latin
America and the Caribbean is to be close to it.
Another dimension of social development is the distribution of income,
between enterprises and employees and between income deciles of employees.
This dimension has become more important with rapid advancement
of globalization in the last two decades12. In this period China, India and
countries belonging to former communist bloc joined the global economy
and the global labor market. According to Freeman (2005) this has led to
an increase of the global labor supply from 1.46 billion to 2.93 billion, which Freeman calls the “great doubling”. According to Heckscher-Ohlin model13
labor abundant countries should specialize in labor intensive goods, and capital
abundant countries should specialize in capital-intensive goods. Additionally
according to Rybczynski theorem14 great doubling should lead to a
decline of prices of labor-intensive goods relative to capital intensive goods.
Because relative differences in labor and capital endowments between countries
increase, gain from international trade of good and services will increase
and it should lead to an improvement in the global prosperity. However there
will be groups that will loose in this process, especially when labor markets in
their countries are not flexible enough. For example labor intensive production
in developed economies will be reduced and many jobs in these sectors
will be lost. Higher global labor supply could also reduce the relative bargaining
power of employees vis-à-vis employers.
Figures 8 and 9 below shed some light on these developments in the last
fifteen years. In many countries compensation of employees as a share of
GDP declined, in some case this decline was very sizeable. For example
in the EU-15 the share of employee compensation to GDP fell four percentage
points, this drop was marginal in the United States, but the most pronounced
reduction of the part of the value added pie going to employees
was in Poland, it fell by an astonishing eight percentage points between 2000
and 200515. This evidence suggests, that globalization of the labor market
was accompanied by the rising bargaining power of corporations, while is
some countries there were also other idiosyncratic factors (such as domestic
monetary policy) that strengthened or weakened this process. It is interesting
to note that in CEE-4 region we have seen diverse developments, a sharp decline
in labor share of GDP in Poland and Slovakia, and a moderate increase
in the Czech Republic. It is worth remembering, that both Poland and Slovakia
recorded the highest levels of unemployment in the European Union.
Income dispersion rose in the last fifteen years within all regions, reflecting
rising return to knowledge. Again the strongest growth of income inequality
among the analyzed countries/regions took place in Poland, where it almost
doubled and moved from level typical to the socialist country (everybody
equally poor) to level indicating higher inequality than in the United States,
and much higher than in the EU. It is worth noticing that at the same time
NIEs managed to grow rapidly and recorded much smaller increases in income
inequality.
Figure 8. Decile dispersion ratio (10th income decile/1st income decile). Source:
WIDER World Income Inequality Database; World Development Indicators 2007.
U.S. Census Bureau; Korean Statistical Information Service: http://www.kosis.kr
/eng/main.htm; Report on The Survey of Family Income and Expenditure in Taiwan
Area, National Statistics Republic of China (Taiwan): http://eng.stat.gov.tw
/ct.asp?xItem=3458&CtNode=1597.
Figure 9. Compensation of employees (in % of GDP). Source: Ecowin Databases:
Ecowin Economic and OECD QNA.
*)Refers to earnings and excludes employer social contributions.
It is important to stress that globalization reduces inequality, as documented
in Sala-i-Martin (2006), where eight indices of world income inequality
declined in the period 1970-2000. However we witness two diverging
trends, globalization allows poor countries to catch up, which reduces international
income inequality, while at the same time, as described above, there
is a trend of rising intra-country inequalities.
Studies show that poverty can be both a determinant and a result of ill
health. On the one hand illness may undermine households’ ability to cope
financially and thus can be the reason of why they end up in poverty. On the
other hand, it may also be a cause of ill health as poor people suffer from a
number of deprivations (e.g. lack of adequate food, clean water, good sanitation
and health services) that have an impact on it. It is also important to
note that health, as a human capital ingredient, is especially relevant for sustained
economic development and, as such, is increasingly seen as a robust
predictor of economic growth (WHO 2006).
Under communism worsening state of health constituted another worrying
trend in CEE-4. The 70’s saw a major deterioration in health trends
in all CEE-4. The best evidence was an enormous divergence in death rates
compared to the West (Schweitzer 1990). The reason of this situation was
many-fold:
- A universal entitlement to comprehensive and free health services made
the system very inefficient with excess human and physical infrastructure.
According to the World Bank studies management and financing of
health services were inadequate. It resulted in severe shortages of drugs,
equipment and high-volume disposable articles like needles and syringes.
- Another reason was environmental pollution, especially in the regions
such as Bohemia in Czechoslovakia and Silesia in Poland. It resulted in
high-risky spots in which syndromes of lead poisoning were very intensive.
It included high incidence of anemia, digestive tracts problems and
mental disturbances.
- But the main reason for that was a very unhealthy lifestyle: heavy alcohol
consumption and smoking as well as high-fat diet and lack of exercise.16
Most significant health indicators (e.g. life expectancy at birth) in CEE-
4 stagnated or even deteriorated in the first stage of the transition but later
in the decade a significant improvement appeared. Although many common
health problems, cardiovascular and cancer diseases in particular, still
remain more prevalent than in the EU, overall health conditions dramatically
improved. Life expectancy jumped by 5% to 74.4 years, which still leaves
room for improvement compared to developed countries. At the same time
infant mortality rate went considerably down (by 60%) to 5.8 per 1,000 live births – the level slightly better than in the U.S. though still higher than the
EU’s and NIE’s.17 While these trends in CEE-4 are highly positive the superior
performance of the NIEs is also meaningful.
Figure 10. Life expectancy at birth, total (years). Source: World
Development Indicators 2007.
Figure 11. Infant mortality rate (per 1,000 live births) Source: World
Development Indicators 2007.
Together with dramatic economic and social changes all CEE-4 recorded
low birth rates, net emigration (that rocketed after the EU enlargement) and,
as a consequence, falling populations, especially those of working age. The
share of older people in population, though still lower than in the EU-15, dramatically
increased (European Communities andWorld Health Organization 2002). It has had an important impact not only on economic issues, but also
social, including political, aspects.
