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

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

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

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

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

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

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

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

Econ. Incentive Regime Innovation Education Information Infrastructure most 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)

El Salvador – Basic Knowledge Scorecard

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

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

El Salvador: Economic Regime Latin America

El Salvador: Governance Variables Latin America

Based on the benchmarking: El Salvador scores very well on tariff and no-tariff barriers, regulation and the soundness of its banks It is at the 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

El Salvador : Education Variables Latin America

% 80% 60% 40% 20% 0 Secondary (gross) Enrolment rates Chile Nicaragua Latvia Guatemala Costa Rica El Salvador Thailand Bulgaria

Literacy Rates 2002: Adult Total (% of people 15 and older) Less than 60% 60 – 80% 80 – 91% 91 – 97% 97% and 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%

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

El Salvador: ICT Variables Latin America

Telephone Penetration Telephone (fixed mainlines plus mobile lines) per 1,000 people Chile Nicaragua Latvia Guatemala Costa Rica El Salvador Korea Mexico

Computer Penetration Personal Computers (Per 1,000 people), Chile Nicaragua Latvia Guatemala Costa Rica El Salvador Korea Mexico

Internet Penetration Internet Hosts (per 10,000 people), Chile Nicaragua Latvia Guatemala Costa Rica El Salvador Korea Mexico

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

El Salvador : Innovation Variables Latin America

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

El Salvador: Summary of Strengths & Weaknesses 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

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

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 …..