Outline: Closing RemarksKey challenges ahead for the ECA RegionBusiness environmentInnovationSkills for the Knowledge EconomyLooking ahead: policies for private sector growth Did we meet the Forums objectives?

The world is moving fast with or without you!Increasing globalization: reduction of transportation & communication costs, increasing global information, increasingly mobile FDI. Rapid pace of technological change and innovation.

Increasing competition, driven by trade liberalization and increasingly larger players (e.g., China, Korea, India)

Demographic pressures: ECA faces declining and aging populations.

Tighter regional integration: Joining a regional club (EU and NAFTA, ASEAN +3) is useful, but not a panacea.

EU Membership opportunity, but not a guarantee for success.

Carl, Wim Kok

The world is moving fast with or without you!Carl

Creating conditions for sustainable growth is key Productivity and growth: firms perspectiveLabor costsReduce Costs & Improve Quality of SupplyInformation costs Access to credit for start up and operationSimplify interactions with the GovernmentInfrastructure and Logistics costsTechnology absorption, adaptation and innovationSkills of the labor force Business EnvironmentKnowledge

Key constraints in the business environment in developing and transition economiesPolicy uncertainty is the dominant concern. Improving predictability can increase likelihood of investment by over 30%.Business environment constraints are costly: (>8% of sales)Business Environment Costs as % of SalesPolandChinaBrazilIndonesiaTanzaniaWorld-wide surveysKey constraints to growth8%13%15%20%27%Warrick

Chart1

0.31049762.744661.092.88621141.24131579

3.0603861.7525162.094.30524571.81344596

2.79542.17683.244.16709142.91158332

7.92.442.423.45

12.23154963.7836995.532.77003662.26318841

Unreliable infrastructure

Crime

Bribes

Regulation

Contract enforcement difficulties

Percent of sales

Fig 1.2 Costs

54321

Unreliable infrastructureCrimeBribesRegulationContract enforcement difficultiesTOTAL

Poland0.31049762.744661.092.88621141.241315798.27268479

China3.0603861.7525162.094.30524571.8134459613.02159366

Brazil2.79542.17683.244.16709142.9115833215.29087472

Indonesia7.92.442.423.4520.17

Tanzania12.23154963.7836995.532.77003662.2631884126.57847361

Edits to note:

"Infrastructure disruptions" include sales lost to interruptions in power and telecommunications"

(delete 'water')

Fig 1.2 Costs

00000

00000

00000

00000

00000

Unreliable infrastructure

Crime

Bribes

Regulation

Contract enforcement difficulties

Percent of sales

Fig 0.8 & 1.6 by size

Have a bank loanConfident courts will uphold property rightsBelieve regulations will be interpreted consistently

Informal6.43940.5

Small49.443.646.5

Medium58.450.451.1

Large61.451.356

Overview fig 8

Figure 1.6 Informal and small firms are often hit hardest by investmetn climate constraints.

Note: Uses 10 countries for which formal and informal surveys were conducted, controlling for

industry, country, ownership and firm age.

Source: World Bank Investment Climate Surveys and WDR Surveys of Micro and Informal Firms.

Fig 0.8 & 1.6 by size

0000

0000

0000

Informal

Small

Medium

Large

Percent of firms

Fig 0.9 & 3.1

Security & StabilityRegulationTaxationFinanceInfrastructureLabor

Bulgaria0.5775713540.45768143990.3263705750.93049173530.19690882650.3625608885

Georgia0.53059142770.56370785580.66501686440.07447912930.93253019380.5618265935

Ukraine0.65372080210.57522104220.62301608010.60294140410.17799245491

Fig 0.9 & 3.1

000

000

000

000

000

000

Bulgaria

Georgia

Ukraine

Constraints reported by firms--comparing Bulgaria, Georgia and Ukraine

Fig 1.3 Risks - unpred reg

Risk

Estonia4545%

Indonesia5655%

Pakistan6565%

Zambia7070%

Russia7575%Fig. 1.3Regulatory unpredicatability is a big concern for firms.

Peru7979%

Guatemala8989%

Note: Countries selected to illustrate a range.

Source: World Bank Investment Climate Surveys

Fig 1.3 Risks - unpred reg

3.221.0962.5773.5173.542

0.8344.1662.0963.9265.583

3.4712.21147.4574.495

5.4343.893.1355.5584.03

5.856811.3511595.5235826.7013354.969313

8.4572.0322.6099.5813.991

5.14810.2137.2294.2921.629

12.9726.111.7593.3195.806

Infrastructure disruptions

Crime

Bribes to private and public

Regulation

Disputes with suppliers and creditors

Costs

Fig 2

0

0

0

0

0

0

0

Risk

Fig 3

Policy uncertainty13

Macro instability11

Tax rates9

Regulation and tax administration5

Corruption5

Finance2

Electricity1

Skills1

Crime1

Note: Top constraint identified by firms based on rankings by country.

