Between a rock and a hard place. Sectoral vs. local approaches to private sector development

I am preparing for a presentation at a conference in May about development programmes shifting from a sectoral to a regional or local perspective. This got me thinking about these shifts in focus and why they appear.

In economic development, it is often necessary to choose whether to intervene at a sectoral level, or whether it would be better to take a locational or geographic approach. In my experience I have learned that when you start with the one, i.e. with a specific sector or value chain, you often end up with the other, i.e. supporting specialization or addressing specific issues in a certain location. But this is of little consolation to managers of development programmes and Local Economic Development units who are then typically measured by the wrong indicators or that have different incentives due to the design of their programme or institutional mandate.

During my MBA, the Professor in Organisational Development introduced us to a really elegant tool to assess whether a tension or conflict between different approaches could really be addressed. He introduced us to Polarity Management, a simple instrument developed by Johnson (1992). According to Johnson, many problems that we face today are not really problems to be solved, but polarities to be managed. Johnson argues that we can continually try to solve these problems by shifting our strategies to another mode where we perceive lots of benefits. The trouble is that after a while of some negative aspects emerge, and suddenly the benefits of the other strategy seems to be more attractive.

Polarity management is an instrument that can be used by change management practitioners to understand these polarities and to manage them. It implies that perhaps these different strategies even depend on each other, like breathing in versus breathing out. We need both, even if they have very different objectives, benefits and downsides. This means that the strengths and the weaknesses of alternatives must be understood, and then managed.

In development we have many polarities, for example wealth creation versus poverty reduction, or designed interventions versus enabling evolution, project versus process, top down versus bottom up, and many others. It is very expensive and even risky to shift between these, and an organisations current expertise, instruments and orientation may find it very hard to make these shifts effectively. But some try and some even manage to do this.

This post is for those organisations that are undecided about their strategy and their focus.. A key question then is how do we manage these alternatives, especially if we want the best of both worlds?

There are 3 steps to better understand a polarity:

  1. Fill in the headings of the two polarities in the matrix
  2. Capture the strengths and the weaknesses of both in the columns
  3. Determine if there is a movement of preference between the polaries, meaning that when the negative consequences of a particular strategy becomes too much, strategy is shifted to the other approach for its apparent strengths. Then over time, the negatives start to weight in on the positives, resulting in a shift to the other approach.

Below I have quickly written down some of the positives and negatives of both approaches. This is an incomplete list but I think it is sufficient to illustrate the point. The PDF of the graphic below can be found here. For those that cannot read so small, the bottom line is this: there are pluses and minuses to both paradigms. Under each strategy, the benefits of the one approach may outweigh the negatives of that approach, but be aware, these weights are changing and after a while the other strategy may become more desirable!

Polary table

 

 

 

 

 

 

 

 

 

 

 

 

The third step in understanding the polarity is to look at whether there is a shift between these polarities. From my experience working in a dozen or so developing countries, development programmes are either designed to be sectoral or geographic, with very few programmes designed to do both. From a local perspective, institutions and programmes are designed and resourced to either be targeted at specific industries and sectors, or they have a locational focus. It is very hard for programmes and institutions to build a case that a strategic shift to the other paradigm may be needed, even if for only a part of the resources to be dedicated to the other approach. This typically happens when the negatives of a current path starts to outweigh the positives, and the benefits of the other approach increasingly looks appealing. The danger is that a compromise is reached, instead of a synergy being developed.

From a Local Economic Development perspective, growing the technical capability to pursue both strategies simultaneously is important. This does not imply that both are equally important at any given time, as both these approaches have different timescales, resource requirements, and objectives. For example, it would be unwise to leave a dominant sector to its own devices in order to focus on emerging enterprises. At the same time, focusing on the issues of a dominant sector might distract attention from purposefully promoting emergence, diversification and economic resilience. Yet, many programmes and organisations are forced to choose, often too early when not enough is understood about the dynamics of the place or the industries. For me the worst reason to choose an particular approach is because some or other decision maker has attended a training course or conference, or because a particular approach is deemed “best practice”. In fact, most of my time is spent trying to help leaders and decision makers get out of a mess because their programme or institutions was designed based on some ideology or “solution” without enough attention being given to the requirements, trajectories and complexity of the specific context.

