Economic development strategy as a Toyota Production System

I have been spending some time in South Africa, along with my collaborators Chuck Sabel and Ricardo Hausmann, doing research on industrial policy. We are advising the government on its growth strategy, and this part of our work focuses on generating ideas for policies to stimulate structural transformation in the economy towards higher-productivity tradable activities. So I have been spending my time doing rounds in government offices and talking to firms and entrepreneurs.

On Thursday, our group spent the day with Toyota and one of its local suppliers. This is my second visit to Toyota here, and once again I am awed by the famous Toyota production system (TPS) with its on-going monitoring of output processes, feedback loops, and continuous improvement.

Chuck Sabel has been telling me for some time that our Growth Diagnostic framework is nothing other than the application of TPS principles to the design of economic growth strategies for countries as a whole. Listening to Toyota trainers, the point really hit home this time around. Toyota training manuals make clear how TPS differs from conventional "Western" modes of organizing a manufacturing operation. The former is based on experimentation, gradual but continuous change, identification of bottlenecks, self-correction, group approaches, small investments at the outset but continuous attention and effort. This is to be contrasted to the Western mode, based on top-to-bottom direction, big leaps, large investments, and over-reliance on technology. Not a bad way to describe the difference between the Growth Diagnostics framework, on the one hand, and approaches such as the Washington Consensus or the Millennium Development Project, on the other.

Comments

[Nilgun]

Dani, this is great news... I am delighted to see that the Government of South Africa plans to increase infra spending to 8% of GDP and 40% of this will be spent by the SOEs. Any simultaneous attempts to improve the financial and operational performance of the infra SOEs? I was told that Eskom recently signed a performance contract with the Government. Any other parallel reforms, those of us working on infra SOEs need to know of? I well know that other East African countries are closely following South Africa, especially the ones which experienced failed or short-lived attempts of private participation.

[Kenji]

I think the key question for me in applying something like the TPS to development economics is whether TPS can achieve changes that are greater than incremental changes. After all, the TPS allows Toyota to make cars very very well. But can the same system help Toyota to make, say, computers, if such a fundamental change ever became necessary?

[robertdfeinman]

Assume that these modern management practices become more widespread, doesn't this just mean that overall efficiency goes up while doing nothing for competitiveness?

It's like the period when powered looms replaced hand weavers. There were holdouts, but eventually everyone adopted the new technology and the firms became just as cutthroat as any other capitalist enterprise. Workers ended up suffering as did the environment.

We are in a transition period with the US being the Luddites, perhaps, but the goals of economic growth are still unexamined.

We live in a finite world. At some point growth itself needs to be questioned. There can be regional improvements, but overall the world is already consuming at an unsustainable level.

[Per Kurowski]

During my very brief term as an Executive Director at the World Bank I often complained about that the country assistance strategies we were presented seemed all so similar which made it very hard to visualize a competitive place under the sun. Therefore when I read about “policies to stimulate structural transformation in the economy towards higher-productivity tradable activities” and I suspect that all countries would love to go there, my first reaction is that there is going to be an oversupply in the world of higher-productivity tradable activities… which as a consultant makes me wonder whether there could not be a niche in lower-productivity tradable activities.

Let me pester you with a question that I made to my colleagues and that I included in a book that I wrote, and that by the way has become almost a collectable on account of how few have read it.

Suppose the country was an island and that the only boat with which you could leave it for the next thirty years was scheduled for departure today. If you were an ambitious and hopeful 15-year-old who loved his country and that has just read the country’s Strategic Development Plan, would you stay or would you take the boat?

I mention this because besides a good development “technique” I believe a country must also have a good development “story” that inspires it to come together.

[Per Kurowski]

robertdfeinman correctly mentions: "We live in a finite world. At some point growth itself needs to be questioned. There can be regional improvements, but overall the world is already consuming at an unsustainable level."

He is so right since even though we know about the limitations we tend to ignore them on account that in that case we do not know what to suggest. Again as an ED in the World Bank I was shocked seeing in 2003 and 2004 so many country studies and strategies that did not even mention the word energy…even while we must all have been aware among others of Asia going from bicycles to motorcycles and then cars.

