• Background
• Introduction
• What is a knowledge based economy?
• The OECD Growth Project
• Statistical framework for a knowledge based economy and society
• APEC framework
• OECD Growth Project framework
• Overview of the proposed ABS framework
• Dimensions and characteristics of the proposed ABS framework
• Innovation and entrepreneurship
• Human and social capital
• The role of information and communications technology
• The fundamentals - economy, society and the environment
• Economic and social impacts
• Data dissemination from the framework
• Compendium approach
• Thematic publications
• Directory of data sources
• Conclusion
• Bibliography
• Appendix
• Structure of the proposed framework
• Dimension: Innovation and entrepreneurship
• Dimension: Human and social capital
• Dimension: The role of information and communications technology
• Dimension: The fundamentals - economy, society and the environment
• Dimension: Economic and social impacts

Background

1. There is currently no internationally agreed framework for measuring the extent to which an economy or society is knowledge based. In order to contribute to debate on this topic, the ABS is developing a statistical framework which presents measures of knowledge in the Australian economy and society.

2. ABS expects to publish an Information Paper on the framework in early 2002. Readers will be invited to comment on its theoretical basis, as well as its structure and the range of indicators proposed.

3. The current paper has been prepared for the ESCAP Working Group of Experts meeting in November 2001. It outlines the content of the forthcoming Information Paper and broadly describes the proposed statistical framework.

Introduction

4. Most other work in this field refers to the so-called Knowledge Based Economy (KBE). The framework being developed by the ABS explicitly includes the concept of a knowledge based society because of the presumed economic importance of societal factors and the potential positive and negative impacts on society of an increasing emphasis on the importance of knowledge.

5. The ABS framework draws on the work of a number of organisations. In particular, it builds on work of the Asia-Pacific Economic Co-operation (APEC) Economic Committee and the Organisation for Economic Co-operation and Development (OECD). Current expectations are that the forthcoming Information Paper will:

• outline the interest in the knowledge base of the Australian economy and society;
• examine theoretical and empirical work relating to the role of knowledge in the economy and, to a lesser extent, society;
• discuss the need for a Knowledge Based Economy/Society (KBE/S) framework and describe KBE measurement frameworks used by APEC and the OECD;
• describe the hierarchical structure of the proposed ABS framework in terms of its dimensions, characteristics and statistical indicators; and,
• discuss follow up and related ABS work, and describe options for disseminating statistical information from the framework.

6. ABS will determine its future work in this area on the basis of user reaction to the proposed framework.

What is a knowledge based economy?

7. The term "knowledge based economy" was coined by the OECD and defined as an economy which is "directly based on the production, distribution and use of knowledge and information" (OECD 1996). The APEC Economic Committee (2000) extended this definition to state that in a KBE "the production, use and dissemination of knowledge is the main driver of growth, wealth creation and employment across all industries" (APEC Economic Committee 2000). According to these definitions, a KBE does not rely solely on a few high technology industries for growth and wealth production. Rather, all industries in the economy are knowledge intensive, even so called 'old economy' industries like mining and agriculture.

The OECD Growth Project

8. The OECD Growth Project began in 1999 with a Ministerial Council request to analyse the causes underlying differing economic growth of member nations during the 1990s. There was a particular interest in why the US economy had experienced increased non-inflationary growth relative to most other OECD economies, whilst maintaining low unemployment. The importance of information and communication technology (ICT) had increased in the US and there was evidence of restructuring of enterprises and markets. Levels of economic growth experienced by Australia, Ireland and the Netherlands had also been higher in the 1990s - in contrast to other OECD member nations (OECD 2000a). Empirical evidence indicated that divergence in growth between OECD countries could be attributed to:

• investment in ICT
• increased use of labour
• rising quality of labour and
• greater efficiency in how labour and capital are combined (multi-factor productivity) (OECD 2001a).

9. The final Growth Project report, The New Economy: Beyond the Hype (OECD 2001a), contains the major policy conclusions from the two year project. It emphasises the importance of a stable and open macro-economic environment with effectively functioning markets; the diffusion of ICT; fostering innovation; investing in human capital; and stimulating firm creation.

Statistical framework for a knowledge based economy and society

10. Without well defined, valid and reliable measures of constructs such as knowledge, the applications of developing economic theories relating to the role of knowledge in economic and social growth remain limited. KBE/S measures therefore need to be developed to allow the progress of Australia and other nations to be monitored in light of possible structural changes occurring in conjunction with advancements in technology and knowledge.

