INTRODUCTION GENERAL WHAT IS A K-BASED ECONOMY?

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1 INTRODUCTION I GENERAL 1.1 In his Keynote Address at the Second Global Knowledge Conference in Kuala Lumpur on 8 March, 2, Prime Minister Dato Seri Dr. Mahathir Mohamad declared as follows: If Vision 22 was the first strategic step into the Information Age, is now ready for the second step. We are now ready for a concerted, comprehensive and committed quantum leap which will re-make n corporations and re-invent n society. This second step will be called Strategic Initiative One of the 21st Century. 1.2 Earlier, former Minister of Finance Tun Daim Zainuddin, when introducing the 2 Supply Bill in Parliament on 25 February, 2, stated: We must now make a paradigm shift from a production-based economy (P-economy) to a K-based economy. This is in line with the Government s efforts to intensify the development of high technology industries as well as make IT the catalyst for growth in the 21 st century. 1.3 This chapter focuses on the following key issues: What is a K-based economy? Why the K-based economy? Where is situated with regard to migrating to the K-based economy, in relation to other selected countries? II WHAT IS A K-BASED ECONOMY? 1.4 There are many definitions of a K-based economy, all revolving around the notion of an economy based on the production, distribution and utilisation of knowledge, which constitutes the primary engine of growth and wealth creation in the economy. For s purpose, it is proposed that a K-based economy be defined as an economy in which knowledge, creativity and innovation play an ever-increasing and important role in generating and sustaining growth. 1.5 In a K-based economy knowledge is the most critical factor of production. It generates more wealth than the other traditional factors of production, land, labour and capital. It is also a commodity itself. This is in contrast to a production-based economy, where knowledge plays a less prominent role, and growth is driven largely by the accumulation of the traditional factors of production. In a K-based economy, educated and skilled human resources, or human capital, 1

2 Knowledge-Based Economy Master Plan is the most valuable asset. Box 1-1 summarises some further key information on knowledge and knowledge-based economies. 1.6 In a K-based economy a high proportion of its GDP derives from knowledge-based and knowledge-enabling industries such as high technology and medium-high technology industries, financial and other business services, and the teaching profession. Box 1-2 contains examples of knowledge-based industries as classified by the OECD. K-based economies are also characterised by high investment in R&D, high literacy, high tertiary education enrolment, good technology-related capacity and skills, strength in innovation, and high ICT penetration and Internet usage. III WHY THE K-BASED ECONOMY? 1.7 There are at least seven reasons why should develop towards a K-based economy: 1. Erosion in global competitiveness. As Chart 1-1 indicates, according to the World Competitiveness Report, s international competitiveness has slipped from 18 th place in 1994 to 29th in 21. This trend has to be arrested. In contrast to, Finland rose from 19 th during the same period to 3 rd since Ireland improved substantially as well, from 21 st in 1994 to 7 th in 2 and 21. Both are recently developed K-based economies which were once performing extremely poorly. Box 1-1 Knowledge and K-based Economy - Some Key Questions What do we mean by knowledge? Knowledge can be broadly grouped into two types: tacit knowledge and codified knowledge. Knowledge can also be sub-divided into know-what, knowhow, know-who and know-why. What is tacit knowledge? Tacit knowledge is usually unwritten. Tacit knowledge is embodied in individuals. It is accumulated through education, training and general working experience involving, say, apprenticeship and how markets work. What is codified knowledge? Codified knowledge unlike tacit knowledge is written down. When tacit knowledge is written down it becomes codified knowledge. Scientific blueprints, formulae and software programmes are examples of codified knowledge. More and more knowledge is being codified. Codified knowledge is more easily diffused and transferred. What is a P-based Economy? A P-based, or production-based, economy is a loose term used to denote an economy where knowledge plays a less important role in growth. Growth is driven much more by the accumulation of the factors of production of land, labour and capital. What is a K-based Economy? There are many definitions. In this plan and in the n context, a K-based economy is defined as an economy where knowledge, creativity and innovation play an ever-increasing and important role in generating and sustaining growth. 2