According to Commission of the European Communities (2005) pursuing
a democratic system is one of the key elements of social development. After
almost half of the century under communism, CEE-4 as well as most postcommunist
countries transformed their political systems into democracies. It
is of prime importance for sustainable development to make the state work
for its society as a whole and not for the interest groups. This is however very
difficult to do under democracy as many studies show.18 The most evident
example of this tendency is CAP under the auspices of the EU, consuming
44% of the EU’s budget,19 which shows that even pan-European bodies are
prone to the pressure from the interest groups. Western multinational agreements
tying these issues may be even more difficult to challenge. Another example
may be a mass exodus of young Polish people (usually under 35) to the
West, which may be a form of protest against the lost balance in the society.20
This stays in stark contrast with highly successful and, paradoxically,
non-democratic NIEs.21 Thus it seems that, to reach high long term growth,
democracy is not a necessary condition. Does it mean that democracy should
be abandoned? Of course not. Let us think of many other autocracies,
e.g. Zimbabwe (where the IMF forecasts inflation to reach 100000% in 2007),
North Korea or not so remote experience of the communist bloc. While under
democracy there is a certain control of the society over the government, under
autocracies it is not the case. Hence, the autocratic governments may choose
market-oriented or communist stance as well.22 The answer therefore has to
be: do not abandon democracy, change it! This is, however, not a trivial task.
1.3. Environmental protection
The communist countries based their development on rapid industrialisation.
Not only were their economies big polluters, but also they were very
inefficient. Hence the centrally-planned regimes led to an intensive and excessive
use of natural resources, which had a highly adverse effect on the
environment. As a result the environmental issues in these countries posed
a significant and wide-ranging problem: serious pollution of air and water,
degradation of soil and forests as well as significant contamination of
rivers and seas. Lack of sufficient water supply and waste water (e.g. treatment
plants) infrastructure made untreated waste water flow to groundwater,
lakes, rivers and the sea. Many people lacked access to clean drinking
water. There was no coordinated solid waste management.23
This situation had a negative impact on health boosting e.g. birth defects
and such diseases as cancer and thus worsening the standard of living and reducing
life expectancy. Between the mid-1970s and mid-1980s life expectancy
in all Eastern European countries, apart from East Germany, even dropped.
This brings about an evident relation to the other dimension of sustainability
– social development.
This situation posed an urgent need of a systemic approach to change the
attitude of economic agents towards the environment. There was a great need
of enhancing efficiency and reducing waste in the production process. Water
supply and waste water infrastructure had to be improved or very often set
up from scratch. Old landfill sites had to be closed and new sealed landfills
had to be built in order to prevent hazardous waste from contaminating surrounding
soil and groundwater. The communist legacy in CEE-4 left also a
huge backlog with regard to road network, which obviously was not neutral
to the environment.24
A positive, yet still sluggish, move forward in the environmental agenda
in CEE-4 can be dated back already to the second half of the 1980’s (Darst
2001) when a political thaw fostered an environmental cooperation between
the West and the East. A breakthrough, however, has occurred from the
outset of the transition. CEE-4, together with Slovenia, paved the way to
stricter environmental agenda for the whole post-communist bloc (Carter and Turnock 2002). It was partly due to the fact that environmental issues were
given high priority in the EU widening process. This impact was three-fold:
- In the early 90’s the policy towards the post-communist countries adopted
by the EU was to promote flexible regulatory approach that focused on
cost-minimizing economic instruments and on building the civil society.
- In the second step the accession countries faced strict environmental
conditions for accession with simultaneous supportive measures: a preaccession
technical assistance in the areas of financial and administrative
support from the second half of the 90’s.
- In the third step the framework of environmental regulations, once accepted,
is to be obeyed by the EU members.
The transition process itself as well as the mixture of pressure and incentives
from the West brought about a number of significant changes. One of
them was a steady process of switching to less share of the agriculture and
industry in the economy and higher share of the services. It helped to reduce
the significance of heavy industry in the economy – the most detrimental to
the environment. Unfreezing energy prices and implementing competition
improved energy use efficiency both in factories and households. In the years
1990-2003 CO2 emissions per unit of GDP slumped in CEE-4 by 33%, a result
comparable only to the China’s (35%) and NIEs (33%). In spite of this positive
process the level of energy inefficiency in relation to GDP still remains
high (0.58), especially when compared to EU-15 (0.33) and Latin America &
Caribbean (LAC) (0.34), but also to NIEs (0.40). It is worth mentioning that
considerable efficiency gains were also attained through adopting new technologies.
Not only has the improvement been made in the CO2 emissions relative
to GDP, but also in nominal and per capita terms. In the years 1990-2003 the
volume of CO2 emissions has diminished by 17%, which is the only case of a
slump among the countries under consideration. Similar phenomenon can be
noticed while comparing the per capita emissions. In 2003 CEE-4 reached the
level substantially lower (8.0%) than the U.S.’s (19.9), EU-15’s (9.6), comparable
to the NIEs (8.8), though still much higher than China’s (3.2) and LAC’s
(2.4). The positive trends in the CO2 emissions were feasible to a high extent
due to a shift in the use of energy sources.
Figure 12. CO2 emissions (kg per 2000 PPP $ of GDP).
Source: World Development Indicators 2007.
Figure 13. CO2 emissions (million kt). Source: World
Development Indicators 2007.
CEE-4 countries for many years were, and still to a some extent are, highly
dependent on fossil fuels, especially coal. Higher energy prices brought
about a shift in the composition of fuel use. Relatively higher coal prices
broke the tradition of excessive coal consumption in favour of, less harmful
for the environment, energy sources such as oil and gas. In the production
of electricity the coal source, most harmful to the environment, has been reduced
by 16% to the level comparable to the U.S.’s (50.4) but still much higher
than the EU-15’s (27.8) and LAC’s (4.7).
Exposure of companies transmitting and distributing energy to market
competition as well as liberalisation and partial privatization reduced wasteful
practices. Power transmission and distribution losses as a share of total output decreased by 13% in the years 1990-2004. Although at the end of
this period the losses were still higher than in other developed countries and
China, it was significantly better than in LAC.
Figure 14. CO2 emissions (metric tons per capita).
Source: World Development Indicators 2007.
Figure 15. Electric power transmission and distribution losses
(% of output). Source: World Development Indicators 2007.
Another example of positive changes (by 3% in the years 1990-2005) is the
higher percentage of land occupied by forest area – a trend that is also seen
in theWestern Europe, the U.S. and China. It is also worth noting that in this
area, just as in the others, economically high-performing countries like NIEs
do not lag behind EU-15 in terms of environmental issues. On the contrary
in many indicators they are one of the leaders.
In the globalization era it is perhaps also interesting to mention how this
phenomenon affected environmental changes in CEE-4. There can be differentiated two mutually contradictory streams in this area that have been
mainly put forward in the literature:
- On the one hand exposure to global markets may have a negative impact
on environment as international competition demands loosening of
regulations, including the environmental ones. As many experts note the
increased competition from global counterparts forces companies to relocate
their investments into countries that minimize regulations.26 Thus governments find themselves under pressure either to turn a blind eye
on disobeyment or to reduce regulation costs (Ichikawa, Tsutsumi and
Watanabe 2002).
