As economies shift workers and economic activities from low productivity to high productivity sectors, especially when they are near the middle-income threshold, advancing the knowledge economy helps them overcome the ‘middle income trap’— crucial for a continued and meaningful structural transformation. A knowledge economy not only propels high value added services activities, but also contributes to moving manufacturing activities up the value chain. Think of it as follows: With cheap labor cost a country can competitively produce normal garments and light machinery goods—all require either copying already existing techniques or importing intermediate raw materials and technology to produce these goods. But, to climb up the value chain and to not get stuck at lower middle- to middle-income levels, there has to be progress on four fronts so innovation and mastery of management skills takes place domestically, and these are readily absorbed by the backward firms in the value chain— contributing to a continual build up of competitiveness.
The four essential elements of a knowledge economy, according to WB’s Knowledge Economy Index, are:
- Economic and institutional regime: tariff and non-tariff barriers, regulatory quality, rule of law
- Education and skills: adult literacy rate, gross secondary enrollment rate, gross tertiary enrollment rate
- Information infrastructure: Telephones per 1,000 people, computers per 1,000 people, internet users per 1,000 people
- Innovative systems: royalty payments and receipts ($ per person), technical journal articles per 1 million people, patents granted to nationals by US Patent and Trademark Officer per 1 million people
So, where does Nepal stand in the cross-country knowledge economy indicators? Well, it stands well below the average for Asia and the Pacific. Below is a chart from ADB’s highlights from a forthcoming report titled “Asia’s Knowledge Economies: Next Policy Agenda”.
Below is a chart, sourced from Kenichi Ohno’s discussion paper on middle-income trap, showing how countries can move up the value chain and avoid the middle-income trap.
Now, what can be done to promote the knowledge economy? Some of the recommendations from the road map outlined in the ADB report are as follows:
Innovation:
- Increase investment in R&D (at least 1.5% of GDP)
- Create knowledge hubs and focus on gaining IPR for inventions
- Pursue imported technologies and adaptation of R&D to build the base for domestic capabilities
- Green innovation in energy and agriculture
- Expand quantity and quality of innovation infrastructure (IT parks, innovation hubs, R&D labs, incubators)
- Support start-up entrepreneurial firms
- Expand financing for innovation by promoting capital markets
- Increase tertiary education enrollments and access to technical and vocational education and training and skills development
- Revitalize established and large university campuses with greater financial and administrative autonomy
- Promote a diversified education system
- Incentivize industry giants to set up leading research labs in universities
- Support establishment of technology incubation centers and technology accelerators
- Improve network readiness and invest in backbone ICT infrastructure
- Invest in next-generation mobile broadband infrastructure
- Promote market competition and liberalization in telecom sector
- Augment use of ICT to strengthen e-governance and service delivery
- Better coordination across various agencies to promote knowledge based economy
- Accelerate commercialization of innovation in key sectors with high social impact (off-grid solar and wind power technologies)
- Promote high tech start-ups with a range of incentives and support mechanisms
- Provide financing for R&D of SMEs
- Strengthen IPR regimes
- Promote spread of broadband connectivity through affordable and reliable models
- Develop capital markets