Here follows another of my statements out of my collectable book (which by the way is also quite readable)

I just can’t believe that professional organizations—such as the International Energy Agency, and even the WBG for that matter—were unable to warn the world about the ever narrowing gap between the demand for and the supply of oil. Much more so, they should have been able to warn us about the shortages in refining capacity. Equally, I find it unbelievable to observe how no one really kept track on the building up of demand for natural gas, resulting from so many pursuing the same “clean” though in reality not so clean generation of electricity. Why were they not able to warn how this could affect the price of gas?

This year, for instance, many consumers in the United States are going to pay much higher prices for their electricity bill. That means that we, the rest of the world, besides paying our own higher electricity bills, will of course also pay one way or another for the higher United States dollar inflation. I doubt that the poor planners who got us into this mess are going to pay for their faults, by getting fired, as they should. As I see it, as long as there is more risk for planners in being politically incorrect than just factually incorrect, it will be very difficult to find our way out of this energy labyrinth which we’re facing.

[Dave Iverson]

Kenji: "[Can TPS] achieve changes that are greater than incremental changes. After all, the TPS allows Toyota to make cars very very well. But can the same system help Toyota to make, say, computers, if such a fundamental change ever became necessary?"

Unless Toyota has wandered too far from the original W. Edwards Deming process design, there is little chance that their system overlooks the need to innovate; to keep asking: "What business should we be in?", alongside "What product or service would help our customers more?", "What will we be making 5 years from now?", "10 years from now?" Note: Questions are drawn from E. Edwards Deming's book "The New Economics: For Industry, Government, Education"

For me an ultimate irony would be for Deming to finally get his due as an economist. He would join with others who were never considered among the anointed, like Edward Lorenz, whose work on complexity theory gained him the fame denied him by economists. For a wee bit more praise for the two, see: http://www.asq.org/strategy/stories/butterfly.html

[spencer]

If you are interested in the Toyota approach you should look at some of the work they did at MIT using the engineering concepts of System Dynamics to analyze economic systems and development.

[andrew merrifield]

Whilst I agree with your observation that the TPS and even the TPS as applied in South Africa (I have visited the factory a number of times over the past decade and a half) is a good approach to how development policies may be crafted learning from past mistakes and experimenting, your example however neglects to inform overseas readers that the culture of Government in South Africa is nothing like the organisational learning culture that has been created by the TPS in South Africa and elsewhere (well documented in much management literature). If anything the culture of Government in South Africa is anti-learning and the only experimentation that is allowed is by senior managers and politicians who have already decided what is acceptable and what is not. Reading your blog entry I was struck by the anomaly of the sense of adventure and openess that I remember seeing at the Toyota factory (both amongst workers and management) and the narrow-minded orthodoxy that I have experienced amongst those very people in Government that seek to apply your ideas in South Africa.

[Ken]

Very interesting post on a unique analogy to TPS. The manufacturing guys over at Evolving Excellence just commented on it as well.

http://www.evolvingexcellence.com/blog/2007/07/lean-economic-d.html

[Ken Jarboe]

Dani -- I was interested in this statement: "part of our work focuses on generating ideas for policies to stimulate structural transformation in the economy towards higher-productivity tradable activities"

Do you think you can do the same analysis for the US next?

[Colin]

I have long been an admirer of TPS and the Toyota philosophy as a whole. I now understand that they have entered into the next wave of innovation where they have advised their key suppliers that their future as a supplier will be judged on their ability to contribute to the overall innovate of the Toyota end product.
It seems that they are entering into a supply chain systems approach and possibly even onto systemic comparative benchmarking.
Lessons for development indeed!

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We live in a finite world. At some point growth itself needs to be questioned. There can be regional improvements, but overall the world is already consuming at an unsustainable level.

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Their production management system is actually pretty good! If you don't believe it, look at Toyota yourself and ask: How were they able to be on top of the car industry in such a short time, beating the western pioneers of the automobile industry? I participated in a recent seminar in our office regarding Lean simulations and one piece flow simulations. According to them, TPS originally came from Toyota's very first Lean manufacturing guidelines.

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