3 Box 1-2 Knowledge-based Industries What is a knowledge-based industry? The meaning employed here is the one used by the OECD, which is also used by some other studies. All industries have some degree of knowledge input. What distinguishes a K-based industry from a non-k-based industry is the intensity of knowledge input. The distinction is a matter of degree rather than binary (yes/no). The OECD considers the following categories of industries as K-based industries: high-technology and medium-high technology manufactures; community, social and personal services; finance, insurance, real estate and business services; and communication services 1. In greater detail, K-based industries include the following: High-technology industries: Aircraft Office and computing equipment Pharmaceuticals Radio, TV and communications equipment Medium-high technology industries: Electrical machinery Professional, scientific, measuring and controlling equipment Motor vehicles Electrical machinery excluding communication equipment Chemicals excluding pharmaceuticals Other transport equipment Non-electrical machinery Crude oil refinery Potential broad types of K-services: Community, social, health and personal services Wholesale trade; finance, real estate and business services E-commerce Educational services Tourism ICT and communication services, and electrical power systems All emerging technologies, including biotechnology, are potential K-based industries. Note: 1 For more information, including OECD definition of high-technology and medium-high technology industries, see OECD Science, Technology and Industry Scoreboard Benchmarking Knowledge-based Economies. 3

4 Knowledge-Based Economy Master Plan CHART 1-1: MALAYSIA S RANKING IN WORLD COMPETITIVENESS SCOREBOARD ( ) 35 y g p ( ) USA S'pore Finland Ireland UK Japan Source: The World Competitiveness Yearbook, various issues. 2. Increasing foreign competition. is facing increasing competition for its products from countries such as China, India, Vietnam and Indonesia, which enjoy cheaper labour and more abundant resources. has to make the necessary adjustments and move into areas where it can have better comparative advantage and competitiveness. 3. The impact of globalisation and liberalisation. Globalisation and liberalisation are steadily bringing down barriers and removing protective walls that help sustain local industries., like all other developing economies will have to prospect for new products and services which are viable in the emerging global market where the distinction between local and world markets is gradually disappearing. 4. The need to seek higher value-added. As costs, especially labour costs, climb higher, will have to ensure even higher value is added to its products in order for its industries to remain viable. Such high value-added is generally provided by knowledgebased industries. 4

5 5. The need to move into more profitable and wealth-generating stages of production. In the enduring search for higher profit and greater wealth, n companies have little choice but to move into the pre-production stage (product conceptualisation, research and design, prototyping, etc.) and post-production stage (packaging, branding, marketing, retailing, etc.) of manufacturing, because there is less profit to be made from the core production process. The pre- and post-production stages also happen to be the more knowledge-intensive. Figure 1-1 illustrates this in the context of value added chain in the K-based economy. 6. The need to seek new sources of growth. New sources of growth are required as old sources of growth become less productive. A K-based economy will provide some of these new sources of growth to enable to sustain growth and dynamism. 7. Meeting the challenge of enhancing total factor productivity. The Seventh Plan committed the country to a shift in focus from an input-driven towards a productivitydriven strategy by enhancing the contributions of total factor productivity (TFP). For various reasons however, s TFP push has not been very encouraging so far. The migration to a K-based economy will greatly enhance s ability to meet its TFP enhancement goals. (Please see Annex 1-A for elaboration on the relationship between TFP and Knowledge). FIGURE 1-1: CONCEPT OF VALUE ADDED CHAIN IN THE K-BASED ECONOMY Value Added per Employee Value adding by skills and K-creation and diffusion Value adding by manual means and capital Value adding by skills and K-creation and diffusion (B) (A) Emphasis of P-based economy R & D Product Assembly Branding Marketing Design & & Production Distribution Source: Adapted from Industrial Master Plan II. 5