Source: World Bank Investment Climate Surveys in 48 countries.

Fig 3

0

0

0

0

0

0

0

0

0

Fig 2 Policy uncertainty dominates the investment climate concerns of firms

1.14 Dollar gr and poverty

Figure 3 Concerns about government-related risks vary widely across countries

Macroeconomic instabilityPolicy UncertaintyUnpredictable interpretation of regulationsLack of confidence in courts

BGD0.370.40.210.83

EST0.120.140.450.29

PHL0.40.350.490.34

ZMB0.610.50.70.36

1.14 Dollar gr and poverty

0000

0000

0000

0000

BGD

EST

PHL

ZMB

1.5 Variations within countries

Relationship between higher average incomes and poverty is clear

Annual percentage change, 1992-98GDP per capitaPoverty reduction

Pakistan1.50.5

Bangladesh3.12.1

India4.65.4

Vietnam6.47.5

China9.28.4

1.5 Variations within countries

00

00

00

00

00

GDP per capita

Poverty reduction

Average annual percent change1992-98

1.9 FDI and Dom Pvt I

NorthNortheastNorthwestSouthSoutheastBeijingChenduGuangzhouShanghaiTianjin

% of production lost due to power outages6.31.73.22.12.82.32.821.41.6

No. of days to obtain a telephone connection19.415.617.320.816.820.813.623.613.27

Days to clear customs for imports13.912.715.615.212.810.413.55.46.77.6

Variations within a country can be considerabl

Source: Investment Climate Surveys, World Bank

1.9 FDI and Dom Pvt I

000

000

000

000

000

000

000

000

000

000

000

BRAZIL

CHINA

% of production lost due to power outages

No. of days to obtain a telephone connection

Days to clear customs for imports

Days

Percent

1.12 Competitive pressure

6.319.413.9

1.715.612.7

3.217.315.6

2.120.815.2

2.816.812.8

2.320.810.4

2.813.613.5

223.65.4

1.413.26.7

1.677.6

Source: Investment Climate Surveys, World Bank

BRAZIL

CHINA

% of production lost due to power outages

No. of days to obtain a telephone connection

Days to clear customs for imports

GPFCF_GDP_WEOFDI_GDP

198013.4825330.412623

13.52649130.5673513

12.96697140.4840614

12.36023730.6965473

11.77421790.5333579

198512.25930790.5776679

12.68902810.9883481

13.9232211.487391

14.0681241.287514

14.931851.46182

199015.0571641.383704

14.760241.27403

14.8927421.496092

15.3660561.627756

16.6105382.494488

199517.5266742.761004

18.1269593.193789

17.4506132.896143

19.2399693.955579

18.5086624.454732

200017.2488473.331487

17.7520483.858538

17.1542233.474533

200316.9404483.020078

00

00

00

00

00

00

00

00

00

00

00

00

00

00

00

00

00

00

00

00

00

00

00

00

&A

Page &P

Private gross fixed capital formation

FDI

GPFCF_GDP_WEO

FDI_GDP

Percent of GDP

SOURCE:WDR, using BEEPS II/PICS data from all ECA countries

Pressure from domestic and foreign competitors

Relative increases

New productUpgrade productNew technology

Some competitive pressure37.805813765326.84954255724.8319036307

Moderate competitive pressure50.184352773839.916128360425.6049853328

Strong competitive pressure67.902921957250.988211731755.3885827683

Firms facing major competitive pressures are at least 50% more likely to undertake innovative activities relative to those facing no pressure.

000

000

000

Some competitive pressure

Moderate competitive pressure

Strong competitive pressure

Increase in probability of undertaking activity relative to those reporting no competitive pressurePercent

Policy-Related Barriers to Competition Stifle Innovation and productivityWarrick

A better Investment Climate for allPolicies to reduce regulatory barriers: simplification leading to a better investment climate for all, reducing business risks, costs, and barriers to competition (benefiting consumers through lower prices and more innovative products);Improving predictability of laws, regulations and interpretation of norms, drastically reducing legal/regulatory uncertainty;Provision of a policy basic framework ensuring: stability & security, sensible regulation & tax regime, good infrastructure & logistics, access to finance, and a flexible and fair labor market.Persistence, not perfection in fostering reforms.Fernando

ECA has a Strong Scientific Tradition that does not Translate into Innovation

Fernando How can we move from science to innovation? Technology absorption: get it from abroadCommercialization of local S&T: develop it in-houseIncrease access to finance for innovationLarge S&T base, well-educated workforce, culture of sciencebut limited R&D, innovation and entrepreneurship

Technology Absorption: Attracting FDI, Rooting MNCs Locally and Promoting LinkagesMost R&D and technology in non-OECD countries comes from MNCs, but their investment goes mainly to South & East Asia.

ECA should become more integrated in the global production network by attracting and retaining FDI, creating linkages between foreign and local firms.

