Knowledge as a driver of growth
By Shahid Javed Burki
Monday, 15 Nov, 2010
ECONOMISTS have moved away from their belief that growth is mostly the consequence of the application of capital and the use of surplus labour. Emphasis on labour and capital as the main determinants of economic growth was the foundation of development and growth economics.
It was this way of looking at growth that convinced early policymakers to concentrate on raising capital for investment. If capital could not be generated from within the economy by increasing domestic savings rates – these were low in most of the developing world half a century ago – then serious efforts should be made to get it from abroad.
The latter approach was followed by Pakistan throughout its history. This dependence on foreign money meant that Pakistan has had to accommodate the interests of those countries and institutions that were prepared to finance its growth.
Protracted discussions with the IMF in recent months are one example of the kind of pressures the country comes under because of the reliance on external finance.
As experience was gained in development and growth and as more data became available to recognise and quantify the drivers of growth, economic thinking deepened.
There is now consensus among economists that a number of other contributors to growth are also important – some of them are vital if growth is to be sustained over a period of time. Among them are technology, the capacity to innovate and the levels of skills obtained by the workforce. These three elements are usually lumped together and called “knowledge”.
Some of the pioneering work in this area was done at the World Bank which in 1996 devoted its World Development Report to this important subject. Since then the institution has gathered more data, including from the countries in South Asia, to study how the application of knowledge advances the rates of economic growth and what are the various areas of policy on which the governments should act.
In the process the bank developed a useful tool for benchmarking to determine how countries across the globe were doing in terms of using knowledge to grow their economies. The knowledge economy index, or KEI, was developed which highlights how countries are performing in relation to others.
The bank’s findings indicate that South Asia as a region and Pakistan within this region have done particularly poorly with respect to KEI. Two conclusions can be drawn from this finding. One, that the countries that have fallen behind in terms of using knowledge to advance their economies could possibly catch up if they paid attention to knowledge and, two, that the governments have a critical role to play in helping the countries to catch up with those that have moved ahead.
The KEI is based on four pillars – economic incentive regime, innovation, education, and information infrastructure. The index ranges from zero to ten with the countries doing poorly closer to zero and those doing well closer to ten.
A comparison between two points in time provides an indication of how well the countries have performed in the past and how they might do in the future if the content of public policy does not change. The accompanying Table provides some useful information which is worth considering in formulating public policy in the laggard regions such as South Asia and laggard countries such as Pakistan.
The Table provides data for two points in time: 1995 and the more recent, which is generally the early 2000s. The KEI has declined for G7 group of industrial countries, for all of Europe, and for most of the developing world. It has improved for East Asia.
This is one important reason why East Asia is catching up with the more advanced countries of Western Europe, North America and Japan and is also the reason why the South Asia continues to fall behind. It also tells us why Pakistan is doing so poorly relative to India.
In 1995, the KEI for India was measured at 4.02, the highest among the South Asian countries. At 2.82, Pakistan came in third, behind India and Sri Lanka. A decade or so later the Indian situation worsened a little but Pakistan’s deteriorated sharply.
The gap between India and Pakistan widened from 1.73 points in 1995 to 1.92 points in the early 2000s even though the scores for both countries fell. The Indian decline occurred in spite of improvements in the economic incentive regime as the governments headed by Prime Minister Manmohan Singh continued to dismantle what had come to be known as the “licence raj”. The country also improved its capacity to innovate. But there was decline in education and surprisingly in information infrastructure pillars. Pakistan saw declines in the heights of all the pillars. The sharpest deterioration was in the area of the “economic incentive regime” and the smallest in the “innovation” pillar.
Another way of looking at Pakistan’s situation with respect to the use of knowledge and growth for development is to do it by comparing the country’s performance with respect to India. Using the data presented in the Table we can estimate the ratios between India and Pakistan for the two periods. It is in education with the Pakistani achievement at 40 per cent of India’s that Pakistan has lagged the furthest behind. It is in information technology with Pakistan at 68 per cent of the Indian achievement that Pakistan has done the best relative to India.
Recalling that the KEI is made up of four pillars and that each pillar has five components there are in all 20 public policy options available to the state to use knowledge to promote growth. Which of these are the most important for Pakistan?
The government needs to focus on at least two areas of public policy: education and research and development or R&D. It is now well recognised that well educated and skilled people are key to not only creating knowledge but also sharing and disseminating it. There is need not only to get all children to attend school and stay in the class room to acquire basic education, there is also the need to improve secondary, higher and technical education.
South Asia has not done well in the past in these areas and continues to perform poorly. Between 1990-01 and 2002-03 enrollments rates at the secondary level worldwide increased from 55 to 71 per cent and from 16 to 26 per cent at the tertiary level. For high income countries the increases were 94 to 107 per cent for the secondary and from 47 to 66 per cent for the secondary and tertiary levels respectively. For South Asia the enrollment was only 49 per cent for secondary education. Similarly South Asia invests very little in R&D, with India once again taking the lead.
In conclusion one needs to recognise that a growth strategy for Pakistan should not only be about savings and investment rates and the allocation of investment in high priority sectors. It must also include innovation.