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Introduction
2. The term KBE (or sometimes called the New Economy or Modern
Economy) results from a fuller recognition of the role of knowledge and
technology in economic growth. Knowledge, as embodied in human being (as
human capital) and in technology, has always been central to economic
development.
4. There has been growing demand for KBE indicators partly as a result of
the increasing concern on “knowledge divide” between the advanced countries,
who are generating most of this knowledge, and developing countries, which
have comparatively less developed markets, institutions, telecommunications
infrastructures or educated people to create, adapt, and make effective use of the
rapidly growing stock of knowledge.
What is a KBE?
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8. A KBE is thus a broader concept than an “Information Society”.
While an information society is basically a society where a majority of workers
will be producing, handling and distributing information or codified knowledge,
a KBE is characterized by the need for continuous learning of both codified
information and the competencies to use this information. As access to
information becomes easier and less expensive along with the advancement in
ICT, the skills and competencies relating to the selection and efficient use of
information become more crucial. Capabilities for selecting relevant
information and disregarding irrelevant information, recognizing patterns in
information, interpreting and decoding information as well as learning new and
forgetting old skills are becoming very important in a KBE.
10. More and more analytical approaches are being developed so that
knowledge can be included more directly in production functions. However,
incorporating knowledge into standard economic production functions is not an
easy task, as this factor defies some fundamental economic principles, such as
that of scarcity. Knowledge and information tend to be abundant; what is
scarce is the capacity to use them in meaningful ways. Nor is knowledge
easily transformed into the object of standard economic transactions.
11. The term KBE was first coined by OECD and defined as “economies
which are directly based on the production, distribution and use of knowledge
and information” (OECD, 1996). The APEC then extended this idea to state
that in a KBE “the production, distribution ands use of knowledge is the main
drivers of growth, wealth creation and employment across all industries.”
(APEC, 2000) While the KBE ideal encompasses concepts like innovation,
higher education and R&D, it is broader than this and highlights the importance
of knowledge in all aspects of the economy. KBE is also referred to as the
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New Economy or Modern Economy somehow separate from a stagnant “old
economy”. However, in a truly KBE, all sectors have become
knowledge-intensive, not just those usually called “high technology”.
12. On the other hand, there is growing belief that knowledge can do more
than increase economic growth. It can lead to structural change in an economy
and therefore society. Such change differs from the incremental changes to
which all economies are constantly subjected. OECD started in 1999 a
two-year study called “Growth Project” to analyse the causes underlying
differences in growth performance in OECD countries and identify factors,
institutions and policies that could enhance long-term growth prospects (OECD,
2000a, 2000b and 2001a).
13. The Project suggested that, in some aspects, there is a “New Economy”
and that some of the features associated with the “New Economy” can actually
be observed. It then look beyond the business cycle and asked what structural
shifts, if any, have taken place in growth patterns in OECD economies in recent
years. The questions led to an investigation of the underlying sources of
growth. The Project concluded that there were divergences in the growth
patterns of the OECD countries and attributed this to new capital investment
particularly that on ICT, increased use and rising quality of labour, and greater
efficiency in how capital and labour were combined or multifactor productivity.
Thus, all these elements are regarded as the fundamental characteristics of a
KBE.
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component parts in the frameworks would themselves be the subject of
statistical frameworks, with some of them already in place. Moreover, the
frameworks do not deal with concepts, such as classifications, standards or
definitions, which are left to be dealt with by the frameworks for the component
parts.
OECD framework
17. OECD started to conduct research on the KBE and attempt to compile
statistical indicators on the KBE as early as in 1996, based on their work of
developing and publishing science and technology (S&T) indicators (OECD,
1996). OECD pointed out that “the traditional economic indicators have never
been completely satisfactory, mostly because they failed to recognize economic
performance beyond the aggregate value of goods and services.”
18. To fully understand the workings of the KBE, new economic concepts
and measures are required which track phenomena beyond conventional market
transactions. In general, it was suggested by OECD that improved indicators
for the KBE are needed for the following tasks:
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knowledge capital would seem almost impossible. As such, only a few proxy
indicators have been suggested by OECD. This also applies to the flow of
knowledge. As regards knowledge outputs, again only rough indicators have
been developed, including the delineation of a list of high technology industries.