- On the other hand we can observe a positive spillover effect from the
already high income countries as they can put an effective pressure on
economic agents to increase environmental protection if this is made a
precondition to enter international markets. Because of this many companies
from CEE-4 that exported their goods to theWestern countries implemented
environmental plans stricter than internally required even long
before joining the EU (Jha, Markandya and Vossenaar 1999).
Figure 16. Electricity production from coal sources (% of total).
Source:World Development Indicators 2007.
Figure 17. Forest area (% of land area). Source: World
Development Indicators 2007.
Al in all, it is evident that the changes in the main environmental indicators
in CEE-4 from the beginning of 90’s have been positive. We can also generalize
saying that economic development is a strong driver of the positive
environmental changes. One of the most evident proofs of that is that environmental
damage was much worse in Eastern Europe under communism
than in Western Europe under capitalism (The Economist 1990). Another
argument for that is that all transition countries (not only the EU accession
ones, which faced stringent accession conditions) implemented environmental
plans.27 It is also worth mentioning that many counter-reformation measures
came from non-market areas. For instance the strive for environmental
changes in CEE-4 had to face strong interest groups, e.g. powerful and highly
unionized electricity and coal production sectors in Poland.
Although all environmental effects of economic development are not yet
fully clear the experience of CEE-4 and the, relatively longer, experience of
NIEs confirm fairly new findings of the so-called Environmental Kuznets
Curve (Grossman and Krueger 1991).28 According to these findings environmental
pollution forms an inverted U-shape function of economic development.
In the early stages of growth, little interest is given to environmental
concerns. After a certain threshold, when basic physical needs are met, the
trend is reversed as the demand for better quality of environment eventually
prevails leading to less degradation. At this stage the society already has both
funds and willingness to reduce the pollution. This implies that environmental
protection may be a superior good. It is however important to know that there is no single EKC for all kinds of pollutants. Its viability is also subject to
other factors like place and time. Though still highly discussed (Dasgupta et
al 2002; Harbaugh, Levinson and Wilson 2002) and tested (Shafik 1994), the
EKC casts doubt on the ubiquitous belief of the conflict between growth and
environment.
The EKC hypothesis has important implications for economic policy. It
suggests that some environmental pollution is inevitable, especially in the
early stage of economic growth. Apart from that it claims that once the
threshold is attained, economic development will help to tackle the pollution
generated in the earlier stage.29 This means that policies that aim at
generating growth are good for the environment as well. It does not necessarily
imply a passive government. On the contrary right policies, such as
the removal of distorting subsidies, the imposition of pollution taxes, facilitating
new efficient technologies and promoting environmental awareness as
well as sound institutions such as more secure property rights over resources
may flatten the EKC and thus be beneficial to both the economic growth and
environmental protection.
2. What matters?
Imagine we have the year 205030 and we have gathered in Vienna at the
conference which aims to assess what were the most important factors that
contributed to prosperity of particular regions in the first half of the 21st century.
It is very likely that the crucial factor identified by this prestigious audience
would be the regions’ ability to develop intellectual capital31. While in
the 20th century the key determinants of long term sustainable growth were
sound institutions, in the 21st century, the era of the global knowledge economy,
it was the ability to innovate that proved to be the fundamental component of a countries’, regions’ and corporations’ success. Those who understood
the importance of innovations for growth they thrived and prospered
in the first half of this century. Unfortunately old Europe was not amongst
them, and today, in 2050, it is struggling to reverse a decline in the standard
of living which began in 2020s and lasts to this day32.
2.1. Knowledge economy as the growth engine
If we travel back in time some 50 years, we will find out that already
in the final years of the 20th century economists developed a theory of economic
growth that took into account the importance of knowledge and innovation33.
Already then we had a family of neoclassical growth models
pioneered by Robert Solow, these models assumed constant returns to scale.
In other words, if you double the production inputs, such as capital (machinery,
buildings), the number of employed workers and the number of material
inputs, then you will also double the output. Of course these models
allow for technological progress, a creation of new technology that allows
to produce faster, cheaper with fewer inputs allows to increase output more
than proportionally to the increase of used inputs. In early years the technological
progress was treated as exogenous, simply assumed that it somehow
happens. In the later stage economists made an attempt to explain why
technological progress takes place which gave birth to new class of models:
endogenous growth models.
In order to explain what happened in the first half of the 21st century
it is worth to briefly remind ourselves about the branch of the endogenous
growth models pioneered by Paul Romer, with his well-known article published
in 1986 that was a shortened version of his dissertation from 1983.
What were his key observations? Romer argued that one of key factors of
economic progress are innovations, ideas or more broadly knowledge. Such
innovations as electricity, light bulb, internal combustion engine, Wal-Mart
business model or a cell phone had immeasurable consequences for billions
of individuals around the globe. However, while we often focus on big inventions,
often called “disruptive innovations”, also the little ones, which
come largely unnoticed have far reaching implications for world economic
prosperity. For example nowadays in most bars coffee paper cups have lids with the same diameter, irrespectively of the size of the coffee: small, medium
or large. Few years earlier bigger cups had bigger lids. This little innovation
allows bar owner to reduce costs and the cup lid producer to simplify and expand
production34. There are millions of such small innovations and together
with the big disruptive innovations they are shaping the world economy and
contribute to the improvement of the standards of living.
Romer’s second observation was non-rivalry of ideas. In the case of capital
or labor the same worker or the same machine cannot be employed in
two different places at the same time. That is why when we model output
using standard 20th century production function we assume constant return
to scale, doubling inputs (machinery, employees) doubles output. This is not
the case with knowledge, ideas and innovations. When certain innovation
become available (is in the public domain, or can be used under IPR agreements)
it can be used at the same time in hundreds of enterprises. It applies to
anything from chemical formulas to different way of managing business processes.
So doubling the amount of knowledge used in the production process
will more than double the output, resulting in increasing returns to scale.
This second Romer observation has a number of important consequences
but for the purpose of this paper we will focus on just one. Knowledge increasing
returns to scale imply that the higher the number of knowledge,
idea-rich workers the higher the output. And because the number of knowledge
workers should be proportional to the overall number of workers one
could draw a conclusion that large countries grow faster than small ones and
that large countries should have higher standard of living35. Of course examples
of Ireland, Hong Kong, Singapore or Luxemburg on the one hand and
India and China on the other show that it is not the case, and that the biggest
countries are not richest ones, quite the contrary often very small countries
enjoy very high level of income per capita. But one can also show the example
of the United States, which is a very large country with very high income
per capita.