11. In order to present a statistical picture of knowledge in an economic and social context, relevant statistics need to be chosen or developed and then shown in a structured, logical manner. The development or choice of a framework also enables any gaps in available statistics to be identified, thus identifying priority areas for new statistical collection or compilation activities.

12. Once a set of indicators has been decided upon, it is theoretically possible to create an index to reflect the intensity with which an economy and society is knowledge based. The use of a single figure index would facilitate comparative analyses and could become an important indicator of economic performance. However, before an index can be developed, each indicator would require an appropriate weight to be assigned to it. This in turn relies on the existence of a sound and generally agreed model which defines and prioritises key elements of a KBE/S. As Mohnen & Dagenais (1998) noted, a major obstacle to constructing an index from a compilation of survey data is how to combine various measures of the same concept. This problem is compounded when the index is used over time, as any framework on which it is based needs to change in order to remain relevant. ABS does not intend to pursue the index approach, arguing that a single index could present an over-simplified and possibly misleading representation of the extent to which an economy or society is knowledge based.

13. Examples of KBE frameworks are listed below. References to these can be found in the Bibliography.

• Science, Technology and Industry Scoreboard: Towards a Knowledge-based Economy, OECD (2001b)
• Towards Knowledge-based Economies in APEC, APEC Economic Committee (2000)
• Knowledge-Based Activities: Selected Indicators, Department of Industry, Science and Resources (2000)
• Towards a European Research Area: Science, Technology and Innovation: Key Figures 2000, Eurostat (2000)
• European Innovation Scoreboard: Innovation and Technology Transfer, European Commission (2000)
• The Knowledge-Based Economy: A Set of Facts and Figures, OECD (1999)
• Our Competitive Future: UK Competitiveness Indicators 1999, UK Department of Trade and Industry (1999)
• Measuring the Knowledge-Based Economy: How does Australia compare? Department of Industry, Science and Resources (1999)
• Index of the Massachusetts Innovation Economy, Massachusetts Technology Collaborative (1999)
• The New Economy Index: Understanding America's Economic Transformation, Atkinson and Court (1998)

APEC framework

14. This framework was developed as part of a project commissioned by the APEC Economic Committee in mid-1999. The title of the project was Towards Knowledge-based Economies in APEC (APEC Economic Committee 2000) and was progressed by a specially created KBE Task Force, members of which included Australia, Canada and Korea. The aim of the project was to "provide the analytical basis useful for promoting the effective use of knowledge, and the creation and dissemination of knowledge among APEC economies". Empirical evidence was examined, leading to the suggestion that economic growth is most sustainable for those economies which are strong in all of the following four dimensions (early findings of the OECD Growth Project, analysed and cited in APEC Economic Committee 2000):

• "Innovation and technological change are pervasive, and are supported by an effective national innovation system."
• "Human resource development is pervasive: education and training are of a high standard, widespread and continue throughout a person's working life."
• "An efficient infrastructure operates, particularly in information and communications technology (ICT), which allows citizens and businesses to readily and affordably access pertinent information from around the world."
• "The business environment is supportive of enterprise and innovation."

15. These four dimensions form the basis of the APEC KBE framework and are summarised as:

• Innovation system
• Human resource development
• ICT infrastructure
• Business environment.

16. Drawing on the literature, in particular on a paper by Gera et al (1999), the KBE Task Force developed the concept of a fully developed KBE and described the characteristics of such an economy. Once the characteristics of a KBE were described, quantitative measures (or indicators) of these characteristics could then be selected to incorporate objective measures into the framework. For the purposes of the APEC report (APEC Economic Committee 2000), it was important that the chosen indicators were available for all the case study economies. This tended to limit the choice of indicators.

OECD Growth Project framework

17. The OECD's Growth Project reports can probably be described as presenting a policy analysis rather than a statistical framework. However, they provide a structure which can be used to describe the dimensions of a statistical framework. The reports also include many relevant statistical indicators.

