Business Times

Call to create a knowledge economy

By Lloyd F Yapa

Knowledge is created by investing in education and training or human resource development as it is called now. In the modern world it is codified, diffused and transmitted mainly by using Information and Communication Technology (ICT). The medium of codification and diffusion is mainly English. However, printed material containing information/ knowledge is still widely used.

Peter Drucker spoke of “competitive strength (or competitiveness) and economic achievement” emanating from the productivity of knowledge. Economic achievement involves the production of goods and services mainly by private and public firms for trade in the domestic market of a country or with the rest of the world for generation of earnings or incomes, assisted by the State ; higher incomes can be generated by improving competitiveness which boils down to innovation for undertaking differentiation of:
n goods and services on the basis of customer preferences using technological innovation,
n a set of activities to deliver a unique mix of value to a particular segment of customers in a market using superior knowledge gathered through market research, both to prevent imitation by competitors and win greater market share. This means giving up other segments of customers as all cannot be served at the same time without confusing the employees and customers and as adopting such a strategy can cost a large investment. An example of serving a particular market segment is the production of the ‘Nano’ car by India’s Tata Enterprises for low income customers.

Differentiation thus involves the use of knowledge rather than manual labour. KE (Knowledge Economy) refers therefore to an economy driven by brains/knowledge i.e. educated and skilled workers/personnel, differentiation of products and activities through technical innovation and other strategies to satisfy the needs/preferences of segments of customers to earn higher returns versus an economy producing mainly primary commodities driven by brawn, earning low returns. The Sri Lankan (SL) economy based mainly on tea, garments and foreign remittances of workers residing abroad is of the latter type; however, there are glimpses of the emergence of a KE in the industrial and services sectors. These have to be developed further in the manner suggested here.

The state has to assist the private sector in creating a capability for undertaking the above mentioned two forms of differentiation (and improvement of productivity) i.e. competitiveness, for an economy to become a KE; in fact the government has ambition of creating a Knowledge Hub in SL. The net result of all this would be an increase in incomes due to proliferation of higher paid job opportunities and faster economic growth.

On the basis of the above description the basic elements of creating a KE are:

  • Investment in the development of human resources (HR) through education and training both by the State and the firms producing goods and services,
  • Creation by the State of a conducive (business) environment to the acquisition of knowledge, technologies and strategies for innovation leading to differentiation of goods and services,
  • Improvement of productivity by resorting to economies of scale and scope and,
  • n Investment in physical infrastructure mainly Information Technology both by the State and the firms concerned

HR development

Since SL is not gifted with critical natural resources such as iron ore and coal used in industries, the emphasis has essentially to be on the development of human resources. Though India does possess vast quantities of natural resources for industrialization, priority was given without a break to development of HR/education particularly in S&T and the teaching of English since independence. In fact countries such as India, Japan, South Korea and even Japan, which have succeeded spectacularly in economic development, made it a point to send thousands of students for higher education in S&T as well as management to leading universities in the West particularly in the US and motivated them to come back to their countries after qualifying to contribute to economic development. At present the number of students sent abroad by these countries has declined as they have succeeded in uplifting most of their own educational institutions to the level of those in the West. SL has done the opposite up to now. The country’s ranking in the latest Global Competitiveness Index (GCI) for health and primary education is 35 (vs. 3 for Singapore) out of 139 countries and its ranking for higher education is 62 (vs.5 for Singapore); inexplicably higher education has been neglected, leading to dependence on manual labour in the economy. Since about 80% of students who qualify at the A levels are denied entry to our (public)universities and the quality and type of education imparted by them do not ensure employment, about 10,000 students leave SL for education abroad every year and most of them never return after qualifying as they don’t have suitable jobs back at home. This is only part of the brain drain; scores of qualified and experienced personnel who have been working here also leave the country every year for better ‘pastures’; skilled workers like masons, carpenters and electricians in addition leave for employment abroad as higher paid jobs are not available here. This appalling situation no doubt has to be arrested with a carefully prepared plan of action after an analysis of reasons for the brain drain, not just by setting up foreign universities. A KE and a Knowledge Hub for achieving higher incomes will otherwise be a distant dream.

Conducive environment for knowledge

The role to be played by the State for improving knowledge for differentiation through innovation (and improvement of productivity) is one of creating a conducive (business) environment for firms and other institutions to operate successfully while training personnel and attracting Foreign Direct Investment (as the latter particularly can add to HRD in a way that schools and universities cannot since the larger and more reputed foreign firms have developed their own technologies which are being modernized continuously).

