Britain needs ëknowledge economy policyí

Gordon Brown should use the opportunity of the Comprehensive Spending Review this summer to set out an economic policy that will enable Britain to flourish in the knowledge economy, The Work Foundation says today.

In a submission to the Treasury, the foundation argues that success in the knowledge economy should become one of the key objectives of economic policy-making.

ëThe time has now come to promote the knowledge economy from usefully vague rhetoric to the framework around which economic policy is built,í says Ian Brinkley, the director of The Work Foundationís knowledge economy programme.

ëAlready, the outlines can be seen. Most people know that the economic policy issues most vital to our future involve skills and education, research and development, innovation, the creative industries, how we turn ideas into businesses, science and technology, intellectual property, and the quality of life in Britainís major cities. These are the core knowledge economy issues.

ëBritain now competes on its ability to generate and exploit knowledge. What we need now is for the knowledge economy to move from being an unacknowledged guest at the table of economic policy-making to guest of honour. The knowledge economy could be the unifying theme of Gordon Brownís stewardship of the economy - and perhaps, in time, the nation.í

The paper argues that the CSR later in the summer (and to a lesser extent the budget next week) marks an opportune moment to begin to cast economic policy in a new way.

First, it is becoming obvious that the traditional economic boundaries between manufacturing and services are breaking down; the concept of a knowledge economy applies equally to both. After the painful adjustment shocks of the 1980s and 1990s, Britain now has a more sophisticated industrial structure where making things and providing services are two interdependent aspects of economic activity, both depending on producing innovative, creative goods and services with a high value-added content.

Second, at some point in the next few years, the majority of the UKís economic activity and the majority of its employment will take place in the ëknowledge-based industriesí. Depending on the definitions used, the knowledge economy now accounts for between 40 and 50 per cent of economic activity and employment in the UK. Almost all the net growth in jobs in the 10 years to 2005 in the UK came from the knowledge based sectors - business services, finance, communications, education and health. The UK already leads the world in the export of knowledge services (from consultancy to financial services).

Finally, this summerís CSR could mark the first serious statement of policy of a Gordon Brown premiership. It may offer an obvious point to set out a ëbig ideaí to define a new term in the Labour governmentís history. The knowledge economy is a strong candidate to be that big idea.

Ian Brinkley says: ëEconomic progress has always involved knowledge. What makes the 21st century distinct, though, is that never before have so many well-trained minds and such powerful computers come together. When firms and organisations successfully combine the two and transform the result into economic value, what you have is the knowledge economy.í

The paper says Britainís knowledge economy policy should include:

1. Investing in the knowledge base. The UK is currently in the middle group of OECD countries that invest between 2 and 3 per cent of GDP a year in higher education, RandD and information and communications technology. We are well behind the leaders; Sweden, the US and Finland all spend more than 6.0 per cent. The gap needs to be closed.

2. Increasing the flow of graduate skills. The recommendation in the Leitch review to increase the numbers of graduates from below 30 to around 40 per cent by 2020 could involve raising higher education spending from 1.1 per cent to almost 3 per cent to match the US. Despite criticism of the policy of expanding the number of graduates, the supply and demand for graduates appears broadly in balance.

3. Increasing demand for research and development. The policy should reassess the relevance of setting a target for RandD as a share of GDP. The focus should be on policies that help firms, universities and organisations maximise the domestic demand for and effectiveness of RandD.

4. Reforming intellectual property law. The Gowers report on intellectual property strikes the right balance between encouraging creative innovation through copyright protection and the wider public interest. Its recommendations should be implemented.

5. Increasing decentralisation. In order to capitalise on existing strengths in knowledge economy sectors, Britainís major cities are likely to require more independence from central control. Further devolution and decentralisation need to be explored. Some of the weaker regions (such as Northern Ireland and the south west) have shown strong growth in knowledge industries over the last decade - that growth needs encouraging.