THE KNOWLEDGE ECONOMY, THE KAM
METHODOLOGY AND WORLD BANK OPERATIONS


Derek H. C. Chen* and Carl J. Dahlman**





Abstract

This paper highlights the importance of knowledge for long-term economic growth. It presents the
concept of the knowledge economy, an economy where knowledge is the main engine of economic
growth. The paper also introduces the knowledge economy framework, which asserts that sus-
tained investments in education, innovation, information and communication technologies, and a
conducive economic and institutional environment will lead to increases in the use and creation of
knowledge in economic production, and consequently result in sustained economic growth. In or-
der to facilitate countries trying to make the transition to the knowledge economy, the Knowledge
Assessment Methodology (KAM) was developed. It is designed to provide a basic assessment of
countries’ readiness for the knowledge economy, and identifies sectors or specific areas where
policymakers may need to focus more attention or future investments. The KAM is currently being
widely used both internally and externally to the World Bank, and frequently facilitates engage-
ments and policy discussions with government officials from client countries.







World Bank Institute
Washington, D.C.

* Economist, Knowledge for Development Program, World Bank Institute.
** Luce Professor of International Affairs and Information Age Technologies, Georgetown University, and
Expert Consultant, Knowledge for Development Program, World Bank Institute. The views expressed in this
paper do not necessarily represent those of the World Bank. We are grateful to Robert Vitro, Aimilios
Chatzinikolaou, Anuja Utz, Alexey Volynets and Yevgeny Kuznetsov for very helpful comments and sug-
gestions.

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Copyright © 2006
The International Bank for Reconstruction
and Development/The World Bank
1818 H Street, N.W.
Washington, D.C. 20433, U.S.A.


The World Bank enjoys copyright under protocol 2 of the Universal Copyright Convention. This
material may nonetheless be copied for research, educational, or scholarly purposes only in the
member countries of The World Bank. Material in this series is subject to revision. The findings,
interpretations, and conclusions expressed in this document are entirely those of the author(s) and
should not be attributed in any manner to the World Bank, to its affiliated organizations, or the
members of its Board of Executive Directors or the countries they represent.





The Knowledge Economy, The KAM Methodology And World Bank Operations
Derek H. C. Chen and Carl J. Dahlman
2006. 42 pages. Stock No. 37256

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Contents

1. Introduction







1
2.
Knowledge and Economic Development




2

2.1 Knowledge Revolution and Global Competition



2
2.2
The
Knowledge
Economy
Framework

4

2.3 The Pillars of the Knowledge Economy




5
3.
The Knowledge Assessment Methodology (KAM)



9
3.1
The
Basic
Scorecard
10
3.2
The
Knowledge
Economy
Index
11
3.3
Custom
Scorecards
12
4.
The KAM and World Bank Operations




14
5. Conclusion








16
Annexes:
Annex
1
KAM
Normalization
Procedure
17
Annex 2 Decomposition of Economic Growth for South Korea

18
Annex 3 Real GDP per Capita Projections for Mexico



19
References









21
Figures and Tables








24


iii

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1. Introduction
In the past decade or so, much research has been conducted on productivity-led economic growth and
its determinants. A major reason is the widespread belief that economic growth due to rapid factor
accumulation is subject to diminishing returns, and hence is not sustainable. Recently, there has been
a growing interest in the contribution of knowledge to total factor productivity growth, and conse-
quently to sustainable long-term economic development.

This paper highlights the importance of the use and creation of knowledge for long-term economic
growth. It discusses the concept of the knowledge economy, which is essentially an economy where
knowledge is the main engine of economic growth. The paper introduces the knowledge economy
framework, which holistically encompasses elements or pillars such as education and training, innova-
tion and technological adoption, the information infrastructure, and a conducive economic incentive
and institutional regime. The framework asserts that sustained investments in these knowledge econ-
omy pillars will lead to the availability of knowledge and its effective use for economic production.
This would tend to increase the growth rate of total factor productivity, and consequently result in sus-
tained economic growth.