As we said earlier the ability to innovate is a function of the country, region
or corporation intellectual capital. Knowledge is only one of the three
components of intellectual capital. Imagine there is a “genius innovator” in a company, who can produce ideas which double the company profitability.
But this genius needs resources (lab, computers, funding), and the company
corporate culture and organization has to support breeding innovations. If
proper structures, procedures, incentives and resources are not in place, then
even the brightest minds will have little chances to create ideas and transform
them into usable technology. In other words the company has to develop
structural capital to support its knowledge capital. The same can be said
about the country structural capital. A nation which is plagued by corruption,
has malfunctioning law enforcement, does not respect IPRs, has large
cost of starting up a business, does not support innovative companies with
proper policies, such nation is poised to fail in the global knowledge economy.
Finally, ICT deepening that took place in the past twenty years removed
geographical borders, and nowadays innovations are often created by teams
of experts located in different countries or even in different continents. Therefore
country or company prospects will depend also on the ability to source
knowledge and innovations from other locations, which requires development
of a proper relationship capital.
In the light of above arguments a simple comparison of economies with
different level of structural or relationship capital could lead to wrong conclusions.
For example Diamond (1997) presents a study which compares similar
regions, which were isolated and could not source ideas from other regions.
The last ice age ended some 10,000 years BC. Before oceans were covered
with ice, people could travel and exchange ideas, for example how to make
the best stone weapon. However with ice melting, continents became isolated,
people could not travel and communicate until 1000-1500 of modern
era, when large sail-boats were constructed. For some 12,000 years all ideas
were developed locally. What were the results?
The most populated Europe achieved biggest technological progress. Europeans,
such as Christopher Columbus discovered and conquered other
continents. Next in this ranking were also relatively well populated Americas,
with the cultures of Azteca and Maya. Australia was far less populated
and although its inhabitants invented fire and boomerang, they remained
hunters and fishermen. In the least populated areas, such as Flinders islands,
human race did not survive. This very-long-term analysis does show that in
old times the number of inhabitants was important for achieving sustainable
growth, as large populations were more likely to create innovations.
In the modern knowledge economy the ability to source knowledge globally
has become a key advantage that can be exploited by small countries
with excellent knowledge infrastructure (such as Finland or Ireland). It can
by used to leverage growth by large corporations, which have access to many markets which serve as customer driven innovation platforms or, alternatively,
small companies that managed to grow rapidly amid adopted global
vision or thanks to access to large markets (such as in India or China).
Figure 18. Employment and profit share of the 150 largest corporations
listed in the US, 1994 and 2004. Source: Bryan, Zanini (2005)
Figure 19. The share of intellectual capital in the market value of corporations
listed in the US (in US$ trillion) Source: Bryan, Zanini (2005)
Bryan, Zanini (2005) repeated the exercise performed in Diamond (1997)
for continents at a company level. Authors compare growth dynamics of the
largest 150 corporations listed on US stock exchanges to that enjoyed by firms
ranked by size between 150 and 2000.
Figure18 shows the share of both groups of firms in total profits and total
employment. In those 10 years the share of largest firms in employment
remained unchanged and their share in profits rose from 39 percent to 46
percent.
This superb performance of largest corporations calls for understanding
what is behind their success. Partial answer to this question can be found in
the figure 19 above. In the case of largest corporations the ratio of book value
to market value fell from 75 percent to 36 percent, while in the medium size
companies the ratio rose from 48 percent to 60 percent. Although there could
be several explanations, the most plausible one is that the level of intellectual
capital in large corporations exceeds that in the medium ones, which is
adequately priced by the financial markets36.
For example GE employed 300,000 persons in 1984, in 2004 GE employment
marginally fell but the percentage of managers and highly qualified
specialists doubled. In the same period income per employee adjusted for
inflation rose from 13,000 dollars in 1984 to 54,000 dollars in 2004. It appears
that in the last 20 years typical large corporations achieved on average
significantly better results than typical medium company, if they functioned
in a similar regulatory environment. This success was possible amid much
stronger focus on development of intellectual capital in large corporations.
Global reach, ability to source innovations from many markets, outsourcing
and offshoring, also knowledge process outsourcing, were important factors
behind development of intellectual capital37.
Another example of the role of intellectual capital and ability to innovate
in rapid corporate development is discussed in Aguiar (2006). The title
of the paper is “The New Global Challengers. How 100 Top Companies
from Rapidly Developing Economies Are Changing the World”. Based on
the analysis of 100 fast growing companies (4 from China, 21 from India, 12
from Brazil 7 from Russia, 6 from Mexico and 10 from other RDEs38, making
the RDE100 list) that went global authors develop six primary globalization
strategies listed in the box below.
The focus on development of intellectual capital in above strategies takes
several forms:
- Taking RDE brands global is aimed at creating new intangible values by
28 companies (18 from China) that pursue this strategy, such as global
brand awareness among customers around the globe. A combination
of super-large, low cost manufacturing base, large network of suppliers,
world-class R&D centers, strategic alliances with old world technological
leaders, positioning as good-value-for-money products to well established
brands and creating global brand awareness could prove a very
successful strategy to win significant global market share. This applies
especially in such sectors as consumer electronics, household appliances
or automotive equipment. A representative company in this segment is
China’s Hisense, premier manufacturer of TV sets with production sites
in China, Algeria, Hungary, Iran, Pakistan and South Africa.
- • 22 companies on the global challengers’ list are growing internationally
by marketing innovative technology-based solutions. Boston Consulting
Group proposes WIPRO, IT-services group as a representative company
for this sample. According to BCG study "WIPRO creates much of its value
by completely redesigning its’ clients’ business processes, a task requiring comprehensive
process-innovation capabilities. Furthermore, WIPRO is taking innovation
to the next level by building extensive engineering capabilities, thus
making R&D services the next battle battleground. The company already claims
to be the world’s largest third-party provider of R&D services". According to
BCG innovation-based globalization will require new global challengers
to mobilize engineering and science talent to leapfrog existing giants from
theWesternWorld. Already many new global challengers score very well
on the R&D front, for example China’s large telecom Huawei was rated
as a more attractive employer than any of its multinational competitors in
ranking by university students in China. Out of 22 companies pursuing
this strategy based on global innovation 11 are based in India.
