1. The Challenge of the Knowledge Economy for El Salvador: Preliminary Assessment Robert Whyte World Bank Institute San Salvador, El Salvador November 24, 2003

2. Why focus on Knowledge Economy? A “knowledge revolution”! Reflected in the speed-up in creation and dissemination of knowledge. Opening up opportunities for leapfrogging, but also raising risks that developing countries may fall behind All countries need to develop explicit strategies to take advantage of this new knowledge to avoid being left behind. There are many definitions of the “Knowledge Economy”, many of which focus only on information technology and high technology sectors A broader definition: “An economy that creates, acquires, adapts, and uses knowledge effectively for its economic and social development.”

3. 0 2 4 6 8 10 12 14 19651970197519801985199019952000 Knowledge Explains Differences in economic performance Argentina GNP/head Thousands of Dollars (1955 constant value) Difference attributed to knowledge Difference associated to physical and human capital © Knowledge for Development, WBI © Rep of Korea GNP per capita: Korea v. Argentina

4. The Four Pillars of the Knowledge Economy Economic incentive and institutional regime Educated, creative and skilled people Dynamic information infrastructure Effective national innovation system

5. Knowledge Assessment methodology (KAM) Based on the four Knowledge economy pillars 76 structural/qualitative variables 121 countries Benchmarks performance for two points in time: 1995 and 2002 Each variable is normalized from 0 (weakest) to 10 (strongest) www1.worldbank.org/gdln/kam.htm Basic (simplified) scorecard for 14 key variables Aggregate knowledge economy index (KEI): - Ranging from 0 (weakest) to 10 (strongest)

6. Benchmarking El Salvador Latin America Latin America Average Chile Costa Rica Nicaragua Guatemala Rest of World Republic of Korea Thailand Latvia Bulgaria

7. Costa Rica Latvia Thailand Bulgaria Korea Chile Guatemala Latin America El Salvador Knowledge Economy Index 2002 Strong Correlation: GDP/Capita & KEI R 2 = 0.67

8. El Salvador is below middle ranking globally on the Knowledge Economy Index (3.94), having improved its position slightly since 1995 (3.29) Ahead of most countries in the immediate region but falling some way behind the average for Latin America (4.34) and well behind regional leaders such as Chile (6.32) and Costa Rica (5.47) Falling behind a number of countries with similar income levels: For example: > Bulgaria 5.93 > Latvia 6.77 > Thailand 5.83 El Salvador’s Position on Overall KEI

9. Econ. Incentive Regime Innovation Education Information Infrastructure most recent1995 ECON. INCENTIVE REGIME: -Tariff & Non-tariff barriers -Rule of Law -Regulatory Quality INFORMATION INFR.: - Tel. Lines per 1,000 people - Computers per 1,000 people - Internet users per 10,000 people EDUCATION: - Adult literacy rate - Secondary Enrollment - Tertiary Enrollment INNOVATION: -Researchers in R&D / mil pop - Patents granted by USPTO / mil - Scient. & Tech. Publications / mil pop. Aggregate Changes Basic Scorecards (Four Pillars)

10. El Salvador – Basic Knowledge Scorecard

11. Basic Scorecard: El Salvador compared with Nicaragua and Guatemala Latin America 2002

12. Basic Scorecard: El Salvador compared with Costa Rica and Chile 2002

13. El Salvador: Economic Regime Latin America

14. El Salvador: Governance Variables Latin America

15. Based on the benchmarking: El Salvador scores very well on tariff and no-tariff barriers, regulation and the soundness of its banks It is at the 50 th percentile for the protection of intellectual property rights and for government budget balance In terms of governance variables, political stability, corruption and government effectiveness score very highly for El Salvador However, the rule of law remains a weaker area, and there needs to be more focus on strengthening levels of gross capital formation Benchmarking the EIR for El Salvador

16. El Salvador : Education Variables Latin America

17. 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 100% 80% 60% 40% 20% 0 Secondary (gross) Enrolment rates 1990 - 2000 Chile Nicaragua Latvia Guatemala Costa Rica El Salvador Thailand Bulgaria

18. Literacy Rates 2002: Adult Total (% of people 15 and older) Less than 60% 60 – 80% 80 – 91% 91 – 97% 97% and above No data available Latvia 99.8% Bulgaria 98.6% Chile 96.0% Thailand 95.8% Korea 98.0% Costa Rica 95.8% El Salvador 79.7% Nicaragua 67.1%

