Linking: Gregory Mankiw article “when the scientist is also a philosopher”

In the last two years we (Mesopartner) have been exploring how complexity science affects development practice. Well, we were quite shocked to realize how much of development is based on preference and bias, and how little is actually based on proper scientific research. Frequently practitioners takes little bits and pieces of different theoretical bases to create a construct of an approach that is suitable to them because it meets their own hypotheses of how the world works. It is important also to not confuse evidence based monitoring and evaluation with scientific evidence.

The famous economic thinker, Gregory Mankiw, has published an article in the New York Times where he goes into this topic with his usual easy to understand arguments. The title of his article is “when the scientist is also a philosopher”. He argues that a danger of economics (I would argue of all economic development) is that we are not aware of our bias, and we do not depend on proper scientific methods. He recommends that we offer our advice with a healthy dose of humility, as we are often not aware of how complex the economy is and how our advice will affect other systems, or whether our advice will work at all.

Gregory Mankiw was a great inspiration for me during my PhD research and I am grateful to have stumbled across this article. He is currently an economics professor at Harvard.

Linking: Change: simple, but not easy by Tim Kastelle

I am humbled that Tim Kastelle has quoted a paragraph from a recent blog I wrote in an article he just published on Change and why it is simple but not easy.

For my students and online learners, I recommend that you also subscribe to Tim’s blog as he deals with many issues relating to innovation and especially business model innovation.

 

Entrepreneurs and markets

While most entrepreneurs depend on functioning and competitive markets to survive, there are those entrepreneurs that actually thrive in imperfect markets. These are the entrepreneurs that creates a business around something like an information failure, high costs of finding suppliers or customers (brokering), or overcoming economies of scale (for instance by leasing expensive equipment on a pay-per-use basis).  Their services or products are valuable to the societies that they create their businesses in, as they overcome barriers to entry and barriers to upgrading. However, there are long term consequences to an economy that is riddled with market failures especially when these failures become very profitable for some. But more about that later.

Anecdotal evidence would suggest that entrepreneurs that exploit market failures to create new markets often earn disproportionate returns. They take huge risks as governments could address the market imperfection if it had the will, the competence and the resources to do so. Once these entrepreneurs are established they often have near monopoly market dominance. Unequal income for me is not such a big problem (it basically tells me there are many systemic failures), rather unequal opportunities is a much bigger issue as it is more widespread. For instance, can the cycle of inter-generational poverty be broken in a society? Can a child from a poor rural location one day choose to become a lawyer, engineer, or teacher; or are they trapped with few options? Is the society creating opportunities only for a few entrepreneurs that have connections and that can protect their interests, or are we creating markets where many entrepreneurs can compete in?

In a European country, with layers and layers of competition and market policies, most entrepreneurs compete on a more-or-less even playing field with markets that are carefully designed, or regulated as they emerge. In Africa, many entrepreneurs are competing in markets where government actually introduce imperfections, largely because markets and competition is not trusted (it is called the Law of Unintended Consequences). The situation is also made worse in that our market regulating and shaping institutions are often not resourced sufficiently and over-run with both creating market systems and coping with ongoing change.

How to overcome this situation?

Industrial policy in developing countries cannot be driven only from the perspective of trade and industry, as many other departments (or policy areas) are introducing market failures into the system in for instance health, education, science and agriculture. These conflicting policies then creates market imperfections that if exploited by a few entrepreneurs will lead to huge profits and a firm market footing. Society may benefit in the short term from a particular solution being available, but in the long term society may be stuck with a market that very quickly develops its own interests that may not necessarily be in the interests of the wider society.

Furthermore, market institutions must recognize and identify the patterns that plays out repeatedly in a society, and try to address these. We should not celebrate when one entrepreneur jumps on an opportunity (although this is still better that nothing). We should celebrate when many entrepreneurs are crowded into a market. I don’t know whether it is naive to ask policy makers to also think about the unintended consequences of their decisions. This is the reason why we’ve had to delve into complexity theories to try and curb the damage being done by well-intended policies.