- 13 companies on RDE100 list are going regional or global by rolling out
new business models to multiple markets. This is achieved by rigorous approach to acquisitions and by operational excellence as in the case of
Mexican cement giant Cemex. Other companies in this category strive
to achieve world superiority along critical dimension, others exploit advantages
such as cultural similarities, shared language or political ties to
obtain privileged access to a market. Boston Consulting Group presents
an example of Orascom Telecom, which is using its Egyptian home base
to expand to neighboring markets. Another example of this type of activity
is Chinese presence in many, if not all, African countries, which aims
at building sizeable relationship capital, which will be a useful leverage
in the future for many Chinese companies39.
Above analysis clearly shows, that old, 20th century world division of labor
(with Asia ex Japan providing cheap labor intensive goods) in no longer
valid, and that the 21st century will bring massive changes in this respect.
This conclusion can be reached not only on the basis of case studies, but also
by analyzing the aggregate statistics. It is also worth noticing, that RDE100
companies expand to multiple markets by becoming global leaders of innovation,
and that these innovations are not simple or small value added ones. As
shown above some innovations are related to reengineering of complicated
business processes and can have significant implications for future productivity
of businesses or in entire sectors.
One of more important indicators measuring future knowledge potential
of particular country or region is tertiary enrollment. As documented in figure
20 below tertiary education enrolment has risen in the last fifteen years
in all analyzed regions. Interestingly, South Korea which lagged in this respect
behind the United States has become a leader in our classification. The
gap between U.S. and other regions has narrowed but still the difference remains
very large. China is closing is tertiary education gap with the Latin
America, while CEE countries which had similarly low percentage below 20
percent in early 1990s, last year reached 50% ratio, almost double the level
recorded in Latin America. In light of earlier arguments about positive correlation
between number of researchers and the amount of growth accelerating
innovations it is worth to look at the absolute number of people in the process
of tertiary education as it may be a good proxy for the future number of
domestic researchers, data is presented in figures 21 and 22.
Recent years have witnessed an important shift in the balance of the
world intellectual capital as measured by the number of people engaged in
tertiary education. Number of higher education students40 reached 30 million in China, which is equal to the number of such students in U.S. and
EU taken together. Fifteen years ago China had only four million students
in this category. We can safely predict that with recent war for talent in
Asia raising economic return to education, the number of students will increase
further and China will have increased number of people in tertiary
education tenfold in just 20 years. The absolute number of students in CEE-
4 has also increased significantly, but the gap with NIEs remained, or even
widened when measured by the number of university-level students. Because
of a relatively small population and a number of structural deficiencies
presented below it is very unlikely, that this increase in the number of
students in CEE-4 will translate into higher innovation potential in the coming
decade, unless there is a dramatic change in policies in CEE-4. It is also
worth noticing that LAC countries make steady progress and the number
of university-level students topped that in the EU and approached the level
recorded in the U.S. (figure 22).
Figure 20. School enrollment, tertiary (% gross). Source:
World Development Indicators 2007.
Of course this discussion assumes that the quality of education is similar
in all regions, which is not the case. The average quality of higher education
in the EU or the U.S. is higher than the quality in China or LAC countries.
But emerging markets are making steady and fast progress improving the
education system, and the increase in white-collar wage premium in recent
years is very likely to accelerate this process.
Figure 21. Higher education students (incl. universities) in thousands. Source:
Euromonitor International from national statistics/UNESCO
*)Data for Germany are available from 1992 and for the Czech Republic and Slovakia
from 1993.
Figure 22. University students in thousands. Source: Euromonitor International
from national statistics/UNESCO.
*) Data for Germany are available from 1992, for Luxembourg from 1999 and for
the Czech Republic and Slovakia from 1993.
While the number of people enrolled in tertiary education is a good proxy
for country innovation potential in the future, the current ability to innovate
can be assessed by the number of researchers. As shown on the figures below
the U.S. continues to dominate the world both in terms of researchers intensity
(per million of citizens) and absolute number of researchers in R&D.
However in terms of researchers’ intensity both the EU-15 and the NIEs are
closing the gap, and in terms of absolute number of researchers China is the third biggest in the world, although the average researcher still has poor skills
in comparison with the US or EU average.
Figure 23. Researchers in R&D (per million people).
Source: World Development Indicators 2007.
Figure 24. Researchers in R&D in thousands.
Source: World Development Indicators 2007.
It is evident that in the last ten years the research gap between the NIEs
and the CEE-4 has been growing. Both regions had similar number of researchers
in mid-1990s, while two years ago NIEs had twice as many people
employed in R&D in comparison with CEE-4.
Two more indicators describing country ability to generate innovations
are research and development expenditure and ICT expenditure. First indicator
measures funding available to people with great ideas. Second indicator
is a proxy for country ability to source knowledge globally thank to massive ICT deepening witnessed around the globe in the last decade41. Because
knowledge sharing, exchange of ideas, networking of researchers is becoming
more and more important factor in achieving technical progress, ICT
development is likely to facilitate those needs and contribute to creation of
more inventions. Those two indicators are presented in figures 25-28 below.
Figure 25. Research and development expenditure (% of GDP).
Source: World Development Indicators 2007.
Figure 26. Information and communication technology expenditure (% of GDP).
Source: World Development Indicators 2007.
Figure 27. Total R&D spending per capita (in ECU/euro). Source:
Eurostat, CEIC Data ISI Securities China Premium Database.
Figure 28. Total R&D spending per capita (in ECU/euro, 1991=100). Source:
Eurostat, CEIC Data ISI Securities China Premium Database.
While U.S. and NIEs are world leaders in terms of R&D and ICT spending,
China has made an enormous progress, raising R&D Spending per capita 12 times over the last 15 years. The EU has been closing the gap with the U.S. in
terms of R&D spending as a ratio of GDP but it lags badly behind the US in
terms of ICT expenditures. With growing importance of ICT using industries
for productivity growth42 it may signal the Europe’s troubles lying ahead
despite its improvement in R&D spending.
In the last ten years there was no improvement in R&D spending in the
CEE-4 countries, it remains well below 1 percent of GDP and lags badly behind
the 1.5 percent in China. In terms of absolute levels of spending per capital
still U.S. and Japan top the league and exhibit similar volatility pattern.
Figure 29. Scientific and technical journal articles per million people.
Source: World Development Indicators 2007.
*) From 2000 data exclude Hong Kong.
Various indicators discussed above show that CEE-4 countries lag badly
behind other regions in terms of its current and future ability to generate
innovation. The same picture emerges when one looks at the number of scientific
and technical journals publications and patent filings. The U.S. and
EU-15 dominate the world in terms of publication intensity. In early 1990s
CEE-4 published twice as many papers per million of citizens than NIEs, but
in recent years these proportions changed, and NIEs scholars publish 50%
more than their CEE-4 colleagues.