18. The final report of the Growth Project (OECD 2001a) was released in May 2001. Its policy recommendations cover five broad areas:

1. ICT is an enabling technology. Governments should: focus policy efforts on increasing the use of new technology; increase competition and continue with regulatory reform in the telecommunications industry to enhance the uptake of ICT; ensure sufficient competition in hardware and software to lower costs; build confidence in the use of ICT for business and consumers; and, make e-government a priority.
2. Foster an innovative environment: give greater priority to basic research; improve the effectiveness of government funding of innovation; make greater use of competitive funding and evaluation in supporting public research; tackle new challenges in intellectual property regimes; and, remove barriers and regulations that limit effective interaction between universities, firms and public laboratories.
3. Prioritise policies to enhance human capital (the skills and competencies embodied in labour): invest in high-quality early education and child care; raise completion of basic and vocational education and improve the quality of the system; improve school-to-work transition; strengthen the links between higher education and the labour market in a cost-effective way; provide wider training opportunities; and, reduce obstacles to workplace changes and give workers a greater voice.
4. Foster an entrepreneurial climate: promote access to financing; facilitate firm entry and exit; review and assess the relevance and effectiveness of government support programs; and, encourage an entrepreneurial spirit in society.
5. Assure that economic and social fundamentals are in place: preserve macro-economic stability; encourage openness; make financial systems more supportive of innovation; mobilise labour resources; and, address the redistributive implications of structural change.

Overview of the proposed ABS framework

19. The proposed ABS framework draws on work by APEC and the OECD, among others, to produce a model with five dimensions. Each dimension is described in terms of a number of characteristics. Each characteristic, in turn, is populated by several statistical indicators.

20. The dimensions are as follows:

• Innovation and entrepreneurship
• Human and social capital
• The role of information and communications technology
• The fundamentals - economy, society and the environment
• Economic and social impacts.

21. Indicators to be included in the framework have not yet been finalised but each indicator will generally meet most or all of the following criteria:

• be relevant to the characteristic it is intended to describe and capture an appreciable amount of the variation;
• be supported by reliable and timely data;
• be sensitive to the underlying phenomenon it purports to measure;
• be intelligible and easily interpreted;
• preferably be available for a number of time periods including recent periods; and
• for the purposes of international comparison, preferably be available for other countries.

22. Given the subject matter of the framework, its indicators and characteristics will clearly need to change over time to remain relevant. It is less likely that the dimensions will change.

23. The dimensions and associated characteristics are described below. The types of indicators proposed are shown in the appendix to this paper.

Dimensions and characteristics of the proposed ABS framework

Innovation and entrepreneurship

24. This dimension includes the support for, and performance of, innovative and entrepreneurial activities within the economy.

25. Characteristics of the dimension are:

• Support for knowledge creation (by all sectors, but particularly by government in its direct and indirect support for R&D and business in its R&D performance and funding).
• Research base and potential for knowledge creation. This characteristic deals with the performance of basic research, research in relatively new fields and research by small and medium enterprises.
• Knowledge creation with commercial potential (this includes invention and patenting activity).
• Knowledge networks and capacity for knowledge flows. This refers to sharing and dissemination of knowledge within firms, and between firms and other organisations (other firms, government and education organisations). It includes cross border flows of knowledge.
• Innovative activity across the economy. This characteristic covers innovative activity by firms. Following the OECD's Oslo Manual approach to measurement of innovation (OECD/Eurostat 1997), it has been taken to include activities leading to the introduction of new or improved products or processes.
• Entrepreneurial support in the economy (for instance, supply of venture capital).

Human and social capital

26. The skills, knowledge and behaviour of people living in a society are clearly of central importance to its development as a knowledge economy and society. The current framework considers both human and social capital within this dimension. Human capital consists of stocks of human capital (the level of skills, competencies and knowledge of members of society) and investment in human capital (public and private expenditure on education and training). A KBE/S framework is therefore concerned with education and training inputs, both formal and informal, as well as outcomes in terms of the resulting skills and abilities of the population.

27. As well as being of obvious social importance, recent work by the OECD suggests that social capital may be important for economic growth (OECD 2000b). Given the importance of networks in a KBE/S and the role trust plays in these networks, the ABS proposes to include social capital in the framework. While there is a diversity of views about social capital, there does appear to be agreement that a key component is trust; indeed this can be both an outcome and a source of social capital. Other components of social capital that appear to have some measure of consensus in the literature are such items as civic engagement (e.g. involvement in voluntary organisations or in local political activities) and the extent and type of an individual's social networks.

28. A number of studies cited by the OECD (2000b) showed that, as well as having a number of impacts on well-being, social capital is likely to have impacts on the following areas of economic activity:

• productivity in firms and organisations,
• success in job search activity, and
• macro-economic growth benefits.

