Knowledge holds key for EU hopefuls

ANALYSIS: Reflecting on the shortcomings of men and women, the celebrated eighteenth century poet Alexander Pope wrote that: "A little learning is a dangerous thing."

Nearly four centuries later, the evidence suggests that learning - or its modern equivalent "knowledge" - is more important to people's well-being than capital, labour and the other factors that make our economies grow.

With the European Union on the verge of expansion towards the east, the challenge of acquiring and using knowledge and new information technologies is crucial to the pre-accession countries of Central Europe if they are to catch up with living standards in existing member-states when they join the EU.

In OECD countries, knowledge is credited with contributing much of the "growth dividend" during the 1990s, when economies surged ahead as new technologies were applied to the market and workplace. It translated directly into higher productivity, lower costs, swifter response to consumer demand and new products.

Ireland and Finland offer good examples of countries that have transformed their fortunes through the smart use of knowledge. Ireland's focus on education and information technologies was the key in transforming its once rural economy into Europe's largest exporter of computer software.

Finland transformed itself in a single decade from a distressed exporter of wood and paper into a knowledge-intensive economy whose leading firm, mobile phone-maker Nokia, binds Finns to a billion people in an invisible web around the world.

These examples hold important lessons for the countries of Central Europe now in the waiting room of the European Union. At present, most of them lag well behind member-states in terms of key knowledge indicators like enrolment in tertiary education, computer availability, the presence of internet host sites, and expenditure on research and development.

The challenges are daunting. Companies and products will have to compete in the single European Union market and around the world. High rates of growth will be necessary to meet public expectations among the peoples of Central Europe about rising incomes and attaining standards of living closer to the EU norm. As the pre-accession countries wrestle to meet these challenges, they are focusing more attention on the application of knowledge to their economies.

Many of them are well-placed to do so because they have a well-trained labour force, considerable scientific and technological capacity, relatively well-developed communications facilities, and an increasing openness to foreign technology.

Catching up is thus a reasonable expectation if they put in place the right building blocks. An economic and institutional framework that promotes the efficient use of knowledge and encourages entrepreneurs is essential. Low inflation, good fiscal and monetary policies, and regulations that encourage investment and technology transfers are prerequisites of the knowledge economy.

The same is true of open trading and investment regimes. Free trade creates demand for technology while foreign direct investment fosters technological change. Efficient banks and a solid financial sector determine a country's ability to fund innovative companies. Clear intellectual property rights provide incentives for research and development, and promote knowledge-sharing.

And competition ensures that new firms, domestic and foreign, can enter the market and bring with them their knowledge and technology. Also important is a dynamic information infrastructure to facilitate the communication, dissemination and processing of information.

Several of the countries of Central Europe, with encouragement from the EU, the World Bank and others, are developing national knowledge economy strategies. If they are to work, they must go much further than simply investing in communications and information technologies.

They must develop the capacity to use knowledge effectively by putting in place the right economic and institutional framework, giving people the skills they need to exploit these opportunities, and funding local centres of innovation that guarantee the flow of fresh ideas.

• Johannes Linn is World Bank vice-president