6 Knowledge-Based Economy Master Plan 1.8 In short, there are strong push and pull factors behind s initiative to develop itself into a K-based economy. Ultimately this development will allow to recover and enhance its competitiveness in the global economy while simultaneously enabling it to sustain the rapid economic growth that has been the hallmark of its progress since the Seventies. IV. WHERE IS MALAYSIA SITUATED IN PROGRESSING TOWARDS THE K-BASED ECONOMY? A. Indicators and Indexes 1.9 Besides an overall political, social, cultural and security environment that is conducive to the flourishing of a K-based economy, certain factors can be identified as critical to its development and as indicative of the positioning as well as strengths and weaknesses of a country in that regard. These factors include: Quality of human resources literacy; secondary enrolment; tertiary enrolment; enrolment in science and technology-related subjects; science graduates; technical graduates; expenditure on education; thinking and innovation skills; a learning culture; lifelong learning facilities; English language skills; receptivity to change. R&D Public and private sector expenditure on R&D; personnel in R&D; scientists and engineers in R&D; patents filed. Infostructure newspapers; radios; television; telephone mainlines; mobile telephones; cost of international telephone calls; freedom/availability of information. Infrastructure - investment in ICT infrastructure; electricity power; personal computers; Internet hosts; Internet subscribers; Internet usage. Economy knowledge workers; knowledge-based industries; knowledge-based services; tacit and codified knowledge; knowledge embodied in work processes and products; e-commerce; high-technology exports; venture capital; openness to foreign knowledge workers; entrepreneurship; risk-taking culture. 1.1 As can be noted from the above, some indicators are less quantifiable than others. Factors such as learning culture, risk-taking culture, quality of education, productive rather than unproductive Internet usage, the amount of tacit knowledge in an organisation, knowledge embodied in a process or product, and the value of the knowledge asset of a company or organisation, do not lend themselves readily to quantification and comparison. Satisfactory and credible indexes of a K-based economy are particularly problematic and contestable. Only very broad indicators of a quantifiable nature are therefore possible at this stage. B. Current Status and Benchmark Comparisons 1.11 s journey towards becoming a K-based economy began when Vision 22 was launched in February Among others it recognised the crucial importance of the following for economic and human development: 6

7 ... a scientific and progressive society, a society that is innovative and forward-looking, one that is not only a consumer of technology but also a contributor to the scientific and technological civilisation of the future. An economy that is technologically proficient, fully able to adapt, innovate and invent, that is increasingly technology-intensive, moving in the direction of higher and higher levels of technology. An economy driven by brain-power, skills and diligence, in possession of a wealth of information, with the knowledge of what to do and how to do it The National Information Technology Agenda (NITA) and the inception of the Multimedia Super Corridor (MSC) were the next big steps. NITA aimed to foster the development of IT as a strategic enabler of dynamic economic growth. The MSC was designed to be an engine of economic growth for the 21 st century, to become a K-based economy within an economy. Both projects aimed to bring into the knowledge-intensive high technology era through a number of important demonstrator and flagship applications, culminating in the emergence of a knowledge society by s current status and benchmarking with selected economies in spheres relevant to a K-based economy are depicted in Charts 1-2A to 1-2K. is compared to the United States, United Kingdom, Germany, South Korea, Thailand, Taiwan, Japan, New Zealand, Philippines and Singapore. The critical comparative indicators for which data is available are as follows: Tertiary Enrolment Total R&D Personnel Number of Computers Number of Internet Hosts Computer Power/MIPS Telephone Main Lines Mobile Telephones Newspaper Circulation Total Expenditure on R&D Availability of Venture Capital Infrastructure for e-commerce The same information is also presented in table form in Table 1.1 for the selected countries in terms of ranking. It will be noted that countries can occupy widely different rankings for different K-based economy indicators. The United States excels with regard to almost all indicators. ranks 8 and 9 in most instances among the 11 countries. fares generally better than the Philippines and Thailand for most indicators. Table 1.4 and Chart 1-3 indicate that exhibits a disproportionately high percentage (54) of high technology exports for a non-k-based economy. The figure is higher even than the figures for K-based economies like Germany and Japan. The explanation is that while s high-tech exports are high, they are generally of the assembly variety, and value-added is low unlike in the OECD economies. 7