This paper also introduces a simple knowledge economy benchmarking tool, the Knowledge Assess-
ment Methodology (KAM), which was developed by the World Bank Institute. The KAM is a user-
friendly interactive Internet-based tool that provides a basic assessment of countries’ and regions’
readiness for the knowledge economy. It is designed to help client countries identify problems and
opportunities that they may face, and where it may need to focus policy attention or future invest-
ments, with respect to making the transition to the knowledge economy. The unique strength of the
KAM lies in its cross-sectoral approach that allows a holistic view of the wide spectrum of factors
relevant to the knowledge economy. This, together with its transparency, simplicity and versatility,
has led to the KAM being widely used both internally and externally to the World Bank, and it is fre-
quently use for facilitating engagements and policy discussions with government officials from client
countries.

This paper is organized as follows: Section 1 underscores the importance of knowledge to economic
development. It also presents the knowledge economy framework and provides a brief survey of the
literature showing the importance of the knowledge economy pillars for economic growth. Section 2
introduces the Knowledge Assessment Methodology and provides examples of its various modes us-
ing an array of countries from around the world. Following this, the features of the KAM that have
led to its widespread use, especially in terms of facilitating policy dialogue with country clients are
described in detailed in Section 3. Section 4 highlights the key points of the paper.



1

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2 Derek H. C. Chen and Carl J. Dahlman

2. Knowledge and Economic Development
2.1
Knowledge Revolution and Global Competition
Over the past quarter century, the rate of knowledge creation and dissemination has increased signifi-
cantly. One reason is due to the rapid advances in information and communications technologies
(ICTs) that have significantly decreased the costs of computing power and electronic networking.
With the increased affordability, the usage of computing power and electronic networking has surged,
along with the efficient dissemination of existing knowledge. Modern ICTs also enable researchers in
different locations to work together, which consequently enhance the productivity of researchers, re-
sulting in rapid advances in research and development and the generation of new knowledge and tech-
nologies. One indicator of the creation of new knowledge and technologies is the number of patents
granted by the United States Patent and Trademark Office (USPTO) each year. From Figure 1, it can
be seen that the total number of patents granted by the USPTO increased from 71,114 in 1981 to
187,053 in 2003. Note that the share of patents granted to inventors outside of the United States has
also grown from 39 percent in 1981 to 47 percent in 2003. The increased rate of creation of new
knowledge and technologies thus reflects a recent global trend.

The increased speed in the creation and dissemination of knowledge has led to the rapid spread of
modern and efficient production techniques, plus the increased probability of leapfrogging, which has
consequently resulted in the world economy becoming much more competitive. The share of world
trade (exports and imports) in world GDP, which is an indicator of globalization and competition in
the global economy, has increased from 24 percent in 1960 to 47 percent in 2002 (Figure 2).1 Thus,
the knowledge revolution, together with increased globalization, presents significant opportunities for
promoting economic and social development. However, countries also face the very real risk of fal-
ling behind if they are not able to keep up with the pace of rapid change.

In addition to the higher level of competition, the nature of competition has been changing. It has
evolved from one that was just based on cost, to one where speed and innovation are also essential.
Commodity production is usually allocated to lowest cost producers, but intense competition resulting
from globalization tends to drive profits from commodity production to nearly zero. As such, it has
become crucial to derive additional value added from various means of product differentiation via in-
novative designs, effective marketing, efficient distribution, reputable brand names, etc. Thus, to
prosper it is critical to be able to contribute productively to global value chains and to generate own
new value chains, and the key part of which is not necessarily production, but innovation and high-
value services.

In light of the above, sustained economic growth in the era of this new world economy depends on
developing successful strategies that involve the sustained use and creation of knowledge at the core
of the development process. At lower levels of development, which typically implies lower levels of
science and technology capability, knowledge strategies typically involve the tapping of existing

1 International trade increases the number of consumers and producers participating in the market and hence in-
creases the level of competition.

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The Knowledge Economy, the KAM Methodology and World Bank Operations 3

global knowledge and adoption of such foreign technologies to local conditions in order to enhance
domestic productivity. At higher levels of development, which typically implies higher levels of sci-
ence and technology capability, knowledge strategies also hinges critically on domestic innovative
effort and underlie the move to produce products and services that higher value-added in order to be
consistent with the high wages that are characteristic of these economies.