19. Based on the benchmarking: El Salvador has improved its literacy rate and is maintaining its lead over most other countries in the immediate region But has not yet caught up with countries such as Costa Rica and Chile Similarly, El Salvador is lower than the average for Latin America for school enrolment, average years of schooling, and adult literacy levels Public spending on education is 2.3% of GDP in El Salvador, compared with 3.8% on average for the whole of Latin America Benchmarking Education for El Salvador

20. El Salvador: ICT Variables Latin America

21. 1200 1000 800 600 400 200 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Telephone Penetration Telephone (fixed mainlines plus mobile lines) per 1,000 people 1990 - 2001 Chile Nicaragua Latvia Guatemala Costa Rica El Salvador Korea Mexico

22. Computer Penetration Personal Computers (Per 1,000 people), 1990 - 2001 300 250 200 150 100 50 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Chile Nicaragua Latvia Guatemala Costa Rica El Salvador Korea Mexico

23. 120 100 80 60 40 20 0 Internet Penetration Internet Hosts (per 10,000 people), 1994 - 2000 Chile Nicaragua Latvia Guatemala Costa Rica El Salvador Korea Mexico 1994 1995 1996 1997 1998 1999 2000

24. Based on the benchmarking: El Salvador needs to do more to strengthen its information infrastructure It does relatively well on radios (per 1000) persons But it has relatively low telephone connectivity (fixed and mobile), computer penetration, and Internet hosts Benchmarking ICTs for El Salvador

25. El Salvador : Innovation Variables Latin America

26. El Salvador is strong in terms of R & D expenditure as a % of GNP, and the % of engineering enrollments in tertiary education. However, it is weak in a broad range of areas of innovation: –Private sector expenditure on R and D –Entrepreneurship amongst managers –Publications in scientific journals –Royalties paid and received for technology –University–business collaboration El Salvador needs to increase its focus on innovation: For example: –Dedicating more funding for R&D –Encouraging patenting –Attract more and diversified sources of FDI –Disseminate lessons of local innovation efforts –Strengthen public-private partnerships Benchmarking Innovation for El Salvador

27. El Salvador: Summary of Strengths & Weaknesses STRENGTHSWEAKNESSES Economic & institutional Regime Macroeconomic stability Reform oriented govt. Trade as a % of GDP Tariff & non-Tariff barriers Soundness of banks Gross capital formation Rule of law – crime rates, legal system, courts Innovation System Total expenditure on R&D Science and engineering enrolment rates in tertiary education FDI as % of GDP Private sector spending on R&D Entrepreneurship Public-private partnerships Researchers in R&D, royalties for technology Education & Human resources Significant improvements over 1990s - enrolment rates, literacy, average years at school Public expenditure on education Literacy rates still relatively low Average years of schooling Secondary and tertiary enrolment Information & communication Infrastructure Rate of adoption increasing Build on growing consumer demands Low ICT penetration ratios – individual; and business Low levels of application and use

28. OPPORTUNITIESTHREATS Economic & institutional Regime Opportunities of CAFTA Attract FDI by improving investment climate Regional and global competition is heating up Innovation System Tapping into global knowledge more effectively Harness S&T base in tertiary education Falling behind global advances in knowledge Loss of scientific talent Enterprises lose competitiveness Education & Human resources Launch major re-skilling program Institute LL learning Reform higher education to market needs Continued brain drain Resistance from established institutions Unresponsive universities Information & communication Infrastructure Expand penetration ratios Especially in enterprise sector Focus on applications Risk of digital divide Difficulty of changing processes to use ICT El Salvador: Summary of Opportunities and Threats

29. Very dynamic global situation - risk of some countries falling further behind Performance depends on coherent strategies focusing on how to use knowledge effectively for development Finding advantageous ways of participating in globalization Now critical to engage and and move up in global value chains This requires strengthening ability to acquire, adapt, disseminate, and even to create knowledge Raising awareness among policy makers, private sector and civil society on challenge/opportunities of the knowledge revolution Adopting an integrated approach to policy is critical Setting monitorable goals and constant evaluation is key to improving performance The Way Ahead …..