The statistics showing patent filing by office in 2005 do paint an interesting
picture. There are two world leaders, Japan and the USA, while China,
NIEs and EU-15 file one-third to one-half the number of patents compared
with the leaders. Of course this is a very simplistic picture, because what
matters is not the number of innovations, but the quality of innovations, especially
the number of disruptive innovations. The picture shows that CEE-4
does not exist on the patent map. Having said that and has to add that good
innovation creation capability is not enough to achieve sustainable growth,
both on the company and on the country level. (2007) discuss the innovation
value chain, which consists of idea generation, conversion and diffusion.
There are companies and possibly also regions and countries which may suffer
from existence of a weak link in this value chain. So instead of focusing
on generating more innovations authors recommend that companies should
find and analyze its weakest link in the innovation value chain, and take corrective
actions. This is also true in the case of countries and regions and examining
several other aggregate indicators may lead to identification of weak
links in the knowledge based economy.
Figure 30. Patent filings by office in 2005 in thousands. Source: World Intellectual
Property ORganization.
*) Data for EU-15 are the sum of patent filings from national patent offices and the
European Patent Office. According to WIPO EPO patent filings in 2005 amounted
to 60.8 thousands. The total number of patent filings may be overstated as the EPO
grants patents on behalf of the member States of the European Patent Convention
(EPC), the membership of which is larger than that of the European Union as some
EPC member States are not members of the European Union. Furthermore many
European patent applicants seek patent protection in multiple EPC member States,
therefore, non-resident patent filings by Europeans in other EPC member State of-
fices and at the EPO have become common. Data for Italy are not available. Latin
America-6 includes: Brazil, Chile, Colombia, Cuba, Ecuador and Peru.
Hansen and Birkinshaw define three types of innovation deficiency,
quote:
"Organizations typically fall into one of three broad “weakest-link” scenarios.
First is the idea-poor company, which spends a lot of time and money developing and
diffusing mediocre ideas that result in mediocre products and financial returns. The
bottleneck is in idea generation, not execution.
By contrast, the conversion-poor company has lots of good ideas, but managers
don’t screen and develop them properly. Instead, ideas die in budgeting processes
that emphasize the incremental and the certain, not the novel. Or managers
adopt the “1,000 flowers” approach, letting ideas bloom where they may
but never culling them. The need is for better screening capabilities, not better
idea generation mechanisms.
Finally, the diffusion-poor company has trouble monetizing its good ideas. Decisions
about what to bring to market are made locally, and not-invented-here thinking
dominates. As a result, new products and services aren’t properly rolled out across
geographies, distribution channels, or customer groups. For such companies the real upside lies in aggressively monetizing what it has already been able to develop, not
in paying further attention to idea generation or idea conversion."
The same typology can be applied to regions or countries, on average43.
For example country or region with high R&D spending share in GDP and
relatively low number of patents can be a conversion-poor country or region
if great ideas remain unnoticed, or idea-poor country or region, if poor ideas
are generated.
Figures 31 and 32 present some insights. First shocking observation is that
U.S. has only marginally higher number of researchers than the EU-15, but
records twice as many patent filings. In Asia NIEs are much more effective
that China, but again smaller number of researchers produces almost as many
patents as EU-15. Of course quality of patents also matters, and Europe may
produce more disruptive innovations than China (but not for long) but figure
31 does indicate many weak links in the innovation generation process in
Europe. Figure 32 shows the effectiveness of dollar spent on R&D. The U.S.
holds a supreme position, China files almost as many patents as EU-15 with
half of the EU-15’s level of R&D expenditure as a share of GDP. CEE-4 spend
much more on R&D than LAC countries, and produce fewer patents. Both
regions hardly exist on the world R&D map.
As documented above CEE-4 countries lack ability to generate great ideas
and to transform them into products or services. Therefore it appears that
foreign direct investments become the most important modernization channel.
Indeed as shown below CEE-4 became a very large recipient of FDI, with
FDI stock to GDP ratio topping 40 percent. Only NIEs economies managed
to attract higher FDI stock in relation to GDP and enjoy higher FDI annual
inflows.
However, in the global knowledge economy it is important to attract high
foreign direct investments to sectors that can become globally competitive, in
particular to these sectors that export high-technology, ie. high value added
goods or services. While CEE-4 significantly improved the structure of exports,
the high-tech goods account for only 12 percent of manufactured exports,
which is the world worst result, lagging even behind LAC countries.
NIEs are world leaders and China is about to take over the second post from
the United States44.
Figure 31. Researchers in R&D and total number of patents filled. Source: World
Development Indicators 2007, World Intellectual Property Organization.
Figure 32. Research and development expenditure and total number of patents
filled. Source: World Development Indicators 2007, World Intellectual Property Organization.
*) Data for EU-15 are the sum of patent filings from national patent offices and the
European Patent Office. According to WIPO EPO patent filings in 2005 amounted
to 60.8 thousands. The total number of patent filings may be overstated as the EPO
grants patents on behalf of the member States of the European Patent Convention
(EPC), the membership of which is larger than that of the European Union as some
EPC member States are not members of the European Union. Furthermore many
European patent applicants seek patent protection in multiple EPC member States,
therefore, non-resident patent filings by Europeans in other EPC member State of-
fices and at the EPO have become common. Data for Italy are not available. Latin
America-6 includes: Brazil, Chile, Colombia, Cuba, Ecuador and Peru.
Figure 33. Inward FDI stock (in % of GDP). Source: UNCTAD,World
Economic Outlook.
Figure 34. FDI, net flows (% of GDP). Source: World Development Indicators 2007.
The 21st century will see a new paradigm. Data shown above suggest that
China and NIEs will become thought, innovation and idea leaders. A very
fine summary of this line of thought was offered by Hexter,Woetzel (2007), a
quote:
"In such a competitive hothouse, adapted practices will evolve quickly, and as
China merges into the world economy best practice there will become best practice
globally. More products developed in China will become global products; more industrial
processes developed in Chinas will become global processes. The ability to
develop a Chinese talent pool will therefore be critical across all functions. Learning
how to execute in China – the world’s most competitive market – will teach companies
how to compete more aggressively elsewhere".
Figure 35. High-technology* exports (% of manufactured exports). Source: World Development Indicators 2007.
*) High-technology exports are products with high R&D intensity, such as in
aerospace, computers, pharmaceuticals, scientific instruments, and electrical machinerz. Data for Hong Kong are included from 1992.