8 Knowledge-Based Economy Master Plan 1.14 Additional comparative data is contained in the respective ensuing chapters. With regard to the most critical asset for the K-based economy - human capital - faces some important deficiencies compared to the developed economies and some others in the region. As Table 1.2 indicates, percentage tertiary enrolment in public and private institutions in 1996 for was 5.2 per cent. This compares unfavourably with Japan, Korea, New Zealand, Philippines, Taiwan and Thailand. Similarly, performs poorly in terms of enrolment in natural sciences, mathematics and computer science, and engineering (Table 1.3). In 1999, enrolment in the science and technical fields was still only 31 per cent. Table 3.5 in Chapter Three also shows that, with only 1.7 of its workforce comprising K-skilled workers, lags behind South Korea, Taiwan and Japan Table 9.12 in Chapter Nine provides ICT benchmark data. is ranked 7 th among selected countries, and is classified as being in the medium category. is now better equipped in terms of institutional, legislative and regulatory framework, following the establishment of the Ministry of Energy, Communications and Multimedia. The MSC also positions as an aspiring global multimedia hub. Nevertheless, the K-based economy ICT Working Group report points to several weaknesses. s performance in the ICT sector is graded emerging (better than rudimentary, the lowest ranking, but lower than advanced and world class, the highest ranking). The ICT penetration rate, while better than s neighbors except Singapore, is only half that of Australia, New Zealand and Hong Kong. is also comparatively poor with regard to Internet and e-commerce uptake, and content development and R&D. There is also strong inequity among states and between rural and urban areas As the tables and charts also demonstrate, to successfully develop into a K-based economy, will also have to tend to its low S&T base, poor R&D capacity, low venture capital and weak innovative skills. R& D expenditure in 1998 remained stagnant at.4 per cent of GDP, the same as in 1995 despite the Seventh Plan s target of raising it to 2 per cent at the end of the Plan period. Indigenous innovative capacity (as indicated by the number of patent applications filed by residents, besides resources committed for R&D) is particularly worrisome: at 179 applications in 1997, it is a fraction of a fraction of Japan s (331,487), the United States (125,88), Korea s (92,798) and New Zealand s (1,735) however is not without its strengths, quantifiable as well as non-quantifiable. Among others, it possesses strong government support and commitment, capacity for sustained action and carry-through reform, an open economy, rich biodiversity, and a high proportion of high technology exports. The large proportion of trainable and adaptable young in its population will facilitate rapid development into a K-based economy. The country has also launched a decadeold comprehensive ICT drive that aims to foster an e-community and develop both ICT as an industry as well as ICT as an enabler. In Southeast Asia, is the best placed to make a successful transition into a K-based economy, Singapore excepted. 8

9 TABLE 1.1 THE RANKING OF SELECTED COUNTRIES BY SOME K-INDICATORS Country Number Of Computers 2 Number internet 1999 of hosts Per Telephone Main Lines 2 1, people/inhabitants Mobile Telephones 2 Computer Power/MIP 1998 Newspaper circulation 1996 Total R&D personnel 1999 International call costs US $ per minutes U SA to Total expenditure on R&D % of GDP 1999 Availability of venture capital (survey) 21 Infrastructure for electronic commerce (survey) 21 % of tertiary enrolment in public and private institutions 1996 United States na New Zealand Singapore n a United Kingdom Japan Germany Taiwan na Korea Thailand Philippines Note: 1 Call costs during peak hours. For the USA, cost is from USA to Europe. Source: Selected from The World Competitiveness Yearbook 21 (Manipulated from Table 1.2). 9

10 Knowledge-Based Economy Master Plan TABLE 1.2 COMMUNICATION, INFORMATION AND SCIENCE AND TECHNOLOGY Country Number of Computers 2 P er 1, people/inhabitants Internationa l Call Costs Number of Telephone Mobile Newspaper Total R&D US$ per 3 Internet Hosts Main Lines Telephones Circulation Personnel minutes to U SA Total Expenditure on R&D % of GDP 1999 Availability of Venture Capital (Survey) 21 Infrastructure for Electronic Commerce (Survey) 21 % of Tertiary Enrolment in Public and Private Institutions 1996 Australia Belgium Brazil na Canada China n a Hong Kong na n a France Germany Indonesia na n a Japan Korea New Zealand Philippines Singapore n a Sweden Taiwan na Thailand United Kingdom United States na Note: Call costs during peak hours. For the USA, cost is from USA to Europe. Source: Selected from The World Competitiveness Yearbook 21. 1