29. Characteristics of the Human and social capital dimension are:

• Knowledge base of the nation (information about the education and skill levels of the population and the potential stock of qualified people).
• Investment in human capital (refers to expenditure on education and training by government and business).
• Access to education and training (looks at the accessibility of education and training and lifelong learning - its continuing use by adults throughout their lives).
• Knowledge in the labour force. This characteristic looks at knowledge workers, the level of educational attainment of the labour force and the extent of employer training.
• Human capital loss/gain from the economy (deals with the immigration and emigration of skilled people).
• Social capital in the economy and society (refers to both individuals and businesses).

The role of information and communications technology

30. ICT is an enabling technology of a KBE/S. It is a vital tool for knowledge workers, allowing them to take full advantage of the technology's capacity to access, manipulate and process information. ICT is also an integral part of education, offering students access to information as well as a range of IT based learning tools.

31. It has been argued that a strong ICT production sector is essential for a KBE/S. However, work by the OECD (OECD 2000c) suggests that the pervasiveness of ICT use within an economy and society is more important than the production of ICT goods and services.

32. Characteristics of the dimension are:

• Access to ICT by society. This characteristic considers the availability and cost of ICT to members of society. It is particularly concerned with apparent barriers to ICT access.
• ICT infrastructure in place (refers to Telecommunications infrastructure, availability of Internet access services and Internet hosts).
• Household and individual use of ICT (looks at the extent of use of ICT and the ways it is being used by members of society for particular purposes and activities).
• Business and government use of ICT (examines the penetration of ICT into business and government processes).
• Status of electronic commerce in the economy. This characteristic looks at business and individual use of the Internet (and other computer-mediated networks) for buying and selling goods and services.
• ICT skill base (refers to the share of ICT workers in the labour force as well as covering skill shortage issues).
• Strength of the ICT industry. This characteristic describes aspects of ICT industries in Australia. In particular, it looks at revenue growth, contribution to employment, R&D expenditure and trade in ICT goods and services.

The fundamentals - economy, society and the environment

33. The underlying characteristics of the economy, society and the broader environment provide some of the preconditions for the creation of a successful KBE/S. For instance, they include the macro-economic, policy and regulatory frameworks in which businesses operate. This dimension covers relevant aspects of the business climate in terms of economic performance and stability, openness to investment, trade and ideas, and attractiveness for investment. We have also included society and the environment in this dimension, believing them to be contributing factors to the success or otherwise of a KBE/S.

34. Characteristics of the dimension are:

• Macro-economic performance and stability.
• Global openness (how open the economy and society are to foreign investment, trade and ideas).
• Attractiveness for business investment. This characteristic includes several aspects of government policy and transparency which affect the perception of an economy's attractiveness to investors. It also includes labour market factors such as level of industrial action and the availability of a skilled workforce.
• Society and the environment. We have included indicators of the health of the society and the environment. They include levels of crime, life expectancy and atmospheric pollution.

Economic and social impacts

35. This dimension deals with the effects on the economy and society of an increased emphasis on, and use of, knowledge. It is acknowledged that a cause and effect relationship between impacts and knowledge cannot necessarily be proven. It is also clear that other factors will have been involved in some of the outcomes we are seeing. For instance, micro economic and labour market reforms are likely to be factors in labour productivity improvement and economic growth. In respect of Australia, Parham et al (2001) have suggested that recent productivity gains have come from both increased ICT use and non-ICT factors such as policy reforms.

36. Characteristics of the dimension are:

• Change in productivity (efficiency with which labour and/or capital are used).
• Changing structure of the economy in terms of industry share and type of industry (for instance by level of knowledge intensity).
• Change in trade (changing composition and extent of trade).
• Quality of the education system (as measured by its attractiveness to foreign students).
• Changes in society (impact of education on employment prospects /income levels; teleworking trends).

37. Information on the indicators associated with the dimensions and characteristics of the framework are shown in the appendix to this paper.

Data dissemination from the framework

38. A number of alternative dissemination options will be discussed in the forthcoming Information Paper and are outlined here.

Compendium approach

39. One way to present measures of the KBE/S is in a compendium of statistical indicators. This approach has to date been attempted by the OECD as a whole and by a small number of OECD countries, including the United Kingdom (Department of Trade and Industry 1999) and the USA (Massachusetts Technology Collaborative 1999). A compendium could take many forms. For instance, it could be produced at a simple level consisting of main indicators and little commentary or it could be a more significant body of work, consisting of a greater set of indicators and accompanied by commentary and analysis. The first approach has the advantage that it could be produced more frequently and would be relatively timely. The second approach would be less frequent and timely, but contain more information.

