Features: September 16th, 2003

An Overview of the Knowledge Economy

By Thomas B Riley, Executive Director and Chair, Commonwealth Centre for Electronic Governance

This article was first published in eGov Monitor Weekly <http://www.egovmonitor.com/newsletter/signup.asp>

For the last two hundred years, neo-classical economics has recognised only two factors of production: labour and capital. This is now changing. Information and knowledge are replacing capital and energy as the primary wealth-creating assets, just as the latter two replaced land and labour 200 years ago. In addition, technological developments in the 20th century have transformed the majority of wealth-creating work from physically-based to “knowledge-based.” Technology and knowledge are now the key factors of production. With increased mobility of information and the global work force, knowledge and expertise can be transported instantaneously around the world, and any advantage gained by one company can be eliminated by competitive improvements overnight. The only comparative advantage a company will enjoy will be its process of innovation — combining market and technology know-how with the creative talents of knowledge workers to solve a constant stream of competitive problems — and its ability to derive value from information. We are now an information society in a knowledge economy. This page lists and rates electronic resources related to the field of knowledge based economy and information society.

The Enterprise Development Website: The Knowledge Economy

The knowledge economy, as Prime Minister Tony Blair of Great Britain has said three years ago, is really about one economy. There is, he says, “no new economy…there is one economy, all of it being transformed by information technology…it is a profound economic revolution.”

What this means is that business must be in a constant process of change and adaptation to the new economic realities. In this new economy, it is evident that the key to success is “knowledge”. For governments they are going to have to invest in, and develop, knowledge workers. This is going to mean that government budgets must allocate funds for skills development and education. What is important to realize, from the perspective of knowledge as a capital tool, is that the Internet has tipped the scales in favour of both businesses and governments. For example, for scientists in business and government, the Internet is a major tool to assist in the sharing of research and the findings. Scientists can now do this in an increasingly global environment. Exchange of research and ideas has accelerated innovation, inventions, and creation of new goods and products, at a rate never before known in human history.

The rapid development of the Internet in the past ten years has resulted in an escalation of the global economy. This globalisation has had a profound impact on both the economies of nations and the pressures on countries to compete effectively in this new global environment. Globalisation of the economy has also raised new issues of nationalism and protection of local culture. Yet, the pressures for change, brought by this new phenomenon, have also meant that countries can compete on a global scale. In this new environment two of the most important commodities of a nation are becoming information and knowledge.

Globalisation has been spurred on by the Internet, which operates 24 hours a day, 7 days a week (24/7, as it known). This has meant that ideas and innovation can be occurring around the clock. In this new environment, it will be important for government to development mechanisms to encourage the private sector, and public sector research organizations, to be innovative and able to deploy knowledge. Increasingly, as Prime Minister Blair has pointed out, more and more individuals and companies are engaged in businesses that are connected to the Internet. In 1999 it was estimated that Britain was the leader in e-Commerce in Europe, spending 2 billion pounds online. It is predicted that by the year 2004, the United States might reach sales of 1 trillion dollars online. But this is not just about the Internet, or e-commerce for that matter. The Knowledge economy is about how the new technologies have transformed the way we think and act, and the ways in which we use the Internet and ICTs which are transforming our world economies.

Spreading the benefits of the knowledge economy

Yet, despite these glowing accolades about the benefits of the transformed world economies, there are the deeper issues as to whether or not many of the developing nations can also benefit, as well as the less well off in the developed countries. The digital divide, economies of scale, trans-global organizations dominating the world markets, powerful economic engines of a few rich countries, and other concerns, can leave the impression that the gap in the world between the rich and the poor will widen over time. There is an argument to be made that the gap will widen over time if developed countries and international organizations do not move faster to narrow the gaps and bring in policies that will benefit all the peoples of the world. The evolving, powerful new technological tools, and the Internet, are media that can be harnessed to benefit developing countries. But this cannot happen in a vacuum. To succeed in the knowledge economy there are certain very basic policies that are needed. The first is to create a cultural change within the institutions of the country.

Joseph Stigliz, Senior Vice President and Chief Economist, the World Bank Group, in London, UK, maintains, in a speech in 1999, that “in industry, the shift towards a knowledge-based economy involves a shift in organization away from top-down hierarchical systems to horizontal structures such as networks of semi-autonomous teams.” He maintains that it is essential for any country, in developing structures for their knowledge-based economies, to develop their own best practices based on their history and cultural development. Best practices from other jurisdictions cannot simply be imposed on a country. Stigliz points out that any attempts by external agencies to impose their own set of “Best Practices” for a knowledge economy, “will not produce lasting change. It will undermine people’s incentives to develop their own capacities and weaken their own confidence in using their own intelligence. The external development agency, instead of acting as a catalyst or midwife to empower change, will only short-circuit people’s learning activities and reinforce their impotence. The external incentives may temporarily overpower the springs of action that are native to the institutional matrix of the country but that will probably not induce any lasting institutional reforms.”