11 CHART 1-2A: K-INDICATORS COMPARISON BETWEEN SELECTED COUNTRIES Number of computers* 1 Tertiary Enrolment^ Number of Internet Hosts* 75 Infrastructure for e-commerce~ 5 Telephone Main Lines* 25 Availability of Venture Capital~ Mobile Telephones* Notes: * - per 1, - per 1, inhabitants x 1 #- per 1, inhabitants / 1 $ - % of GDP x 1 ~ - index points x 1 ^ - % of tertiary enrolment x 3 Total Expenditure on R&D $ Computer Power/ MIPS# Total R &D Newspaper Circulation* USA Germany Korea Thailand Source: The World Competitiveness Yearbook

12 Knowledge-Based Economy Master Plan CHART 1-2B: K-INDICATORS MALAYSIA VS USA Number of computers* 1 Tertiary Enrolment^ 75 Number of Internet Hosts* Infrastructure for e-commerce~ 5 Telephone Main Lines* 25 Availability of Venture Capital~ Mobile Telephones* Total Expenditure on R&D $ Newspaper Circulation* Notes: * - per 1, - per 1, inhabitants x 1 #- per 1, inhabitants / 1 $ - % of GDP x 1 ~ - index points x 1 ^ - % of tertiary enrolment x 3 Computer Power/ MIPS# Total R &D Source: The World Competitiveness Yearbook 21. USA 12

13 CHART 1-2C: K-INDICATORS MALAYSIA VS GERMANY Number of computers* 75 Tertiary Enrolment^ Number of Internet Hosts* 5 Infrastructure for e-commerce~ 25 Telephone Main Lines* Availability of Venture Capital~ Mobile Telephones* Total Expenditure on R&D $ Newspaper Circulation* Notes: * - per 1, - per 1, inhabitants x 1 #- per 1, inhabitants / 1 $ - % of GDP x 1 ~ - index points x 1 Computer Power/ MIPS# Total R &D Germany ^ - % of tertiary enrolment x 3 Source: The World Competitiveness Yearbook

14 Knowledge-Based Economy Master Plan CHART 1-2D: K-INDICATORS MALAYSIA VS SOUTH KOREA Number of computers* 75 Tertiary Enrolment^ Number of Internet Hosts* 5 Infrastructure for e-commerce~ 25 Telephone Main Lines* Availability of Venture Capital~ Mobile Telephones* Notes: * - per 1, - per 1, inhabitants x 1 #- per 1, inhabitants / 1 $ - % of GDP x 1 ~ - index points x 1 Total Expenditure on R&D $ ^ - % of tertiary enrolment x 3 Computer Power/ MIPS# Total R &D Newspaper Circulation* Korea Source: The World Competitiveness Yearbook

15 CHART 1-2E: K-INDICATORS MALAYSIA VS THAILAND Number of computers* 6 Tertiary Enrolment^ Number of Internet Hosts* 4 Infrastructure for e-commerce~ 2 Telephone Main Lines* Availability of Venture Capital~ Mobile Telephones* Total Expenditure on R&D $ Newspaper Circulation* Notes: * - per 1, - per 1, inhabitants x 1 #- per 1, inhabitants / 1 $ - % of GDP x 1 ~ - index points x 1 Computer Power/ MIPS# Total R &D Thailand ^ - % of tertiary enrolment x 3 Source: The World Competitiveness Yearbook

16 Knowledge-Based Economy Master Plan CHART 1-2F: K-INDICATORS MALAYSIA VS JAPAN Number of computers* 8 Tertiary Enrolment^ Number of Internet Hosts* 6 Infrastructure for e-commerce~ 4 Telephone Main Lines* 2 Availability of Venture Capital~ Mobile Telephones* Notes: * - per 1, - per 1, inhabitants x 1 #- per 1, inhabitants / 1 $ - % of GDP x 1 ~ - index points x 1 ^ - % of tertiary enrolment x 3 Total Expenditure on R&D $ Computer Power/ MIPS# Total R &D Newspaper Circulation* Japan Source: The World Competitiveness Yearbook