For national governments and international development programmes there seems to be a continuous shift between these two. Almost like a flip-flopping from one to the other. I think that the shifts are counter productive, as the learning from the previous shifts are often lost. If I just think back over my 16 year career how often the value chain or sub sector approaches or alternatively cluster and Local Economic Development have become fashionable again and then losing its appeal after a short time.

My conclusion is that while there is a tension between these approaches, the shifting between the strategies are not taking place at an institutional or programmatic level. Decisions about these strategies are made at higher levels of government and development cooperation with little regard for the challenges faced at sub national level in developing countries to build and grow “the right” institutions that can ensure long term economic evolution and development.

At the implementation level, regional development programmes should do both:

  • Sectoral programmes that ignores the impact of their sector on the geographic areas they are working in are most likely creating negative externalities, even with the best intentions in mind and even when they achieve their objectives of inclusiveness, job creation or export promotion. The negative externalities could be about the environment (mono economy, mono culture), or about increasing the coordination cost of every economic activity not related to the priority sectors (institutional or locational lock-in to particular paths and trajectories). Sectoral programmes that ignore opportunities for regional nuances to develop in their targeted sectors miss important opportunities to enable diversification and emergence of unique regional capabilities.
  • Location development programmes that do not collaborate with other locations to build sufficient scale in particular sectors to justify investing in particular regionally significant institutions will forever remain trapped in low value add, or perpetual dependence on the priorities and mood shifts of national governments. While trying to help every kind of economic activity in a region, you have to at some point also start promoting specific industries and sectors in order to try and reach some leverage or scale.

But most importantly, the economic activity, available institutional capabilities and the regional context prescribes where to start. And when you have started down a chosen path, be sensitive to when it may be necessary to foster additional organisational or collaborate with other institutions with different more adequate capabilities to enable the benefits of the other strategy to be leveraged. A key challenge in developing countries is that we do not have a rich layer of supporting institutions pursuing different strategies. Everyone seem to be trying more or less the same approaches, or chasing the same politically set targets.

In our capacity building sessions in Mesopartner we always elaborate on the importance of value chains and sectors to Local Economic Development practitioners, and the importance of regional competence development for value chain and sector development specialists. Actually, the process of diagnosing industries and regions are very similiar, even if you would give slightly more attention to different issues and perspectives.

In the end, from a bottom up perspective, supporting specific industries allows for scale and focused public investment, but caution must be taken to not create path dependence or institutional lock in. At the same time, a regional approach is critical as it allows for emergence of new kinds of economic activity and for diversity to emerge. I think we need to development of synergies for both, but it depends on the context what your priority should be. Simply being aware that there are pluses and negatives to either strategy is already a good start! This makes it much easier to collaborate with other organisations and programmes that have different objectives and priorities.

Now I have some questions to my readers:

  1. What is your current approach in your programme or organisation? Sectoral or locational?
  2. Have you even been through a shift from the one to the other in your programme, or do you cater for both?
  3. How did making the shift work out? Did you have the networks, resources and expertise to make this shift?
  4. What would you do differently next time?
  5. Please share your thoughts by commenting below, or send me an email if I can paste your comments unanimously if you are afraid to upset somebody higher up the chain.

References:

JOHNSON, B. 1992.  Polarity management : identifying and managing unsolvable problems. Amherst, Mass: HRD Press.

 

Innovation systems in Metropolitan Regions of developing countries

During 2015 Frank Waeltring and I were commissioned by the GIZ Sector Project “Sustainable Development of Metropolitan Regions” (on behalf of the German Federal Ministry for Economic Cooperation and Development (BMZ), Division 312 – Water, Urban Development, Transport) to write a discussion paper about a hands-on approach to innovation systems promotion in metropolitan regions in developing countries. The discussion paper can be found here.

Frank (left) and Shawn (right) in front of the Berlin Wall Memorial

This assignment was a great opportunity for us to reflect on Frank’s experience on structural change in territorial economic development and my experience on industrialization and innovation systems in developing countries. We also had to think hard about some of the challenges of using a bottom up innovation systems logic in developing countries, as such an approach would rely heavily on the ability of local public management to coordinate strategic activities aimed to improve the dynamics between various public and private stakeholders. It was great to reflect on our past Local Economic Development experience and our more recent work on innovation systems, industrial upgrading and complexity thinking.