The last few years were very good for CEE-4 countries. EU accession
serves these economies well, the EU funds help modernize economy, transfers
make farmers richer, EU demand for CEE exports has been rising at a
very robust pace. Some economists are predicting five percent plus growth
for CEE-4 region top last many years. However analysis presented in this
section identified important structural deficiencies of the CEE-4 knowledge
economies. In particular these economies lack the ability to generate innovation,
and have attracted large pool of FDI to modernize economic structures.
Unfortunately, as export structure suggests FDI have been located in relatively
low value added industries. All of this does suggest that the new Europe
after a period of EU-accession positive output shock may find it difficult
to maintain fast and sustainable growth path, unless there is a meaningful
shift in policies towards supporting creation of intellectual capital.
The limitations of the scope of this paper did not allow to discuss another
major deficiency of Europe, which was inherited by new Europe as well. This
deficiency is the lack of ability to create shared and ambitious vision, strategic
goals and successful implementation of strategic plans45. We would not
go as far as Tausch (2007) who analyzes 13 indicators used by the European
Commission to assess the Lisbon agenda progress, presents inherent contradictions in the Lisbon approach and calls Lisbon agenda a “destructive creation”.
However a number of analyzed indicators suggest that Europe needs
a new vision46, and this applies even more to new Europe.
Last but not least new Europe is struggling with massive emigration to
Western Europe which offers better paid jobs. The scale of this migration
has topped 5 percent of the labor force in some new Europe countries and
has become a significant brain drain. It remains to be seen whether governments
in new Europe will reach out to good examples of building large and
effective diasporas47 supporting creation of national intellectual capital networked
around the globe and transforming “brain drain” into “brain gain”.
3. Conclusions
Lucas (2007) argues that in the long run income of all countries will converge.
Bearing in mind what Lord Keynes said about long-run we document
in this paper that income convergence did take place in all analyzed regions.
On top of that we also find convergence in the standard of living as described
by social cohesion and environmental indicators. Progress made on this front
varies with the starting point and the range of adopted policies. Although it
is extremely hard to make general statements on such a broad area as sustainable
development we can propose the following general classification: at
least according to some measures there are countries that perform better with
regard to growth and social progress and worse with regard to environmental
protection (the. U.S. and China), countries that achieved higher social and environmental
standards but low growth (EU-15 and CEE-4) and countries that
maintained eco-friendly environment but accomplished neither high growth,
nor significant social cohesion (Latin America & Caribbean). It should be
however noted that NIEs made biggest progress, managed to increase substantially
the level of income while scoring well both in the environmental
and social development. This example clearly shows that extraordinary economic
performance may be a powerful means not only to achieve superior
social development, but also to maintain decent environmental protection.
This paper presents evidence and argues that ability to innovate will be
the key factor of sustainable growth in the 21st century global knowledge
economy. Globalization of business processes implies that parts of these processes
will be moved to locations where the cost to quality ratio is most attractive.
Because emerging economies quickly move up the value added ladder reducing costs at the same time, it implies that companies located in developed
economies face a real threat that more and more business processes will
be relocated to emerging markets. The only response that will allow the old
world to face the new world competition is to stay on the world innovation
frontier. Data presented in this paper suggest that the ability to retain technological
leadership by the U.S. and especially by the EU is rapidly vanishing,
because:
- Population of present and future innovators in Asia (China and NIEs) is
rapidly enlarging;
- Environment is much more competitive in many Asian markets than in
Europe or the US, and tough competition breeds success;
- Sharply increasing return to education (white-collar wages) is likely to
strengthen recent trends, which will lead to even faster closing of the technology
and innovation gap between the U.S. and China or NIEs;
- Biggest developed world democracies, the UE and the U.S. lack clear vision
and strategy, while strong strategy focus and robust implementation
is present in China and NIEs;
- Western world has failed to understand the importance of intellectual capital
to future prosperity. For example China involvement in Africa is a
very sound investment in 21st century relationship capital, while Lisbon
agenda maybe called an example of “destructive creation”;
The new Europe is gradually converging to the Old Europe. This progress
is most evident in terms of institutional development, as shown in our paper.
However new Europe lags badly behind old Europe and behind China and
NIEs in terms of ability to create and diffuse innovation. All indicators presented
in this paper which measure country innovation potential are at very
low levels in the case of CEE-4, with one exception of tertiary school enrollment.
It is evident that the ability to innovate is very weak in the new Europe,
and there is no evidence suggesting that the situation might change. Therefore
the new Europe in large part has to rely on foreign direct investments
as a technology and know-how transfer. But here also we find evidence that
these investments are on average are not very innovative, as documented by
very low share of high-tech goods in new Europe exports.
So far performance of the new Europe has been good in all three dimensions
analyzed in this paper. However in order to achieve high rate of sustainable
growth new Europe has to change its priorities and policies. New
efforts focused on development of intellectual capital are called for.
Based on presented evidence we formulate the following policy recommendations:
- Abolish present “destructive creation”, when many often contradictory
ideas are floated and the sense of strategic direction is lost;
- Create long-term vision reaching out to 2050, imagine how new Europe
will be able to compete in 21st century global knowledge economy;
- This vision has to be universally shared by citizens and politicians, based
on this vision strategic action plans have to be developed;
- Analyze what assets are needed to fulfill that vision, invest to create these
assets, stop wasting money on assets that will become obsolete in the created
vision;
- Conduct a careful analysis of strategies developed and implemented by
most successful global corporations, especially those from emerging markets.
While managing a company is certainly a simpler task than managing
a democratic nation, many important lesson can be learnt by the
public sector from a successful model of socially and environmentally responsible
corporation.
There will be no success in the 21st century without courage or luck. Those
who do not wish to make their future prosperity a hostage of pure luck need
to show courage to change their policies towards developing proper innovation
capacity. Innovation cannot emerge without reaching an adequate level
of intellectual capital. The quest for intellectual capital of the 21st century has
already begun. Both the old and the new Europe have to wake up and join
the race.
References
ABI/INFORM Global (1996) “East European Markets”, July 19, 1996.
Aghion P., Howitt P. (1992) “A Model of Growth through Creative Destruction”, Econometrica
60(2), March 1992.
Aguiar M. et al. (2006) “The New Global Challengers. How 100 Top Companies from
Rapidly Developing Economies Are Changing the World”, The Boston Consulting
Group, May 2006.
Antal L. Z. (1994) “Causes of High Mortality Rate in the Former Socialist Countries”,
Hungarian Academy of Sciences, Budapest 1994.