This is an important principle to understand as, for any country to succeed, it must, by necessity, rely on its own internal understanding and the wisdom of its culture. There is much evidence surfacing in Asia that many countries there are becoming disillusioned with organizations such as the World Bank and the International Monetary Fund. Many countries see globalisation as a threat to their centuries old cultures. To many in the world, globalisation benefits the rich and powerful nations and is perceived as another form of colonialization. Obviously, individual countries are the ones best suited to change their own culture. But, the lesson is the same, for any country to transform itself into a viable, knowledge-based economy, internal, institutional change will be crucial. Who better to develop its own strategy but the government of a particular country?

The role of government is to provide access, promote skills and set framework

One of the prime tools a government needs, in order to embrace as much of their citizenry as possible, is wide access to both the Internet and Information and Communication Technologies (ICTs). Thus, to achieve this, connectivity programs, funded by government, are necessary. Also, where there is access in the school, or in the workplace, or in the community, programs are needed to widen computer literacy. Of course, in many countries, raising the overall literacy of the population is a primary goal. Part of this should be built into programs to ensure that the current and next generations become computer literate or are in a position to benefit from the changes technology is bringing.

This is essential for the development of knowledge workers at all levels of society. Importance is placed on computer literacy because in many countries, such as Canada, the United States, Great Britain, Singapore, and Australia, it is now estimated that over 60% of production is created by knowledge workers. This does not mean that 60% of the workforce is creating knowledge that can be bartered and sold on the world markets. Though this is partly true, the fact is that information technologies are now driving the economic engines in most of the industrialised world. Chips embedded in the infrastructure now drive most technologies in the workplace and home. Technology pervades our lives, from the kitchen, to our means of transportation, to the workplace. Some form of information technology drives nearly all facets of life. This is not just isolated to developed countries, but is evident in most of the developing countries, though in much smaller numbers. In the case of the latter, the technology, and the economic prospects they bring, are not as universal. But to thrive in the global knowledge economy

Thus, it is evident that the world is rapidly moving towards information and knowledge intensive societies. The following illustrate some of the methodologies that governments are evolving to secure their knowledge economies can thrive in the competitive and innovative global economy. Some of the tools needed for the knowledge economy include information policies, that give citizens equal and universal information rights so that all, now just a privileged few, shall benefit in the new economy. This is a major challenge facing any groups in society who are seeking wide and effective access to government information, as most countries in the developed world have poor or inadequate information policies.

Privacy and data protection laws are also essential, in order to protect the rights of individuals from abuse of their personal information and to give control to the information as to when and ho their personal information can be used.

Thus, education is a key, in order to ensure the skills for the knowledge economy exist in abundance. It is important that there be an army of skilled technical experts who understand and can apply technical knowledge. These workers are the underpinnings of the knowledge economy.

Part of the challenge in allowing wide access to the rich resources that exist through the Internet and other ICTs, is ensuring that there are sufficient opportunities for businesses to be online. This is a step beyond providing the education of citizens to create opportunities. There need to be programs to fund businesses to get them online. This is an important lesson many of the developed countries have had to learn. Getting businesses online is not just ensuring wide access to the Internet. It also requires extensive educational programs so business leaders understand the opportunities and benefits of having an online presence. This is important so that they can take advantage of the world as a potential customer.

Equally crucial is that business be able to thrive in a competitive environment, and can compete, not only within their own country, but in the wider global economy. Diversity is a key characteristic of the knowledge economy. It is important that there be intellectual property laws, to protect businesses and innovators. However, the laws themselves must be flexible to ensure that monopolies do not develop. It is important that there be innovation, creativity and diversity in the emerging knowledge economy.

The combined precepts of the developing knowledge economies are changing the way many national and international institutions operate. For example, the World Bank has changed its focus to the intangibles of knowledge, institutions and culture. The World Bank has been transforming itself “into more of a knowledge bank and is forging a more comprehensive development framework to put the new focus into effect. In more advanced, industrial economies, the challenge of creating and nurturing a culture of innovation and challenge is no less daunting.”

In summary, to succeed in the knowledge economy, governments need to:

Develop programs to create a climate to nurture knowledge workers; education is the key in this process, starting with front-end entrance institutions to higher education institutes;

Invest in online connectivity to embrace as much of the citizenry online;

Invest in technology to build infrastructures;

Build programs to stimulate innovation and creativity;

Enact legislation to create security and confidence for businesses to operate in the growing knowledge economy;

Develop new information laws which extend the information rights of the citizen not just to information held by government but to information held in the private sector;

Create web sites within government with information that will assist businesses, entrepreneurs and citizens as a whole seeking to engage in knowledge-based economic activity

Work to bring about cultural change in institutions to adapt to the new economy emerging in the world.

Thomas Riley is the co-Founder, Chair of the Board and Chief Executive of the Commonwealth Centre for Electronic Governance, a think-tank set up under a Commonwealth Secretariat programme in London. He is also the President of Riley Information Services, a consultant and advisor specialising in national and international IT policy development, and a Visiting Professor of Law and Technology at the University of Glasgow. For further information he can be contacted at Tom@Rileyis.com

? KAM Ltd 2002.