A key aspect of this discussion document was to think long and hard about where to start. We know many economic development practitioners in cities are often overrun by demands from both politicians and industries for support. We also know that by selecting promising sectors based on past data and assumptions about job and wealth creation often end in little impact and much frustration. We agreed that an innovation systems approach must be aimed at stimulating the innovative use of knowledge, so we decided to not start with a demand focus (assuming the officials are already responding to some of the demand) or with statistics but a knowledge application focus. The use, generation and recombination of knowledge is central to the technological upgrading of regions, industries, institutions and societies. From our experience in promoting innovation systems and our recent research into non-consensus based decision making (this is where you do not select target sectors based on consensus or assumptions about growth potential, but you look at emergent properties in the system) we decided to start with three questions to understand the dynamics of knowledge flows in the region:

  1. Which enterprises, organisations and even individuals are using knowledge in an innovative way? Obviously this question is not simple and can only be answered by reaching out in the local economy to institutions, firms and individuals.
  2. Which stakeholders are actively accumulating knowledge from local or external sources? Again, this is an exploration.
  3. Who are individuals or organisations that know something about unique problems (challenges, demands, constraints) in the region? These could be buyers, supply chain development officials, public officials, engineers or even politicians that are willing to articulate unique demands on the regional economy that might not have been responded on by local (or external) enterprises.

These three questions are treated as an exploration that will most likely be most intensive at the start. In our experience economic development practitioners should constantly be asking themselves these questions when working on any form of private sector upgrading.

A second dimension is about assessing the interplay between institutions and industries and its effect on innovative behavior within regions. Who is working with whom on what? Why? What are the characteristics of the life cycles or maturity of various kinds of stakeholders in the region? Thus we are trying to understand how knowledge “flows” or is disseminated in the region. While some knowledge flows are obvious, perhaps even formal, some knowledge flows could be more tacit and informal. For instance, while knowledge flows from education is quite formal, the informal knowledge exchange that takes place at social events is much more informal, yet very important.

Apart from the identification of the dynamics and interrelations between the industries and the different locations, one other key factor is to identify the drivers of change who want to develop the competitive advantages of the region.

We also present our technological capability upgrading approach as six lines of inquiry, some of which have been covered in earlier posts on this weblog:

  1. The company-level innovation capability and the incentives of firms to innovate, compete, collaborate and improve, in other words the firm-level factors affecting the performance of firms and their net-works of customers and suppliers. These include attempts within firms to become more competitive and also attempts between firms to cooperate on issues such as skills development, R&D, etc.
  2. The macroeconomic, regulatory, political and other framework conditions that shape the incentives of enterprises and institutions to develop technological capability and to be innovative.
  3. Investigation of the technological institutions that disseminate knowledge.
  4. The responsiveness and contribution of training and education organisations in building the capacity of industry, employees and society at large.
  5. Investigation not only of the interaction and dynamics between individual elements in the system, but of the whole system.
  6. Exploring poorly articulated needs or unmet demands that are not visibly pursued by the innovation system.

We, and of course our GIZ colleagues of the Sector Project Sustainable Development of Metropolitan Regions, are very keen to engage with the readers on these ideas? Please post your comments, questions to this weblog so that we can have a discussion.

Best wishes, Shawn and Frank (Mesopartner)

 

 

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.

Complexity and international development

A while ago I posted an article about the exciting developments in the various fields around complexity science and development (actually there are several earlier articles making reference to this topic). Recently Marcus Jenal wrote a great review of the work of Ben Ramalingam (author of the blog Aid on the Edge of Chaos) and Harry Jones with Toussaint Reba and John Young. The paper can be downloaded here.