17 CHART 1-2G: K-INDICATORS MALAYSIA VS NEW ZEALAND Number of computers* 8 Tertiary Enrolment^ 7 Number of Internet Hosts* Infrastructure for e-commerce~ Telephone Main Lines* Availability of Venture Capital~ Mobile Telephones* Total Expenditure on R&D $ Newspaper Circulation* Notes: * - per 1, - per 1, inhabitants x 1 #- per 1, inhabitants / 1 $ - % of GDP x 1 ~ - index points x 1 ^ - % of tertiary enrolment x 3 Computer Power/ MIPS# Total R &D New Zealand Source: The World Competitiveness Yearbook

18 Knowledge-Based Economy Master Plan CHART 1-2H: K-INDICATORS MALAYSIA VS PHILIPPINES Number of computers* 6 Tertiary Enrolment^ 5 Number of Internet Hosts* 4 3 Infrastructure for e-commerce~ Telephone Main Lines* 2 1 Availability of Venture Capital~ Mobile Telephones* Total Expenditure on R&D $ Newspaper Circulation* Notes: * - per 1, - per 1, inhabitants x 1 #- per 1, inhabitants / 1 $ - % of GDP x 1 ~ - index points x 1 ^ - % of tertiary enrolment x 3 Computer Power/ MIPS# Total R &D Philippines Source: The World Competitiveness Yearbook

19 CHART 1-2I: K-INDICATORS MALAYSIA VS TAIWAN Number of computers* 8 Tertiary Enrolment^ 6 Number of Internet Hosts* 4 Infrastructure for e-commerce~ 2 Telephone Main Lines* Availability of Venture Capital~ Mobile Telephones* Notes: * - per 1, - per 1, inhabitants x 1 #- per 1, inhabitants / 1 $ - % of GDP x 1 ~ - index points x 1 ^ - % of tertiary enrolment x 3 Total Expenditure on R&D $ Computer Power/ MIPS# Total R &D Taiwan Source: The World Competitiveness Yearbook

20 Knowledge-Based Economy Master Plan CHART 1-2J: K-INDICATORS MALAYSIA VS SINGAPORE Number of computers* 8 Infrastructure for e-commerce~ 7 Number of Internet Hosts* Availability of Venture Capital~ Telephone Main Lines* 2 1 Total Expenditure on R&D $ Mobile Telephones* Notes: * - per 1, - per 1, inhabitants x 1 #- per 1, inhabitants / 1 $ - % of GDP x 1 ~ - index points x 1 Computer Power/ MIPS# Total R &D Newspaper Circulation* Singapore Source: The World Competitiveness Yearbook 21. 2

21 CHART 1-2K: K-INDICATORS MALAYSIA VS UNITED KINGDOM Number of computers* 8 Tertiary Enrolment^ 6 Number of Internet Hosts* Infrastructure for e-commerce~ 4 Telephone Main Lines* 2 Availability of Venture Capital~ Mobile Telephones* Total Expenditure on R&D $ Newspaper Circulation* Notes: * - per 1, - per 1, inhabitants x 1 #- per 1, inhabitants / 1 $ - % of GDP x 1 ~ - index points x 1 ^ - % of tertiary enrolment x 3 Computer Power/ MIPS# Total R &D United Kingdom Source: The World Competitiveness Yearbook

22 Knowledge-Based Economy Master Plan TABLE 1.3 TERTIARY ENROLMENTS BY FIELD OF STUDY Economy Natural Science % of 2-24 age group a % female a Mathematics and Computer Science % of 2-24 age group a % female a % of 2-24 age group a Engineering % female a Transport and Communication % of 2-24 age group a Australia Belgium Brazil Canada Hong Kong France Germany Indonesia Japan Korea, Rep New Zealand Pakistan Philippines Singapore na na na na na na na Sweden Thailand United Kingdom United States Note: a Data is for the most recent year available. Source: World Bank, World Development Report, 1998/1999, Table A.1. 22