Figure 3 presents the decomposition of South Korea’s economic growth over the past four decades,
and clearly highlights the contribution of knowledge, represented here by total factor productivity
(TFP), to South Korea’s economic miracle.2 In 1960, Korea’s real GDP per capita was around
US$1,110, and increased by eleven-fold to US$12,200 in 2003. In contrast, Mexico’s real GDP per
capita experienced a slightly more than two-fold increase, from US$2,560 to US$5,800 over the same
period. Note that without the contribution of knowledge, Korea’s real GDP per capita in 2003 would
still be below that Mexico’s.3

Similarly, Figure 4 demonstrates the enormous potential of knowledge use and creation in sustaining
long-term economic growth by presenting alternative projections real GDP per capita for the years
2004 to 2020, assuming different TFP growth rates for Mexico. It can be seen that with a TFP growth
rate of 3 percent per annum, Mexico would attain South Korea’s 2003 real GDP per capita by 2020.4



2 It is well accepted in the economics literature that total factor productivity depends on the availability of
knowledge. For example, Romer (1986, 1990) and Lucas (1988) argued that TFP levels depend on the stock of
knowledge or human capital. Grossman and Helpman (1991) postulated that imported goods embodied foreign
technology and hence imports would lead to increases in TFP. Similarly, Coe and Helpman (1995) found that
for a sample of developed countries both domestic and foreign R&D had significant impact on TFP.
3 Technical details regarding the growth decomposition illustrated in Figure 3 are presented in the Annex.
4 Note that for all 4 projections, capital, labor and population were all assumed to grow at their 1991-2003 aver-
age annual growth rates for Mexico, which are 3.68 percent, 2.70 percent and 1.59 percent, respectively. Tech-
nical details regarding the TFP and real GDP per capita projections illustrated in Figure 4 are presented in the
Annex.

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4 Derek H. C. Chen and Carl J. Dahlman

2.2
The Knowledge Economy Framework
With sustained use and creation of knowledge at the center of the economic development process, an
economy essentially becomes a Knowledge Economy. A Knowledge Economy (KE) is one that util-
izes knowledge as the key engine of economic growth. It is an economy where knowledge is ac-
quired, created, disseminated and used effectively to enhance economic development.5

It has been found that the successful transition to the Knowledge Economy typically involves elements
such as long-term investments in education, developing innovation capability, modernizing the infor-
mation infrastructure, and having an economic environment that is conducive to market transactions.
These elements have been termed by the World Bank as the pillars of the Knowledge Economy and
together they constitute the Knowledge Economy framework.

More specifically, the four pillars of the Knowledge Economy (KE) framework are:

• An economic incentive and institutional regime that provides good economic policies and institu-
tions that permit efficient mobilization and allocation of resources and stimulate creativity and in-
centives for the efficient creation, dissemination, and use of existing knowledge.
• Educated and skilled workers who can continuously upgrade and adapt their skills to efficiently
create and use knowledge.
• An effective innovation system of firms, research centers, universities, consultants, and other or-
ganizations that can keep up with the knowledge revolution and tap into the growing stock of
global knowledge and assimilate and adapt it to local needs.
• A modern and adequate information infrastructure that can facilitate the effective communication,
dissemination, and processing of information and knowledge.

The Knowledge Economy framework thus asserts that investments in the four knowledge economy
pillars are necessary for sustained creation, adoption, adaptation and use of knowledge in domestic
economic production, which will consequently result in higher value added goods and services. This
would tend to increase the probability of economic success, and hence economic development, in the
current highly competitive and globalized world economy.

5 Contrary to some beliefs, the concept of the Knowledge Economy does not necessarily revolve around high
technology or information technology. For example, the application of new techniques to subsistence farming
can increase yields significantly or the use of modern logistical services can enable traditional craft sectors to
serve broader markets than before.

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The Knowledge Economy, the KAM Methodology and World Bank Operations 5

2.3
The Pillars of the Knowledge Economy
We elaborate in detail on each of the knowledge economy pillars in this section. We also briefly re-
view empirical literature that shows that all of the pillars are important determinants of long-term eco-
nomic growth, thereby lending empirical support to the knowledge economy framework.

Educated and Skilled Labor Force
A well-educated and skilled population is essential to the efficient creation, acquisition, dissemination
and utilization of relevant knowledge, which tends to increase total factor productivity and hence eco-
nomic growth.

