The oblique search for new industrial opportunities

Industrial policy is typically set at national level. It is often aspirational and attempting to “stretch” an economy into new kinds of production and value addition. Programmes are designed, targets are set such as doubling manufacturing contribution of x% within 7 years. Therefore it is sometimes disconnected from the present as it seeks a new Status Quo, a different structure of production.

Yet the natural process under which new production activities are created is complex. It is not as simple as finding a market opportunity, finding the right production process, securing funding and launching a business. The economic context, the political climate, the entrepreneurs with the right levels of experience, backing and confidence are all needed. And don’t forget individuals with a desire to expand, take risks and try new things.

Danni Rodrik argues that Industrial Policy should be a search and learning process. Many centrally planned industrial policies even cite Rodrik as they then commence with outlining with great certainty what must be done, by whom, with which resources and to which effect. This logic completely ignores the importance of what exists, and what is possible from here. It ignores that fact that the past matters, and that the current structures are the result of a series of evolutionary steps. Complexity science teach us that these plans ignore the fitness landscape, a landscape that is dynamic and constantly changing. Any attempt to extend the horison further than what is within reach should be treated with great caution. One of the greatest obstacles is the attide towards risk and the optimism of enterprises. I don’t think Rodrik meant the ministers officials must do the search, rather, industry must do the search or at least be actively involved in the search in partnership with government and institutions.

But the search is not about answering a simple question. A more oblique approach is called for (see John Kay, Obliquity). Which means we should set aside targets and indicators, and focus on creating small experiments to introduce more variety and options into the system. It means that finding out that something is not possible is as valueble as figuring out that something else is indeed possible. Taking Rodrik literally, it would mean also giving much more attention to what entrepreneurs are searching for and experimenting with in the background. It requires that we recognise that the current economy is creating what is viable under the current dynamic circumstances, and that only strategies that recognise where we are and what is certainly within reach from here is in fact viable. The challenge for developing economies is that what is possible is typically limited and further constrained by strong ideological bias as to what is possible or desirable. For instance, many South African business owners are trying to shift out of price sensitive markets competing on a basis of low cost skills. Entrepreneurs are moving into knowledge and capital intensive production, with more focus on service and integration. Government is searching for a way to employ people with low skills because its own social programmes and service delivery is not a viable fall back for people with insufficient skills.

The search is not about analysis
Complexity describes a situation where the patterns of what exactly is going on is unclear or shifting. We cannot entirely figure out what is leading to what and what is reinforcing what. Due to the dynamism, we cannot really understand the situation better through analysis. Another way of explaining this, is that a situation is complex when more than one competing hypothesis can with some probability explain what is going on. The only way to make sense of complexity is to try something, actually, try many things. And then see what seems to work better. It means that we start with what we have and who we know (and can trust), and then try a range of things with the simple purpose of seeing what is possible within the current constraints of the economic system. Steps must be taken to reduce risks (for instance by ensuring that the costs of failure are small, or that the experiments try different ways of solving the same problem), but then this whole approach in itself must be recognised to be politically risky.

This is where donors and development partners come in. By assisting developing countries to conduct low key experiments in order to create variety is essential, as development partners can reduce the political risks of their counterparts. This approach will furthermore require the abondenment of targets and indicators as an attempt to measure accountability and progress. A more subjective approach that sets indicators that monitors the overall health or dynamism is needed so that the experimentors can sense when they are indeed making progress. Thus the indicators does not measure success, nor input.

Perhaps then a skunkwork approach to a more complexity sensitive industrial policy approach is needed. Let the normal industrial policy targets and rigmarole be there. Politicions and bureacrats like this sense of certainty and purpose. But allow for some experimentation on the side under the heading “industrial policy research”. Allow this team to work with private sector partners to conduct small experiments to try new business models in an incremental way. For instance, do incubation to try new ways of mineral beneficiation, but without investing in large buildings or expensive equipment. Use what is existing as far as possible, even if it means having the manufacturing done on a contract basis elsewhere in order to test if local demand for the outputs exist.

Landing spacecraft on a comet but still not enough development

Since the landing of the Philae lander on comet 67P/Churyumov-Gerasimenko yesterday I have been asked a few times times by readers and friends why this is possible, yet we struggle with development, inequality, racial transformation in RSA, exclusion, inclusion and poverty.

I have two answers. Firstly, landing a spacecraft is by now no longer complex, it has become merely very complicated. I mean that once you can figure out the questions, many answers are self-evident. For the parts that are not self-evident you can conduct research and development, and choose between alternatives based on the results. You still have a huge problem with sequencing, but this is why these space missions are so expensive. That is why India can put a spacecraft in space (it is complicated) but still struggle with gender and poverty issues (it is complex). That is why South Africa can host the SKA (very complicated) but not deliver water to communities (complex, as it involves politics, competencies and competing priorities). We just don’t know in which order to solve all the problems in our developing countries, and everything seems to affect everything. Development is complex. In fact, we are not even allowed to fully unpack or discuss the problems because we have become overly sensitive, making things even more complex.

The second answer is about science. For space, we have science. Once politicians allocate funding to an agency, technocrats and scientists take over. We have scientists and engineers arguing about principles, about facts and about theorems. Experiments are conducted. Tests are run. Data recorded, processed and compared. There is a lot of debate allowed and even if criticism is never nice to receive, it helps to refine results, arguments and propositions. There is also the scientific method which means that even if I think I am right I must still convince editors and reviewers and funders with evidence in the form of data and experiments that can be repeated.

Our problem in development is that we do not appreciate criticism, never-mind not relying on proper research. If I question black economic empowerment policies in South Africa I am labelled a racist, even if I believe some kind of redress is needed but I am merely questioning the current modalities. If I question the way donors select value chains based on preferential impact on women I am described as being against inclusion and social justice. If I question the focus on low skilled jobs I am thrown out as a market liberal or capitalist. We just don’t allow sufficient debate backed by proper research. In many countries where I work criticism is not welcomed or appreciated.

I am afraid that the same can be said of the climate change debate, where any person that questions the prevailing consensus is quickly dismissed as a a person in denial.

Extrinsic and intrinsic rewards

Anybody that has read any recent articles on management, HR, strategy and leadership will know that you cannot use extrinsic rewards to motivate people extrinsically. Yet, in my daily experience of working between ordinary employees and management, in firms and in public institutions, it seems that this logic rules supreme.

The most acute form I find in South African universities, where journal articles are counted by everyone but the good lecturers and researchers. The good researchers and thinkers in our universities don’t need the recognition (nor the little research grant they are paid in South Africa). Our best lecturers and researchers are driven by an intrinsic motivation. They love teaching, they enjoy their work. They love the technology they get to work with. If they were driven by extrinsic rewards they would have been working in the private sector, or running their own company.

I find the same crazy logic in economic development. Except the extrinsic rewards is not so aimed at the individual, but a team or a programme. Perhaps it is not even a reward, it is a unspoken threat. However, our best practitioners out in the field don’t need specific measures (treated as targets), they know what resources they have, and what is not working as it should. Perhaps they don’t know exactly how to fix the complicated nest of interrelated problems, but they are intrinsically motivated to find solutions. To try and try again. Of course the extrinsic reward of a good income matters, but it is not the highest priority. I often think the targets and indicators set for development is a better indication of a lack of trust by donors in their employees (and their counterparts) than it is about making sure activities are leading in the right direction.

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