23 TABLE 1.4 SCIENCE AND TECHNOLOGY Economy Scientists and Engineers in R&D per million people High-technology Exports % of Mfg. Exports 1998 No. of Patent Applications Filed 1997 Residents Non-Residents Australia 3, ,937 39,274 Belgium 2, ,687 84,958 Brazil ,947 Canada 2, ,192 5,254 H ong Kong ,359 France 2, ,669 93,962 Germany 2, ,52 113,543 Indonesia ,517 Japan 4, ,487 66,487 Korea, Rep. 2, ,798 37, ,272 New Zealand 1, ,735 33,42 Pakistan Philippines ,44 Singapore 2, ,188 29,467 Sweden 3, ,893 17,17 Thailand ,25 United Kingdom 2, , ,618 United States 3, ,88 11,884 Source: World Bank, World Development Report, 2/21 23

24 Knowledge-Based Economy Master Plan Annex 1-A TOTAL FACTOR PRODUCTIVITY AND KNOWLEDGE It has been documented in empirical work on economic growth that after accounting for physical and human capital accumulation, something else accounts for the bulk of output growth in most countries. Both physical and human capital accumulation are certainly critical for economic growth. The process becomes more complicated with the role of knowledge in the economic growth process. Knowledge obviously accounts for a part of the growth that is not accounted for by the other factors of production, namely capital and labour. In growth theory, the so-called Solow residual that is unexplained by labour and capital is attributable to the growth of Total Factor Productivity (TFP). The notion of TFP is interpreted as an index of all those factors other than labour and capital not explicitly accounted for but which contribute to the generation of output. TFP refers to the additional output generated through enhancements in efficiency accounted for by such things as advancement in human capital, skills and expertise, acquisition of efficient management techniques and know-how, improvements in an organisation, gains from specialisation, introduction of new technology, innovation or upgrading of present technology and enhancement in Information and Communication Technology (ICT). TFP can explain the growth in a K-based economy because it captures endogenous technical change and other characteristics of the K-based economy, including diffusion of knowledge, organisation, restructuring, networking, and new business models that would contribute to market efficiency and productivity. While intellectual capital can be gauged to some extent and incorporated in capital, there are many factors that explain growth in the K-based economy that are not measurable at present. The size and performance of the TFP provide a clue to the extent of the performance of the K-based economy. When growth accountants fail to consider improvements in the quality of labour inputs due to education, these improvements would be assigned to TFP. Unmeasured improvements in the stock of physical capital would also be assigned to TFP. Labour Capital Growth TFP Knowledge 24

25 Most of the studies for the East Asian economies have concluded that capital accumulation was the key driver of output growth. In general, most empirical work confirmed that TFP contribution to economic growth in was much below the share achieved by industrial economies. During the period of , TFP contributed 25.9 per cent to economic growth but the share declined to 24.8 per cent during In terms of growth, TFP rose by 2.5 per cent during and slowed down to 1.2 per cent during The Eighth Plan envisages a share of 37.2 per cent and growth of 2.8 per cent for the Plan period. In a recent World Bank study after adjusting for the quality of labour to account for education attainment, TFP was said to contribute 2 per cent to economic growth as against 47 per cent for capital and 33 per cent for labour during The study found that between 1987 and 1991, five years following the last recession, TFP was the chief contributor to growth, averaging 6 per cent. But in more recent years ( ), the contributions of TFP have fallen to below 1 per cent. And in this period, capital accumulation became the main driver of economic growth with average shares of 6 per cent. Factors Growth 6MP 7MP 8MP Share Growth Share Growth Share GDP Labour Capital TFP Source: Eighth Plan. Labor Capital TFP 1 Unadjusted for Labour Adjusted for Labour Source: World Bank, Notes: 1 Unadjusted for labour refers to the level of employment in the economy but with no adjustments made to reflect the quality of labour. 2 Adjusted for labour refers to employment levels that reflect the quality of labour. The employment level is adjusted by an index of labour quality that takes into account the education attainment of the labour force and income levels. 25