The creation of an environment conducive to the emergence of a KE that will improve competitiveness, includes:

  • Laying greater emphasis on macro economic (budgetary and monetary) discipline (as according to the latest Global Competitiveness Index –GCI- Sri Lanka ranks 124 out of 139 countries on this score) to reduce budget deficits and rely less on borrowing. The main objective of all this is to reduce the intensity of inflation which adds pressure on costs of inputs and prices of outputs and to increase savings for investment e.g. in infrastructure for adding to a KE.
  • Development of infrastructure (dealt with below) including education and training (already dealt with under development of HR).
  • Simplification of the numerous bureaucratic procedures and cumbersome laws by improving the efficiency of government institutions (GCI rank 55 as against rank 1 for Singapore) including the judiciary by recruitment and promotion purely on merit without politicization to enable the employment of top class knowledge workers/professional managers. This ability has almost irredeemably disappeared in SL due to the disastrous decision in 1972, to make the politicians responsible for it with an intolerable increase in corruption and poor law and order conditions with the deterioration of the public service.
  • Formulating a closely monitored set of policy reforms, incentives and regulations to motivate the expansion of a KE through innovation in products and services to meet customer expectations thereby increasing earnings. The Budget 2011 has proposed reduction of taxes for encouraging firms to increase investments. Competitor countries, however, offer more attractive incentives that enable them to draw in reputed FDI which add to the type of knowledge that is scarce in SL.
  • The most important requirement is to increase competition among firms particularly by discouraging monopolies and cartels and reducing the degree of protection to domestic enterprises so that they will be compelled to look for ways and means to innovate using knowledge workers instead of seeking protection which would make them sluggish and less competitive. Sadly, however, import substitution is promoted in SL despite its failure in the nineteen seventies; India for instance sharply deviated from import substitution that led to economic stagnation and integrated with the rest of the world with spectacular results particularly through the development of a KE.

It must be stated here that it is the overall environment in the country that would induce firms to invest and improve knowledge and innovation and not a single incentive.

Improvement productivity

Innovation for differentiation by acquisition of knowledge/technologies will not be enough if unit costs cannot be reduced as most consumers would not tolerate higher prices even though value addition has taken place, as stated earlier.

The firms have a direct role in this endeavour with the State playing an important indirect supporting role (which was already discussed under creating a suitable business environment). According to the latest available IMF World Economic Outlook data, GDP per capita (proxy for productivity or output of labour) in SL is US$ 1972 vs. US$ 8,141 in Malaysia, US$ 38,972 in Singapore; the productivity in agriculture in SL is about 1/3 of the national average).

The techniques that should be adopted by the firms to improve productivity or output per man hour are well-known. The major ones include:

  • Realization of Economies of Scale (and scope, i.e. using the same assets for example S&T personnel to undertake work in the subsidiaries of a firm) to reduce unit costs using large scale production and capital deepening/ widening or the use of machinery and equipment (particularly those that are ICT related) at a faster rate than that of (manual) labour.
  • Research &Development –R&D to create new knowledge: The country spends much less than some of its Asian counterparts on R&D (0.17% of GDP or less while India spends 0.61%, Malaysia 0.93%, China 1.34% and Singapore 2.36% of GDP); local firms therefore undertake very little innovation (the country’s GCI rank for technological readiness is 84 vs. 11 for Singapore). Fortunately the budget 2011 has extended double deduction of Research and Development (R&D) expenses in the calculation of income taxes to encourage firms to raise their level of technological readiness.

Investment in Infrastructure/ICT

The infrastructure development programmes being undertaken do not seem to be prioritized on the basis of costs and benefits, improvement of productivity and contribution to knowledge. Express ways and an ICT development programme including an advanced fibre network to improve the extremely poor connectivity between Colombo and other towns especially in rural areas, wider use of computers/Internet with the provision of electricity connecting all the towns/cities are yet to be realized; the use of knowledge and the generation of knowledge therefore ise still confined to the areas around the city of Colombo.

The above requirements will therefore have to be met quickly for the emergence of a KE to contribute substantially to the improvement of competitiveness through innovation, thereby pushing towards double digit economic growth as envisaged by the government.

(The writer is an economist)

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