Thematic publications

40. Separate publications could be produced for dimensions or topics within the framework. This would allow a more extensive treatment of those components of the framework than a compendium approach. Given that such releases would not cover the whole framework, it is likely that this approach would be used in conjunction with a regular compendium release of some kind.

Directory of data sources

41. As well as, or instead of, publishing indicators against the KBE/S framework, the ABS could compile and publish a statistical directory, that is, a publication which sources and describes data relating to the KBE/S framework. Obviously a directory would need to be updated periodically as more appropriate data become available, or as data sources are discontinued. A directory would initially take some time to produce but would be reasonably quick to update, once established. It would allow experts in the field to assemble the statistics themselves and add their own expert analysis to provide insight into the data.

Conclusion

42. This paper has described ABS work in the development of a measurement framework for the knowledge based economy and society. Following publication of the proposed Information Paper early next year, ABS expects to refine the framework and start to produce output from it. The latter could include compendia, thematic publications and/or statistical directories.

43. ABS welcomes comments on its proposals for a KBE/S measurement framework. We would also welcome the opportunity to collaborate with other countries interested in this work.

Bibliography

• APEC Economic Committee 2000, Towards Knowledge-based Economies in APEC, APEC Secretariat, Singapore, http://www.apecsec.org.sg
• Atkinson, R. D. and Court, R. H. 1998, The New Economy Index: Understanding America's Economic Transformation, Progressive Policy Institute, Washington DC, http://www.dcippi.org
• Department of Industry, Science and Resources 1999, Measuring the Knowledge-Based Economy. How does Australia Compare?, Department of Industry, Science and Resources, Canberra, http://www.isr.gov.au
• Department of Industry, Science and Resources 2000, Knowledge-Based Activities: Selected Indicators, Department of Industry, Science and Resources, Canberra, http://www.isr.gov.au
• Department of Trade and Industry 1999, Our Competitive Future: UK Competitiveness Indicators 1999, Department of Trade and Industry, United Kingdom
• European Commission 2000, European Innovation Scoreboard: Innovation and Technology Transfer, Special Edition, pp 26-31
• Eurostat 2000, Towards a European Research Area: Science, Technology and Innovation: Key Figures 2000, European Commission, Brussels
• Gera, S., Lee-Sing, C., Newton, K. 1999, The emerging global knowledge-based economy: trends and forces, prepared for the Doing Business in the Knowledge-Based Economy: Facts and Policy Challenges Conference, CIRANO and Industry
• Massachusetts Technology Collaborative 1999, Index of the Massachusetts Innovation Economy, MIT, Westborough, http://www.mtpc.org
• Mohnen, P. and Dagenais, M. 1998, The Construction of Innovation Intensity Indexes, University of Quebec, University of Montreal and CIRANO
• OECD 1996, The Knowledge-based Economy, Paris
• OECD/Eurostat 1997, Oslo Manual: Proposed Guidelines for Collecting and Interpreting Technological Innovation Data, Paris
• OECD 1999, The Knowledge-based Economy: A Set of Facts and Figures, Paris
• OECD 2000a, Is There a New Economy? First Report on the OECD Growth Project, Paris
• OECD 2000b, The Well-being of Nations: The Role of Human and Social Capital: Human and Social Capital and Sustained Growth and Development, Paris
• OECD 2000c, A New Economy? The Changing Role of Innovation and Information Technology in Growth, Paris
• OECD 2001a, The New Economy: Beyond the Hype, Final Report on the OECD Growth Project, Paris
• OECD 2001b, Science, Technology and Industry Scoreboard: Towards a Knowledge-based Economy, Paris
• OECD Growth Project, http://www.oecd.org/subject/growth
• Parham, D., Roberts, P.; and Sun, H. 2001, Information Technology and Australia's Productivity Surge, Productivity Commission Staff Research Paper, AusInfo, Canberra

APPENDIX

Structure of the proposed framework

The structure of the proposed framework is shown below. It outlines the dimensions and characteristics as currently proposed but groups indicators by type rather than listing them individually. The Information Paper will provide more detail on indicators. In particular, it will:

• describe each indicator more fully than is possible in this paper;
• identify those indicators which could belong in more than one dimension (in this situation, an indicator is allocated to one dimension and cross-referenced to any others which are relevant); and,
• include information on relevant Australian and international data sources for each indicator.

Most indicators will be expressed in relative terms, for instance, on a per capita or proportion of GDP basis, as a time series, and/or by comparison with other countries.