Ark B. van (2005) “Europe’s ProductivityGap: Catching Up or Getting Stuck?”, paper
presented at the International Symposium on Productivity, Competitiveness and
Globalisation, Banque de France, 4 November 2005.
Hansen M., Birkinshaw J. (2007) “The Innovation Value Chain”, Harvard Business Review,
June 2007.
Harbaugh B., Levinson A., Wilson D. (2002) “Reexamining the Empirical Evidence for
an Environmental Kuznets Curve”, Review of Economics and Statistics, 84(3), 2002.
Hexter J.,Woetzel J. (2007) “Bringing best practice to China”, The McKinsey Quarterly,
number 4, 2007.
Ichikawa N., Tsutsumi R.,Watanabe K. (2002) “Environmental Indicators of Transition”,
European Environment, 12 (March/April) 2002.
Jakubowska P., Kukli ´ nski A., ÿ Zuber P. eds. (2007) “Warsaw Conference. The Future
of European Regions. Pre-conference volume”, Ministry of Regional Development,
Warsaw 2007.
Jha V., Markandya A., Vossenaar R. (1999) “Reconciling Trade and the Environment:
Lessons from Case Studies in Developing Countries”, Edward Elgar, Cheltenham
1999.
Jones C. (2004) “Growth and Ideas”, NBER Working Paper 10767, September 2004.
Kasiewicz S., Rogowski W., Kicińska M. (2006) “Kapitał intelektualny”, Oficyna ekonomiczna,
Kraków 2006, (in Polish).
Kukliński A. (2007) “The Regio Futures Programme – The Feasibility Study”, research
memorandum, August 2007 (available at www.rybinski.eu/resources/)
Kukliński A., Pawlowski K. eds. (2005b) “EUROPE – The Global Challenges”,
Wyższa Szko³a Biznesu – National Louis University, Nowy Sącz 2005.
Kukliński A., Lusiński C., Pawłowski K. eds. (2006) “Creative Europe. Warsaw Conference
Towards a New Creative and Innovative Europe. Pre-conference volume”,
Wyższa Szkoła Biznesu – National Louis University, Nowy Sącz 2006.
Kukliński A., Pawlowski K. eds. (2005a) “EUROPE – The Strategic Choices”,Wyższa
Szkoła Biznesu – National Louis University, Nowy Sącz 2005.
Kukliński A., Skuza B. eds. (2003) “Europe in the Perspective of Global Scene”, The
Polish Association of the Club of Rome, Oficyna Wydawnicza Rewasz, Warsaw
2003
Kukliński A., Skuza B. eds. (2006) “Turning Points in the Transformation of the
Global Scene”, The Polish Association of the Club of Rome, Oficyna Wydawnicza
Rewasz,Warsaw 2006
Leonard M. (2005) “Why Europe Will run the 21st Century”, Fourth Estate, 2005.
Lucas R.E., Jr. (2007) “Trade and the Diffusion of the Industrial Revolution”, presentation
at a conference organized by the Polish Financial Supervision Authority,Warsaw,
June 26, 2007.
Maddison A. (2003) “Development Centre Studies. TheWorld Economy: Historical Statistics”,
OECD, Paris, 2003.
Marcinkowska M. (2004) “Roczny raport z dzia³a ´n i wyników przedsi²ebiorstwa”, Oficyna
ekonomiczna, Kraków 2004 (in Polish)
OECD (2007) “OECD Reveiws of Innovation Policy. China. Synthesis Report”,
OECD 2007, available at www.oecd.org>
Ohlin B. (1933) “Interregional and International Trade”, 1933.
Okólski M. (1993) ”East-West Mortality Differentials“ European Population, vol. 2,
edited by Blum A. and Rallu J., John Libbey, London 1993.
Rodrik D. (2006) “Goodbye Washington Consensus, Hello Washington Confusion”, Journal
of Economic Literature, December 2006.
Romer P. (1986) “Increasing Returns and Long-Run Growth”, Journal of Political Economy,
October1986.
Romer P. (1990) “Endogenous Technological Change”, Journal of Political Economy, October
1990.
Rybczyński T. (1955) “Factor Endowments and Relative Commodity Prices”, Econometrica
vol. XXII, 1955.
Rybinski K. (2007b) “Meaningless Europe?”, presented at the conference The Future
of the European Regions, held in Warsaw on 31 May – 2 June 2007, available at
www.rybinski.eu
Rybinski K. (2007a) “Three aspects of globalization. Offshoring, global imbalances, monetary
policy.”, Difin, Warsaw, May 2007 (in Polish). Several topics covered in the
book are available in English at www.rybinski.eu
Sala-i-Martin X (2006) “The World Distribution of Income: Falling Poverty and . . .
Convergence Period”, Quarterly Journal of Economics, May 2006.
Schweitzer J. (1990) “Transition in Eastern Europe – The Social Dimension”, Finance &
Development, December 1990.
Shafik N., “Economic Development and Environmental Quality: An Econometric Analysis”,
Oxford Economic Papers, New Series, Vol. 46, Special Issue on Environmental
Economics (Oct.) 1994.
Skyrme D. (2003) “Measuring knowledge and intellectual capital”, Optima Publishing,
London 2003.
Solow R. (1956) “A Contribution to the Theory of Economic Growth”, Quarterly Journal
of Economics, February 1956.
Solow R. (1994) “Perspectives of Growth Theory”, Journal of Economic Perspectives,
Winter 1994.
Stewart, T. A. (1999) “Intellectual Capital: The New Wealth of Organizations”, Currency/
Doubleday, New York, NY, 1999.
Sveiby, K. E. (1997) “The New Organizational Wealth: Managing & Measuring
Knowledge- Based Assets”, Berrett-Koehler Publishers, San Francisco, 1997.
The Economist (1990) “Clearing After Communism”, London: Feb 17, 1990. Vol. 314,
Iss. 7642.
The Economist (1995) “Eastern Europe’s hungry children”, London: Dec 16, 1995. Vol.
337, Iss. 7945.
The World Bank (1994) “Environmental Action Program for Central and Eastern Europe”,
Report no. 10603-ECA,World Bank, Washington, DC. 1994.
United Nations (2004) “Economic Survey of Europe”, No. 1, New York and Geneva
2004.
University, Usery lecture in labor policy, 2005.
WHO (2006) “Health and Economic Development in South-Eastern Europe”, Paris 2006.
World Bank (2005) “Empowering People By Transforming Institutions: Social Development
in World Bank Operations,”Washington D.C. 2005
|
|
|
|
