Knowledge Economy Framework

January 2009

The purpose of the World Bank's Knowledge Economy framework is to evaluate the quality, adaptation, and use of knowledge in an economy, with the goal of creating effective knowledge economies capable of competing in the global economy.

knowledge economy

A Knowledge Economy is one that utilises knowledge to develop and sustain long-term economic growth, thus the Knowledge Economy framework focuses on four pillars which it suggests are needed to support a successful knowledge economy.

The first pillar of the framework is an economic and institutional regime that is conducive to the creation, diffusion, and utilisation of knowledge. A regime that provides incentives that encourage the use and allocation of existing and new knowledge efficiently will help to foster policy change. The economic environment must have good policies and be favourable to market transactions, such as being open to free trade and foreign direct investment. The government should protect property rights to encourage entrepreneurship and knowledge investment.

The second pillar is a well-educated and skilled population that creates, shares, and uses knowledge efficiently. Education, especially in the scientific and engineering fields, is necessary to achieve technological growth. A more educated society tends to be more technologically sophisticated, generating higher demand for knowledge.

The third pillar is a dynamic information infrastructure that facilitates the communication, dissemination, and processing of information and technology. The increased flow of information and knowledge worldwide reduces transactions costs, leading to greater communication, productivity and output.

The final pillar is an efficient innovation system of firms, research centres, universities, think tanks, consultants, and other organisations that applies and adapts global knowledge to local needs to create new technology. The generation of technical knowledge leads to productivity growth.

With these pillars in place, countries can develop a knowledge economy and sustain long-term economic growth.

Example of the framework in use: South Korea after 1997
The Knowledge Economy framework can be applied to the development strategy used by South Korea after its financial crisis in 1997. The World Bank, Organisation for Economic Co-operation and Development, and several think tanks worked together to develop a strategy to develop a knowledge economy. The organisations found that South Korea needed to improve its productivity since it was not getting the returns it expected from massive capital and investment inputs. They determined that updating Korea's economic incentive and institutional regime, including the role the government played, would improve productivity.

A more favourable climate was needed for innovation since universities conducted little research. The specialisation and knowledge exchange among universities, local government, firms, and research institutes would reduce transaction costs and lead to greater productivity. Contrary to expectations, information and communication technology was growing at a fast rate. Thus, no major improvements to the information infrastructure were needed.

However, education was determined to be a huge roadblock in the way of a knowledge economy. The country was only investing 13 percent of its GDP in education, which was deemed inefficient and inappropriate. Reforms included: deregulating the control by the Ministry of Education; implementing outcome-oriented governance; reallocating public and private resources; integrating learning systems; and strengthening links to the global education system.

By implementing good economic policies, adopting a high-growth development programme, and increasing social capital and improving the labour force through enhanced education, Korea was able to transform itself into a knowledge economy.

What sorts of policy advice does the framework deliver?
The Knowledge Economy framework suggests that to be effective knowledge economies in which knowledge is created, disseminated and used well, economies have to have four pillars in place. Policy advice would focus attention on which of the pillars is in particular need, in terms of appropriate policies, institutions, investments and coordination. The World Bank has produced a guide - the  Knowledge Assessment Methdology, which can be used to assess what a country needs if it is to become a knowledge economy

This tool first appeared in the ODI Toolkit, Tools for Policy Impact