If we do not succeed in building the right market systems that are based on fair competition we will forever be creating opportunities just for a few entrepreneurs. In the meantime, we depend on a few entrepreneurs that combine intelligence about an opportunity with the right resources and the right competences.

For bottom up development to work, you must go up

For about 6 years I was intensely involved in establishing, promoting and cheer leading Local Economic Development in South Africa and elsewhere. In a country where so much planning, allocation and overall coordination came from the top, these were exciting years. I was always amazed and delighted to find hard working champions in the public and the private sector in every town, city or community where we worked. Our GIZ programme identified private sector and governance experts; and we trained, developed methods, and supported these experts to provide hands on services to local communities, the private sector and the local governments over several years. A small group of experts emerged out of this that are still actively involved in Local Economic Development in South Africa and in many other countries.

While Local Economic Development is something NGOs, Business Associations and donors understand and value, it was often a hard sell to local government, provincial government and even national government. In many parts of the world where societies are more homogenous and where social trust is high, many important economic decisions are in fact made at the local level – this is even thought of as common sense. But not here in South Africa, and also not in many of the other countries in Africa where we worked (our communities is not homogenous and is often divided along ethnic and political lines, our social trust is low even within these ethnic and political groups). This is because the ideas generated by local communities and priorities expressed by business did not always tie in so well with what planners or public sector managers had in mind (I call this top down development as it is rooted in someones authority to decide on behalf of communities).

Everybody who appreciated local ownership, local self determination and participatory approaches liked our logic and could integrate our concepts into their activities, but for many public sector managers our ideas created tension. I must add, on a few occasions we also faced resistance from business, especially as participatory approaches often challenge those in powerful positions.

But the experts, many local government champions, and industry often felt frustrated (see the irony of bottom up development). A group of people actively engage in diagnosing the local economy, and lots of energy would be unleashed. Often, the disconnect between government plans and the real issues confronting business would sometimes become visible. Or the power plays between different politicians and even between different business interests would be revealed. The same patterns emerged in different places, and we could not address these at local level. Unfortunately, many funders of these local processes did not have a mandate nor an interest to go beyond their pilot or designated areas. For instance, an international donor funding an Local Economic Development process in a particular town wanted to see local action that would result in jobs, gender equality, etc. They did not want to rock the boat by questioning local, provincial or national policies and programmes that often made their primary objective unreachable. Even in cases where local government was strongly in support of local action, their funding for economic development often came from national or provincial funding programmes that had different priorities, resulting in good ideas not being implemented because of a lack of funds or too much bureaucracy.

In 2008 I decided to switch my attention to innovation systems, private sector promotion and applying science to industry. I remained committed to bottom up development and decentralized decision making, but felt that I had to get away from depending on local government. However, here too the same challenge emerged, but this time it was not the fault of local government. Reflecting on the last few years and relating it back to my years in Local Economic Development I realize that there is an important lesson in all this for me. The same patterns emerge when I work with universities, a small local chamber of business or a city.

For bottom up development to work, you must go “up”. Sounds simple. But think about it. You cannot just focus on working in a local community as if it is an eco system on its own. Many policies that are undermining local development, trust building, etc. are coming from outside the designated area. The same applies to value chain promotion, cluster promotion and any other flavor of development. Creating a little isolated area where things are working for a particular designated group while the greater system is not working (or creating incentives for contrasting behavior) is wasting resources – when you withdraw your external resources things go back to how they were (see my post here about how we draw boundaries). While I would never regret empowering more local champions to do their advocacy and development work better, I must wonder what would have happened if we could have taken more of our insights to higher levels BOTH within the countries where we work, BUT ALSO to the international agencies that often funded these programmes. Not that we did not try, but often our efforts to communicate what was wrong was challenged on the basis of a lack of data supporting our arguments.

We do not want “bottom development” only. While this may suit the priorities of an NGO to equip a small group of designated people, we should strive to identify patterns, find new paths, and then communicate and use this insight elsewhere in the economy to reinforce what is working and address what is undermining local development. One of the reasons why we as Mesopartner dived into complexity thinking is because we realized that much of the answers to the questions that effect local stakeholders and economic systems are not to be found in the traditional, silo based (also called focused development) that are increasingly becoming “evidence based”.