Cheap unskilled labor and protected markets not an option Good investment climate; skills; training; quality standards and technology; suppliers networks; logistics and ICT; FDI promotion, including targeting of foreign firms; selected incentives. (Ireland, Malaysia and Singapore cases).Improve capacity of local suppliers with MNCs assistance looking for long term viability Governments have a role to play: matchmaking and information dissemination and financing. Lall/Varney

Commercialization of Local S&T: Get the Scientists Out of Their Ivory Towers! Key to local innovation: strengthen university-firm collaboration and commercialize university research.Requirements:Changes in the IP policy framework: giving IP rights to universities.Change in policies and in the culture of the academic and business worlds: policy makers need to agree on quantity and type of spending in R&D; researchers need to select R&D themes that serve economic growth; the business community has to engage scientists in problem solving. Technoparks and incubators are not enough without skilled management with links to global markets, they may turn into real estate development projects.

Wessner/Lindholm/Brett.

Finance for Innovation: Governments Have a Careful Role to Play

On Finance for innovation:Matching grants Government risk sharing in private risk capital funds (US, UK, Israel)Make R&D expenditures tax deductibleBut:Avoid rent-seeking, capture and moral hazard. Financial Markets and Financial Information Infrastructure. VC as a new financial industry.Protection of Intellectual Property RightsInnovative Skills

Grants, Credit, Technical Assistance

Risk Capital Markets / Venture Capital

Business Environment (Broad)Fernando Getting the sequence right:

Venture Capital is not the only way to finance innovation in ECA. Realities of VC: need a significant number of bankable projects. VC is highly selective: 1/200 firms in non-OECD countries get funds.

Financing innovation w/o VC: the Go Forward PlanBuild on your comparative advantages.Remember that technology can be embedded in very traditional products and processes. All sectors can be high-tech!Characterize the deal flow quality and performance.Go after corporate investors (not financial investors) that do business in your country and have a long-term perspective. Create industry consortia: multinationals and private-public local funds.

Nastas

Human Capital Crude Oil of the 21st CenturyRequirements of Knowledge-intensive economies 21st century jobs demand new skills and competencies Employment security, not job security: LLL and flexibilityWithout education innovation will not occur

Status QuoEducation and training systems are not meeting demandsHigh unemployment despite generally high enrollment and high growthMismatch of skills and knowledge for future jobsLack of dynamic private sector (particularly SMEs) to generate employment

Education Panels --all

ECA Youth has difficulty applying skillsand knowledge acquired at schoolPolicy Challenge:Teaching practical skills Improving performance indicatorsAligning general education and vocational trainingProviding equitable access to life-long learning

*

Performance in all domains

Mathematics

Reading

Science

Problem Solving

Acute Youth Unemployment in Candidate Countries and South Eastern EuropeMcBride

Complementary roles of Government and Private Sector in skills developmentProvision of relevant quality secondary education Curricula for flexible and transferable core skills Certification to facilitate the transferability and portability of skills and competencies and recognition of prior learningQuality Assurance and Accreditation for all forms of Lifelong LearningResult: Broader participation and increase labor market relevance

Provide Learner-Friendly High-performance Work Environments:Team-based learningAccess to Formal and Informal learning opportunities (e-learning)Incentives for employees In-company and external knowledge networksRecognition of prior learning

Lifelong Learning

Complementary roles of Government and Private Sector in skills development

Public Sector: Develop and implement education policy, curricula, and qualifications frameworksImplement lifelong learning strategies through Public-Private partnershipsPrivate Sector: Education and training provisionProvide just-in-time in-company training

Looking ahead: Key policies for private sector growthStabilize policy environment

Implement microeconomic reforms for a better business environment

Absorb technology by attracting and retaining FDI and creating linkages between foreign and local firms

Improve local innovation by strengthening university-firm collaboration and commercializing university research

Governments have a role to play in facilitating access to finance and promoting technology start-ups. Public-private industry consortia are a viable alternative to VC in very early stages.

Enable application of knowledge by teaching practical skills

Align general and vocational education to improve the skills of the labor force

Did we meet the Forums Objectives?Yes IF:Generated new ideasShared relevant experiencesIdentified specific lessons in the three critical areas discussed (business environment, innovation and skills)Identified follow-up actions (country cases)Established networks for continuous sharing and learning

Knowledge Economy Forum:Documentswww.worldbank.org/eca/ke

In the US, the Bayh-Dole Act, giving universities the right to patent and earn royalties from licensing. Nearly 300 US universities have Technology Transfer Programs today and thousands of new firms are based on university research (e.g., the birth of the biotech industry).

Why VC is not common in emerging markets?

It is expensive (% equity);;It requires highly skilled management teamsIt requires well developed capital markets.

Why VC is not common in emerging markets?

It is expensive (% equity);;It requires highly skilled management teamsIt requires well developed capital markets.

B uild on your comparative advantages and mix and match local and western technologies to provide innovative solutions.