23. Later on, the OECD Growth Project further explored the idea of a KBE
and concluded that a number of factors are important for a KBE (OECD, 2001a).
These conclusions suggest the following broad elements of a KBE framework:
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(i) the importance of a stable and open macro-economic
environment with effectively functioning markets;
(ii) the diffusion of ICT;
(iii) fostering innovation;
(iv) investing in human capital; and
(v) stimulating firm creation.
APEC framework
24. APEC approached the KBE from a perspective similar to that of the
OECD Growth Project. In 2000, the APEC Economic Committee, in
partnership with organizations in member economies, analysed the
underpinnings of the KBE by examining the empirical evidence from the
individual economies concerned. The work concluded that four dimensions
characterize KBEs and are largely responsible for the strong economic
performance of some economies over the last few decades (APEC, 2000). The
four dimensions so deduced are that:
However, APEC only chose those indicators that were available for the case
study economies. This somehow tended to limit the choice of indicators.
25. In 2001, APEC conducted another study to examine what are the
fundamental underpinnings of the New Economy. The definition of the New
Economy is compatible with the KBE concept. They concluded that the four
dimension of KBE success are necessary conditions for the New Economy as
well (APEC, 2001). The study in fact pushed the analyses deeper than the four
characteristics of the KBE, to focus on achieving the New Economy outcome of
high productivity growth and on minimizing the exacerbation of a digital divide
which could result from too shy a discussion of policy.
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World Bank framework
26. Besides OECD and APEC, the World Bank Institute (WBI) in the
World Bank Group has been running a programme on Knowledge for
Development (K4D). It aims at creating capability in client countries to take
advantage of the new opportunities raised by the knowledge revolution and in
effect building the knowledge dimension into their development strategy.
27. The K4D programme has also developed a framework to help countries
articulate strategies for their transition to a KBE. The framework consists of a
set of 69 structural and qualitative variables that benchmark how an economy
compares with their neighbours. The set of 69 variables serve as proxies for
the five areas that are critical in the development of a KBE, namely:
28. Given the large set of variables, WBI has developed a simplified
“knowledge assessment scorecards” consisting only of 14 key variables among
the 69 variables. Besides, WBI has also undertaken a comparison of the 69
variables for a group of 100 countries/territories, including Hong Kong.
29. While different sets of statistical indicators have been selected and
grouped according to different aspects in the above frameworks, they can be
broadly grouped into the following four dimensions:
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(iii) Human Resource Development – indicators to reflect the
quantity and quality of individuals equipped to access and use of
knowledge and information for further production/creation and
distribution of knowledge and information in the economy.
(iv) Business Environment – indicators to reflect a business
environment conducive to the production/creation and
distribution of knowledge and information in the economy.
31. Based on the complete list of indicators from the various frameworks, a
list of indicators based on the following considerations is drawn up in Annex I:
32. The above list would form the preliminary basis for developing a set of
KBE indicators for Hong Kong. It can be seen that above list of indicators has
a rather good balance in the number of indicators for the four dimensions
concerned. In terms of number of indicators, it is on the high side, amounting
to about 80.
33. All the KBE frameworks discussed above, including the one proposed
for Hong Kong, are not without limitations. First of all, without an
international standard on KBE indicators, it is difficult for benchmarking an
economy’s position as a KBE against other economies. Given that different
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economies would have different emphasis on the various aspects of a KBE, it is
understandable that they might choose quite different sets of KBE indicators in
their frameworks. In this connection, international cooperation in devising a
core set of indicators for international comparison would be useful.
35. The indicators might not be able to fully reflect the very substantial
achievements in the KBE attributes of an economy resulting from the adoption
of a small number of break-through technologies.
36. With the vast number of indicators, it is not easy to assess the overall
performance of an economy, i.e. with some indicators improving while some
other deteriorating, it is difficult to assess whether the economy is becoming
more knowledge-based or less. Of course, one option is to develop a single
KBE index based on the individual indicators. However, such approach is not
without limitations as this would require assigning an appropriate weight to
each and every indicator. This would only be possible if there is an
appropriate model that links up the various dimensions and the indicators
therein, not to mention that such a model would have to be agreed upon in the
international arena before any international comparison could be done.