 

Perhaps you have noticed that I often make reference in my posts to “complexity”, “evolution” and “complex systems” in the context of development. Some have even asked me why I do this. Well, already there are moves by donors and monitoring bodies to start using a more complexity-sensitive approach to evaluation. This is not entirely fair, as too many development programmes are still designed in a very linear way (log frames, impact chains are mostly used in a linear fashion). This means that to reach your impact you must combine your programme activity with faith and good luck (plus good weather) because most programmes are operating in a sea of complexity. There are just too many factors that can influence your outcomes. And even if you hit all your targets the system may remain exactly the same way. (wink wink: I wonder why no-one is making more of a fuss of the poor track of donor programmes in South Africa that were supposed to deal with systemic failures in education, rural development and even Local Economic Development?)

Another reason I am interested in these topics (other than my usual curiosity) relates to my practical activities around building industrial systems from the bottom up. Although I am still biased towards manufacturing with some emphasis on specialized services, I am trying my best to understand the complexity of not only relations between the actors, but also between the factors that are influencing their behavior. Then throw in some factors like policies several self justified meso-level organizations, mix in some government failure, market failure, network failure and also just the uncertainty from Europe. That makes for a complex system where there are a myriad of vicious and virtuous cycles and then the dynamism of time delays.Mix into this that the political system in South Africa also fights bottom up decision making. Local stakeholders have a limited number of instruments at their disposal and can hardly hold other spheres of the public sector (and other organisations) accountable. Despite this all kinds of firms are innovating, and there are even innovation systems that involves individuals in public agencies that are committed to support local actors (even if their institutions is unwilling or incapable to assist).

I find a lot of comfort and maybe some good questions in the literature on complexity and perhaps also the literature on evolutionary economics. Perhaps I even find some comfort that even the so-called industrialized world is struggling with the increasingly complex and interrelated policy environment.

If you are working on bottom-up industrial policy then please let me know, perhaps we can exchange notes.

The irony of bottom-up development

From the participants of our trainings on local and regional economic development it seems evident that many national governments are paying lip service to bottom-up development. Often Local Economic Development (LED) is related to attempts to decentralise certain decision-making to lower tiers of governments. However, this is done in an uneven way where powers to make decisions about financial allocations, education, health investments are centralised. Even is places where local economic development decisions are decentralised to the local level, other national policies counteracts the power of local stakeholders. For instance, LED is decentralised by law in many Southern African countries, however, skills development, university programmes and even small enterprise development programmes are all designed and run from a national level. I do not count a local office of a national or provincial programme as “localisation”, as local representatives have no power over funding allocation and programme development. Other national programmes such as tender regulations, public procurement rules, and public finance legislation were all implemented to contain corrupt or incompetent public officials (thanks for that), but it also inadvertently reduces the ability of local government to drive their own development agenda. My late business partner liked to refer to that as “unintended consequences”.

Despite these obstacles to local development there are several brave souls that are trying to do local economic development from the bottom-up. They may be constrained in many ways, but they continue to try and mobilise local stakeholders.

Often bottom-up development activities in countries and specifically at the local level are driven by external development organizations (ranging from donors to charities). From my experience in Africa I can say that international development cooperation is often more serious about bottom-up development than most governments. While I know from my previous experience (I worked for GTZ on LED) that many national government officials think this is western ideology of democracy that is being forced down the throats of developing countries, I also know from experience that imperfect solutions that are developed by locals often have critical momentum that simply outperforms even smart initiative coming from the national level. But these development organisations are Macro level actors from outside of the country, so on a hierarchy they would be above the top!

Ok, I understand. For many national governments in Africa, their biggest obstacle to programme implementation is often the lower ranking officials in local governments. But this is not the cause of their problems, it is simply a symptom of other problems. A symptom that is further re-enforced by a lack of an ability to respond to the local context. Perhaps this is why local governments accross Africa are struggling more and more, despite evidence that national governments in Africa are improving their performance. But more about that in another post.

So the irony of bottom-up development is this: bottom-up development is often still happening in parts of Africa not because of top-down (national) support, but because of international (above-the-top down) support.

Until this situation changes, bottom-up development will always be limited to making local stakeholders feeling better about addressing some of their own issues without a guarantee that the framework conditions will re-enforce their goodwill. Sometimes this will yield excellent results if the right champions drive the activities, thus making it dependent on individuals and not systems. But for local initiative to become systemic, in other words, leveraged with multiplier effects, governments across Africa would have to sincerely embrace bottom-up development by addressing the constraints that limits local action.

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