Basic education is necessary to increase peoples’ capacity to learn and to use information. On the
other hand, technical secondary-level education, and higher education in engineering and scientific
areas is necessary for technological innovation. Note that the production of new knowledge and its
adaptation to a particular economic setting is generally associated with higher-level teaching and re-
search. For example, in the industrial economies, university research accounts for a large share of
domestic R&D. Technical secondary-level education is also required for the process of technological
adaptation of foreign technologies for use in domestic production processes. Such training is neces-
sary to monitor technological trends, assess what is relevant for the firm or economy, and assimilate
new technologies. A more educated population also tends to be relatively more technologically so-
phisticated. This generates local quality sensitive demand for advanced goods, which in turns tends to
stimulate local firms to innovate and design technologically sophisticated goods and production tech-
niques.

Most empirical cross-country studies of long-run growth now include some measure of human capital
and recent studies of international differences in output per worker6 and economic growth rates have
focused the role of human capital in economic development7. Regardless of the underlying model, it
is a fairly robust finding that a country’s human capital is almost always identified as an essential in-
gredient for achieving growth. For example, Barro (1991), using cross-section data for 98 countries
for the period 1960 to 1985 and the 1960 values of school enrollment rates at the secondary and pri-
mary levels as proxies for initial human capital, found that both school enrollment rates had statisti-
cally significant positive effects on growth of per capita real GDP. Similarly, Cohen and Soto (2001),
using cross-country time-series data on educational attainment or average years of school, finds statis-
tically significant positive effects of education on economic growth. Hanushek and Kimko (2000)
take an alternative approach by focusing on the effects of educational quality on economic growth.
Using international test scores as a proxy for the quality of educational systems, they find that educa-
tional quality does exert positive effects on economic growth.


6 See Temple (1999), Krueger and Lindal (2000).
7 See Mankiw et al. (1992), Benhabib and Spiegel (1994), Hall and Jones (1999).

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6 Derek H. C. Chen and Carl J. Dahlman

An Effective Innovation System
Economic theory indicates that technical progress is a major source of productivity growth and an ef-
fective innovation system is key for such technical advancement.8 An innovation system refers to the
network of institutions, rules and procedures that influences the way by which a country acquires, cre-
ates, disseminates and uses knowledge. Institutions in the innovation system include universities, pub-
lic and private research centers and policy think tanks. Non-governmental organizations and the gov-
ernment are also part of the innovation system to the extent that they also produce new knowledge.
An effective innovation system is one that provides an environment that nurtures research and devel-
opment (R&D), which results in new goods, new processes and new knowledge, and hence is a major
source of technical progress.9

There have been a number of studies that show that innovation or the generation of technical knowl-
edge has substantial positive effects on economic growth or productivity growth. For example, Led-
erman and Maloney (2003), using regressions with data panels of five-year averages between 1975 to
2000 over 53 countries, finds that a one-percentage point increase in the ratio of total R&D expendi-
ture to GDP increases the growth rate of GDP by 0.78 percentage points. Guellec and van Pottels-
berghe (2001) investigated the long-term effects of various types of R&D on multifactor productivity
growth using panel data for the OECD over the period 1980-98. They find that business, public and
foreign R&D all have statistically significant positive effects on productivity growth10. Adams
(1990), using the number count of academic scientific papers of various scientific fields11 to proxy for
the stock of knowledge, finds that technical knowledge contributed significantly to the total factor
productivity growth of U.S. manufacturing industries for the period 1953-1980.

Currently, the majority of technical knowledge is produced in the developed countries: more than 70
percent of patenting and production of scientific and technical papers are accredited to researchers in
industrialized countries. The disparity in the production of technical knowledge per capita between
developed and developing countries is even greater than the disparity in income. However, note that
domestic technological innovation is not the sole source of generation of technical knowledge. There
are many ways for developing countries to avoid reinventing the wheel and tap into, adopt and adapt
technical knowledge that was created in other developed countries. Therefore, a key element of a de-
veloping country’s innovation strategy is to find the best ways to tap into the growing global knowl-
edge base and to decide where and how to deploy its domestic R&D capability.



8 See Solow (1957) and Romer (1986, 1990).
9 The OECD defines R&D to “comprise of creative work undertaken on a systemic basis in order to increase the
stock of knowledge and the use of this stock of knowledge to devise new applications” (OECD, 1993).
10 Guellec and van Pottelsberghe (2001) define public R&D as R&D performed by government and higher edu-
cation sectors, and foreign R&D as business R&D performed in other 15 OECD countries.
11 Adams (1990) used worldwide annual counts of publications in nine sciences: agriculture, biology, chemistry,
computer science, engineering, geology, mathematics and statistics, medicine, and physics.

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