Bottom up development remains important as we recognize that economies are complex adaptive systems and that the way to make an economy healthier is to equip its agents (business people, local government officials, communities) to make better decisions based on the signals they receive and the factors that affect them locally (local here means close to a particular context).  Our task in development is to try and identify patterns that can be amplified, or to assist agents to probe and try low risk experiments to create new paths for upgrading, decision making and wealth creation. This will require that we challenge how development programmes decide where to work, what to do and what outcomes to expect. Mesopartner is actively involved in the international discussion about how this complexity insight will challenge our development paradigms.

A final reflection. Perhaps our objective in Local Economic Development was wrong to start with. It is not (just) about empowering local stakeholders. Our objective should have been to use the insight from what is possible and what is not possible at the local level to try and affect top down strategy. Or maybe it was about holding up a mirror for top down and bottom up champions to see their effect and role in the system. These questions are at the heart of our new thematic area in Mesopartner looking into bottom up industrial policy, and will be a theme in our 2014 Summer Academy event in Berlin. Remember to apply soon as the early bird discount deadline expires at the end of March.

Recent Mesopartner Working paper on complexity theory and development

This article was originally posted by Marcus Jenal on the systemic-insight.com website in December 2013. I co-authored this paper with Marcus. It is an output of the theme of applying complexity theories to economic development.

For the last 3 years we at Mesopartner have been purposefully experimenting with complexity and systems theories in our practice. Not only did we change our company logo and strapline based on our new learning, we started to dismantle and question almost every aspect of our instruments, tools and theories.

This was a steep learning curve for us and for our key customers who agreed that we could embark on these serendipitous journeys together. While we still believe in bottom up development, we are wondering about how to achieve developmental change within the typical timelines and resource constraints that development projects often face.

One of the results of this process is this website (http://systemic-insight.com), where we want to share our thoughts and invite our followers to contribute to the discussions we have.

A new Mesopartner working paper now provides a theoretical grounding for the work we have done in the last three years and will continue to do. We consider some definitions, ponder the implications and try to formulate some responses to some of the key challenges that systems and complexity theories confront us with in our field of bottom up economic development.

We see this paper as an input into a broader discussion with our close collaborators, our close clients, and the broader network that we form part of. We ask  you to send us your thoughts and add your comments to this and future posts.

We thank the colleagues that have already commented on the paper. Many of the suggestions are already incorporated into this version. Your contributions are greatly appreciated. Shawn and Marcus

Building institutions that supports knowledge flows to industry

It sounds like a cliche to state that manufacturing has changed a lot in the last 30 years. Yet people often say this without thinking of how it has changed. It is not just about the size of our manufacturers, or the increased competition from Asia or elsewhere. It is also not about the sophisticated equipment and the tremendous range of products that are now available to consumers. An important aspect of manufacturing change is the dependence on knowledge from internal and external experts, or Knowledge Intensive Business Services (KIBS). These knowledge experts include engineers, product developers, process experts, industry experts or logistical experts. While in a country like Germany, there are many public, academic and private specialists to go around and assist manufacturers to tweak their processes or solve specific problems, in developing countries we have a bigger challenge. Knowledge intensive services are prone to several market failures, and therefore it is important that we consider the role, importance and challenges that these knowledge services have.

Let me just state upfront that despite my PhD research focusing on the importance of knowledge services in the manufacturing sector, I am hesitant to treat the “knowledge economy” as something separate as it is often done in the South. The increasing importance of many different kinds of knowledge throughout the economy is pervasive. Just ask a commercial farmer in Africa how they have had to change their farming practices in the last 3 decades. It is almost unthinkable that 30 years ago a person could start commercial farming without a tertiary education or at least one highly experienced supervisor. The same goes for manufacturing.

There is a big difference between generic Business Development Services (BDS) and Knowledge Intensive Services. While with BDS our problem is to get good all-rounders to provide services to enterprises where it is very hard to determine the real value of the service offering, in Knowledge Intensive Services the service is very specific to a certain (technical) problem, it is deep knowledge and the value (and cost) is usually very clear. Firms that know what they are doing need knowledge intensive service providers to fill in the gaps where deep knowledge is needed, a BDS provider is typically out of their depth with a manufacturing enterprise that are trying to be competitive.