Way forward
37. Despite the above limitations in the KBE framework, it is still planned
to finalise the list of relevant KBE indicators for Hong Kong by end 2004/early
2005. Relevant parties and potential users of the KBE indicators both within
and outside the Government would be consulted. If everything goes smoothly,
the first full set of KBE indicators for Hong Kong would be available in mid
2005.
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38. The above framework would of course be regularly reviewed taking
into consideration latest developments in this area in the international arena.
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Annex I
Proposed Indicators on Knowledge-based Economy for Hong Kong
Patents
1.11 Patent applications filed in/patents granted by US Patent Office per million
population
1.12 National patent applications by field
Innovation
1.13 Innovation expenditure as % to total business receipts
1.14 % of firms with technological product or process innovation
1.15 University licensing, spin-outs and start-ups
Research outputs
1.16 Scientific and technical articles per million population
Technological cooperation
1.17 % of firms with cooperation arrangement in R&D with government or higher
education institutions
1.18 % of firms with cooperation arrangement in innovation activities with other business
firms
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(II) Information and Communication Technology (ICT)
ICT investment
2.1 Investment in ICT equipment and software as % of non-residential gross fixed capital
formation in business sector
2.2 Expenditure on ICT goods and services in business sector as % to business receipts
2.3 Expenditure on ICT goods and services in the economy as % to GDP
ICT manpower
2.4 % share of ICT workers in the labour force
2.5 % share of high skill ICT workers in the labour force
E-commerce
2.21 % of firms having sold through Internet
2.22 % share of e-commerce receipts in total business receipts
2.23 % of firms having purchased through Internet
2.24 % of population having ordered through internet
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ICT sector
2.25 Value added of ICT sector as % of value added of business sector
2.26 Capital expenditure by the ICT sector as % of total business capital expenditure
2.27 Employment in ICT sector as % of employment in business sector
General education
3.4 Educational attainment of adult (aged 25-64) by level
3.5 Enrolments in secondary schools as % of relevant age group
3.6 Enrolment in tertiary education as % of relevant age group
3.7 % of workers with tertiary education level in workforce
3.8 % distribution of highest completed level of education of population
3.9 % distribution of highest completed level of education of labour force
Globalization
4.1 Trade in goods as % to GDP
4.2 Exports of high-technology products as % to GDP
4.3 Exports of high-technology products as % to exports
4.4 Trade in services as % to GDP
4.5 Inward and outward foreign direct investment (FDI) flow as % to GDP
4.6 Technology balance of payments flow/balance as % to GDP
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Economic conditions
4.7 Average annual GDP growth
4.8 Volatility of GDP, exchange rate, inflation and short term interest rate
4.9 Sectoral distribution of GDP
4.10 Gross capital formation as % of GDP
4.11 GDP per capita
4.12 Labour productivity by industry
4.13 Unemployment rate
4.14 Labour force participation rate by age and sex
4.15 Prices movements
4.16 Value added of knowledge-based industries as % of GDP
4.17 % share of knowledge-based industries in total business sector value added
4.18 % share of high technology imports and exports in total trade
Social conditions
4.19 Life expectancy at birth
4.20 Annual average population growth rate
4.21 Age structure of population
4.22 Income distribution of the population
4.23 Median household income
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References
Maguire, C., Kazlauskas, C. and Weir, A.D. (1994), Information Systems for
Innovative Organizations, London, Academic Press
OECD (2000a), Is There a New Economy? First Report on the OECD Growth
Project, Paris
OECD (2000c), The Well-being of Nations: The Role of Human and social
Capital, Human and Social Capital and Sustained Growth and Development,
Paris
OECD (2001a), The New Economy: Beyond the Hype, Final Report on the
OECD Growth Project, Paris
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Romer, P.M. (1990), Endogenous Technical Change, Journal of Political
Economy, Vol. 98, No. 5, Part 2, 1990
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