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Innovative Economies Key to Faster Recovery in Post-Crisis Europe and Central Asia

May 5, 2010

BERLIN, May 5, 2010 – Economies that promote diversification to withstand commodity shocks, stimulate private sector innovation, encourage commercialization of public R&D, and strengthen workers' skills will be critical to faster recovery for Europe and Central Asia in a post-crisis world, according to the World Bank at its Knowledge Economy Forum (KEF), held May 5-7 in Berlin.

The Berlin Forum is the ninth annual Knowledge Economy Forum organized by the World Bank, this year in partnership with the Fraunhofer Center for Central and Eastern Europe, to support European and Central Asian countries in their transition to becoming increasingly knowledge-based.

"Europe and Central Asia has been the Region hardest hit by the financial crisis, and is projected to be the slowest to recover", said Philippe Le Houérou, Vice President for the World Bank's Europe and Central Asia Region.“In many ways, the pre-crisis boom years masked a deterioration in competitiveness in many countries in the Europe and Central Asia Region. Significant capital flows, high commodity prices, and strong growth in export markets in the pre-crisis period masked the fact that countries were not tackling bottlenecks to growth.”

According to Le Houérou,“Innovation is more important now than ever before — for promoting diversified economies based on commercialization of R&D and innovation, and expanding the skills of its workers. There is a renewed sense of urgency emerging within the Region in defining a new growth path a growth path fueled by innovation — in a world that will be both more competitive and more constrained.”

Commercial R&D — the missing link

The Forum examines how spending in Europe and Central Asia on applied research and development (R&D) that has high commercial potential is low, especially by the private sector, when compared with the world's most developed countries. There is also a mismatch between the research being undertaken in the public sector and private sector needs.

“Among the key factors driving self-sustained, long-term economic growth post-crisis.”, said Gerardo Corrochano, Director for Private and Financial Sectorfor the World Bank's Europe and Central Asia Region, “are reforms focusing on leveraging commercial innovation through scarce public funding. Translating public expenditures on research into high-quality economically productive commercial applications is a critical missing link in Europe and Central Asia countries.”

The average R&D-to-GDP ratio in the Region is 0.9 percent. Typically, the bulk of R&D spending in Europe and Central Asia — as much as two-thirds of the 0.9 percent of GDP — is financed by governments; only about one-third is financed by the private sector. By contrast, in most OECD countries with high rates of R&D expenditure, such as Japan, the United States, Sweden, Finland, Ireland, and our host Germany, the share of industry-related R&D spending ranges from 65 percent to 70 percent, whereas government spending amounts to only 20 to 30 percent.

“There is a substantial unexploited economic potential of R&D in public research institutions and universities in many countries, including the Eastern European and Central Asian countries,” stressed Thorsten Posselt, Director of the Fraunhofer Institute for Central and Eastern Europe (MOEZ). “To ensure future growth and economic prosperity, we need to focus on the improvement and acceleration of transforming R&D results into new products and services. Developing institutions, learning, and best practice analysis of cooperation between research institutions and private sector companies, as well as the development of new models of knowledge transfer and the application of these insights, are therefore key elements of economic growth and sustainable societal development.”

Posselt added, “We consider the Knowledge Economy Forum as the start of cooperation between the World Bank and Fraunhofer MOEZ regarding these issues. Weare looking forward to intensifying this cooperation with the World Bank in the future.”

Diversifying and Harnessing Quality for Global Competitiveness

The crisis has also revealed the overreliance of some countries in the Region on a single commodity, further exposing them to commodity shocks and severely affecting their current account balance. And as Europe and Central Asian governments decide on diversification of their economies to improve their competitiveness, they should consider how the quality of their exports compares with those from other countries, according to the Harnessing Quality for Global Competitiveness report Overview, discussed at the Forum (final report due out Summer 2010). A country's openness to imports, diffusion of standards, trade partner incomes, and economic size and structure are all correlated with its export product quality.
According to the report, most Europe and Central Asia countries' quality lags behind high-income countries, middle-income competitors such as China, and the world average. But Europe and Central Asia is a diverse Region. Differentiation among countries resulted in varying degrees of impact that the crisis has had on individual countries and will also define their prospects for recovery. This is true as well in terms of their levels of quality, but improving the quality of goods and services across the Region is a sustainable source of international competitiveness and a driver of economic growth. Regional policymakers now face decisions about what type of national quality infrastructure — certification, standards, and accreditation bodies — will best enable their countries' further entrance to a globally integrated market economy, as well challenges of how and how quickly to transform the systems they have inherited.

Reducing Skills Shortages

Europe and Central Asia has a high level of educational attainment, but paradoxically, skills shortage emerged as one of the most important constraints to growth. The Forum looks at two main reasons for skills shortages — a lack of the right skills among graduates, and few opportunities for adults to retain and upgrade skills or acquire new skills during their careers.

Reducing the shortage of skills will require a fundamental change of approach in the education system. Countries could benefit from a greater focus on the quality of education and measuring what students actually learn, as well as a stronger emphasis on incentives to produce better learning results. Countries also need to develop a policy framework for increasing the opportunities for adults to upgrade or acquire new skills. The World Bank will further reflect on this issue of skills in a report which will be launched in Fall 2010.

“This is why we are here in Berlin for the Knowledge Economy Forum,” stressed Le Houérou. “These combined measures will help contribute to a rise in productivity and employment and help enhance the innovation capacity and competitiveness of countries — significantly benefiting economic growth. So while the projections for the Europe and Central Asia Region are the lowest among the regions in the world, much can be done in the next few years to prove these projections wrong. This Forum, and more broadly all of the World Bank's work in the Region, is our attempt to ensure that we see a much more robust recovery for the Region.”

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