  • The first challenge we have with intensive or specific knowledge is scale. When just a few manufacturers use more advanced equipment in a country there is a good chance that few service providers, experts or technicians will be available. In market failure terms, this is called an indivisibility (you cant divide the cost of the expert easily between different enterprises, or just take a small piece of the expert). It could also be about scale (not enough business to justify the emergence of a specialized service provider). It is often difficult for manufacturers to coordinate their use of expert service providers, or to coordinate the procurement of similar equipment that makes the development of a pool of service providers possible. This is called a coordination failure and it is pervasive in our developing economies.
  • A second challenge is that many manufacturers are hesitant to search outside their firm. This is often due to costs (which includes the time spent to find the right expert), but also because for so long manufacturers had everything they needed in-house. In South Africa, many of our older firms are hesitant to use “consultants” because they don’t trust them. This could be described as a market failure around asymmetrical information or adverse selection.

One way to increase the availability of knowledge intensive service provision in a developing country is through the connection between academic institutions, public funded industry support programmes and industries themselves. This requires that technical or knowledge experts are able to be released from certain teaching or research duties to work with firms. This is often very difficult due to the high student load in many of our African universities. I am often astounded by the world class research capacity and expertise that are hidden inside universities that are desperately needed in industry. This failure has many names, but in market failure terms it is called a public goods failure, in other words, public funds are not used to overcome persistent market failures in industry.

A second and parallel strategy should be to make sure that the Meso level organizations (which include universities and higher education institutions) are concentrating on overcoming the market failures in industries and in firms. In developing countries these Meso organizations, meant to address specific performance issues at firm or industry level, are more focused on securing and spending national (or international) funding than to become valuable and responsive to the needs of industry. To get the Meso organizations focused on the plight of firms requires an industrial and modernization policy that is focused on building the right economic and industry supporting institutions – this cannot be done just by merely implementing projects or programmes – it must be systemic. With right I mean relevant and equipped with high level experts that understand and can relate to the issues in industry.

This phenomena of the disconnect between public knowledge services and the need of industry is more widespread than you would think in our developing countries. It is a public good failure that undermines the well being of our economies. I believe this is also an ideological failure, because governments tries to use their funds to provide incentives or prioritize certain kinds of behavior both in the public sector and in the private sector. Instead of responding to what is emerging or what is needed in the private sector, the public sector tries to prioritize what it believes to be ideal. The result is that the firms that are most able to create jobs and wealth are left without public support.

In Mesopartner we will be working on consolidating our experience in bottom up industrial policy. We will work closely with research organizations and development partners around the world to strengthen and develop a body of knowledge on how some of these issues can be addressed in the developing world. We do this by developing a theme where instruments, concepts, theories and practice can be integrated. If you are interested in participating in this process, or have experience to share, please give us a shout.

I have previously written about this some years ago in the post about the service sector  and about the increased importance of knowledge intensity here.

Linking – Posts on innovation and science

Somewhere in December I started to rest and neglected reading some of my favorite blog sites. I have now caught up and here are some important posts that I would like to share with my readers.

One of my favorite authors on innovation, Tim Kastelle, made the following posts:

  • Innovation: Are you a gardener or an architect? You can guess that architects plan their innovations, while gardeners are sensitive to what emerges from their environment. When we deal with economic development, we have too many architects and too few gardeners.
  • Failure is ALWAYS an option. This post is also relevant for practitioners working in economic development. We must use our resources to assist our counterparts to experiment. Their resources are often to scarce or expensive for them to experiment with things that might just fail!

One of my other favorite authors, Duncan Green, posted an excellent summary of research on what White House Policy Makers want from Researchers? This is an important question for practitioners working on promoting science to industry and to government. He provides some interesting comments on the original research that is available from his blog article.

In future I will post articles on systemic thinking and complexity on the Systemic Insight Blog that I co-author with Marcus Jenal

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